1. Disruptive Innovation

2. Model of Disruption Steel Industry
Two ways of making steel
Massive integrated steel companies $10 billion to start
Mini Mills
Melt scrap in electric furnaces
Don’t have to scale up the down stream process
Make steel at any given quality 20% lower costs
Steel is a commodity
If you were a integrated company would you adopt the mini mill?

3. Flee or Fight Sheet Steel Quality Structural Steel
Quality of integrated mill’s steel
Bars and Rods
Rebar
1975
1980
1985
1990
1995

4. Flee or Fight
Prior to the late 1960s, integrated mills were doing all types and were making buckets of money
Late 1960s mini mills came on to the market
Melting scrap, quality was low and could only participate in rebar market

5. Flee or Fight Sheet Steel Quality Structural Steel
Quality of integrated mill’s steel
Quality of mini-mills steel
Bars and Rods
12% GM
7% GM
Rebar
1975
1980
1985
1990
1995

6. Flee or Fight Integrated mills were happy to get out of rebar
Why fight for a 7% gross margin?
Profitability of integrated mills increased as they left rebar
Profitability of mini-mills increased as they entered rebar
Everyone was happy
But then in 1979 last integrated mill exited rebar
Price of rebar collapsed
Competition drove prices down to where mini mills were barely making money.
Becoming more efficient only a recipe for survival
Looked up!

7. Guess what happened? Sheet Steel Quality Structural Steel 18% GM
Quality of integrated mill’s steel
Quality of mini-mills steel
Bars and Rods
12% GM
7%gm
Rebar
1975
1980
1985
1990
1995

8. Flight or fight? Same thing happened
Integrated mills were happy to leave
Mini-mills were 20% cheaper so made profit
Until 1984

9. Guess what happened? 24% GM Sheet Steel Quality Structural Steel
Quality of integrated mill’s steel
Quality of mini-mills steel
Bars and Rods
12% GM
7%gm
Rebar
1975
1980
1985
1990
1995

10. Flight or fight? Same thing happened
Integrated mills were happy to leave
Mini-mills were 20% cheaper so made profit
Until 1996

11. Guess what happened? 24% GM Sheet Steel Quality Structural Steel
Quality of integrated mill’s steel
Quality of mini-mills steel
Bars and Rods
12% GM
7%gm
Rebar
1975
1980
1985
1990
1995

12. Eventually integrated mills only producing specialty steel
Mini mills 65% of market
All but one integrated mill has gone bankrupt
“stupid manager”?
No stupidity involved
Innovators Dilemma

13. Innovator’s Dilemma Firms have a choice: How to defeat a giant? Toyota
Make better products that we can sell for more profits to our current customers?
Or make worse products that none of our customers would buy and would ruin our margins?
Companies can put too much emphasis on customers' current needs, and fail to adopt new technology or business models that will meet customers' unstated or future needs
How to defeat a giant?
Go after best customers?
Enter the bottom
Giant is motivated to flee rather than fight
Toyota
Entered in the 1960s
Corona
Ford GM, were happy to let them have it
Today Kia and Hyundia

14. Three types of Innovations
Disruptive Innovation
Sustaining Innovation
Efficiency Innovation

15. Disruptive Innovation
Large $
Medium $$
Small $$$

16. Disruptive Innovation
Personal Computer
P=$2,000
GM=$700
Mainframe
P = $2,000,000
GM=#1,200,000

17. Disruptive Innovation
Smartphone/Tablet
P=$200
GM=$80
Personal Computer
P=$2,000
GM=$700
Mainframe
P = $2,000,000
GM=#1,200,000

18. Disruptive Innovation
People making the early products tend not to make the new products:
It doesn’t make sense to make products that don’t make cents
Disruptive innovation transform complicated products into simple products
Takes something that was very expensive and hard to produce and only a few could afford, and converts it into something that is much simpler to produce, is cheaper, and many can afford it.

19. Disruptive innovations create jobs
More people can buy them, need more people to make them service them sell them
Data show that almost all of the net jobs created in our economy were created through disruptive innovation
Disruptive innovation requires capital

20. Sustaining Innovation
Making good products better
Better mainframe computers
Better personal computers
The iPhone 4, 4s, 5, …..
On average, they don’t create jobs
When we buy the new product, we stop buying the old product
Don’t use a lot of capital

21. Efficiency innovation
Sell the same products to the same customers for cheaper
Walmart
Process Improvement
Tend to eliminate jobs
But will free up capital
Prior to Toyota, it took 60 days for GM to assemble a car
Toyota did it in 2 days
Frees up lots of capital (inventory)

22. The three together? Sustaining Innovation Disruptive Innovation
Efficiency
Jobs
Creates
Little
Eliminates
Capital
Uses
Frees
Efficiency Innovation

23. How does this apply to Healthcare?
Most innovation in healthcare has been sustaining
To understand this first describe the basic components of a business model

24. Components of a business model
Value proposition
Product or service that helps customers get a job done more effectively, conveniently, and affordably
Resources
People, supplies, intellectual property, equipment, cash required to deliver the value prop

25. Components of a business model
Processes
As resources work together to produce the product, process emerge and become ingrained in the business model
Profit Formula
Defines the pricing, mark-ups, gross and net profit margins, and volumes necessary to profitably cover the costs of the resources and processes that are required

26. The Business Model Value Proposition Resources Processes
Profit Formula

27. Over time, the causation reverses:
Value Proposition
Resources
Processes
Profit Formula

28. Once the die is set…
Once the pieces are in place to deliver a particular value proposition
Only value props that fit the existing recourses, processes and profit formula of the organization can be successfully taken to market.
Kodak

29. Where Capabilities Reside
Three factors determine what an organization can do:
Resources
Processes
Values

30. Resources Tangible Intangible People equipment technology cash
Product designs
Information
brands
relationships

31. Processes
Patterns of interaction, coordination, communication, and decision making that employees use to transform resources into products and services of greater worth.
Designed not to change or to change in very prescribed ways
Both formal and informal

32. Values
The standards by which employees set priorities that enable them to judge whether:
an order is attractive or unattractive
A customer is more important or less important
An idea for a new product is attractive or marginal

33. Two values that affect innovation
Acceptable profit margins
Tend to rise over time
Toyota Corona – Honda et al. entered
Camry, Lexus – higher cost structure meant exiting low end market. Its values had changed

34. Two values that affect innovation
How big an opportunity needs to be before it is interesting
A company’s stock price represents its discounted present value of its projected earnings stream.
Most managers feel compelled to maintain a constant rate of growth
For a $40 million company to grow by 10%, they need $4 million in new business this year
For a $40 billion company, however, they need $4 billion in new business.
So an opportunity that excites a small company might not be big enough to excite a large one
As companies become large, they loose the ability to enter small, emerging markets.
This is a result of a change in values, not a change in resources

35. Fitting the Tool to the TaskB
Use a heavyweight team within the existing organization C
Use a heavyweight team in a separate spinout organization
Poor A
Use a lightweight or functional team within the existing organization D
Development in-house through a heavyweight team, but commercialization usually requires a spinout
Fit with an organization’s processes
Good
Good
Sustaining
Poor
Disruptive
Fit with an organization’s values
Will the organization commit the required resources?

36. Definitions
A functional team works on function-specifc issues, then passes the project on to the next function
A lightweight team is cross-functional, but team members stay under the control of the respective functional managers – don’t need new processes.
A heavyweight team – members work solely on the project and are expected to behave like general managers, shouldering responsibility for the project’s success. Designing new processes and new ways of working together is required.

37. Typology of business models
Solution Shops
Value-adding process business
Facilitated user networks

38. Solution Shops Built to diagnose and solve unstructured problems
Consulting
Advertising
R&D
Deliver value primarily through people

39. Value-adding process businesses
Transform inputs of recourses into outputs of greater value
Repetitive
Capabilities are built more into its processes than its resources
Focus on process excellence – high quality, low cost
Retailing, restaurants, automobile manufacturing

40. Facilitated user networks
The same people buy and sell and deliver and receive things to and from each other
Successful business are those who can facilitate the effective operation of the network and its user transactions
Telecommunications, stock exchanges, bank activities

41. Health care? Hospitals and physician practices: Solution shops
Rely on intuition of highly skilled professionals
But over time many activities that are based on value adding process or user network models.
“Jumbled mixtures of multiple business models struggling to deliver value out of chaos, incorporating indecipherable systems of cost accounting, excessive overhead, pervasive cross-subsidization, and an unacceptable amount of variability and medical error.”

42. Innovation in Health Care
The successful innovators are those who will be able to un-jumble the mix
Simplify the process
Where is “the bottom”?
Minute Clinic: value adding process business
Facilitated user networks?
User networks shift care of chronic diseases out of intuitive based practices (solution shops)

43. Challenges to new business models
Fragmentation
Some of this innovation could create more fragmentation – carving out focused factories
Coordination is critical
Interoperable health information technology
PCMH

44. Challenges to new business models
Lack of a retail market
Consumers need the proper incentives to shop
Health Savings Accounts?
Population Health Management?
Regulatory barriers
CON and other laws make innovation difficult
Incumbents will often use regulation as a cover
“What’s good for GM is good for America”

45. Challenges to new business models
Reimbursement
First, think about what this term implies
Cutting reimbursement as an attempt to force a solution shop to figure out how to be more efficient will probably not get us very far in improving health care delivery

49. The ACA and Disruptive Innovation

50. The ACA and Disruptive Innovation

51. What do we take away? Disruptive, Sustaining, Efficiency Innovation
Disruptive innovation makes the complex simple
Starts at “the bottom”
The lack of response of incumbent is not typically the result of stupidity, but result of change in values -- LEADERSHIP?