2 Model of Disruption Steel Industry Two ways of making steelMassive integrated steel companies $10 billion to startMini MillsMelt scrap in electric furnacesDon’t have to scale up the down stream processMake steel at any given quality 20% lower costsSteel is a commodityIf 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 steelBars and RodsRebar19751980198519901995
4 Flee or FightPrior to the late 1960s, integrated mills were doing all types and were making buckets of moneyLate 1960s mini mills came on to the marketMelting 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 steelQuality of mini-mills steelBars and Rods12% GM7% GMRebar19751980198519901995
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 rebarProfitability of mini-mills increased as they entered rebarEveryone was happyBut then in 1979 last integrated mill exited rebarPrice of rebar collapsedCompetition drove prices down to where mini mills were barely making money.Becoming more efficient only a recipe for survivalLooked up!
7 Guess what happened? Sheet Steel Quality Structural Steel 18% GM Quality of integrated mill’s steelQuality of mini-mills steelBars and Rods12% GM7%gmRebar19751980198519901995
8 Flight or fight? Same thing happened Integrated mills were happy to leaveMini-mills were 20% cheaper so made profitUntil 1984
9 Guess what happened? 24% GM Sheet Steel Quality Structural Steel Quality of integrated mill’s steelQuality of mini-mills steelBars and Rods12% GM7%gmRebar19751980198519901995
10 Flight or fight? Same thing happened Integrated mills were happy to leaveMini-mills were 20% cheaper so made profitUntil 1996
11 Guess what happened? 24% GM Sheet Steel Quality Structural Steel Quality of integrated mill’s steelQuality of mini-mills steelBars and Rods12% GM7%gmRebar19751980198519901995
12 Eventually integrated mills only producing specialty steel Mini mills 65% of marketAll but one integrated mill has gone bankrupt“stupid manager”?No stupidity involvedInnovators 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 needsHow to defeat a giant?Go after best customers?Enter the bottomGiant is motivated to flee rather than fightToyotaEntered in the 1960sCoronaFord GM, were happy to let them have itToday Kia and Hyundia
14 Three types of Innovations Disruptive InnovationSustaining InnovationEfficiency Innovation
15 Disruptive Innovation Large $Medium $$Small $$$
16 Disruptive Innovation Personal ComputerP=$2,000GM=$700MainframeP = $2,000,000GM=#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 centsDisruptive innovation transform complicated products into simple productsTakes 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 themData show that almost all of the net jobs created in our economy were created through disruptive innovationDisruptive innovation requires capital
20 Sustaining Innovation Making good products betterBetter mainframe computersBetter personal computersThe iPhone 4, 4s, 5, …..On average, they don’t create jobsWhen we buy the new product, we stop buying the old productDon’t use a lot of capital
21 Efficiency innovation Sell the same products to the same customers for cheaperWalmartProcess ImprovementTend to eliminate jobsBut will free up capitalPrior to Toyota, it took 60 days for GM to assemble a carToyota did it in 2 daysFrees up lots of capital (inventory)
22 The three together? Sustaining Innovation Disruptive Innovation EfficiencyJobsCreatesLittleEliminatesCapitalUsesFreesEfficiency Innovation
23 How does this apply to Healthcare? Most innovation in healthcare has been sustainingTo understand this first describe the basic components of a business model
24 Components of a business model Value propositionProduct or service that helps customers get a job done more effectively, conveniently, and affordablyResourcesPeople, supplies, intellectual property, equipment, cash required to deliver the value prop
25 Components of a business model ProcessesAs resources work together to produce the product, process emerge and become ingrained in the business modelProfit FormulaDefines 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 PropositionResourcesProcessesProfit Formula
28 Once the die is set…Once the pieces are in place to deliver a particular value propositionOnly 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:ResourcesProcessesValues
30 Resources Tangible Intangible People equipment technology cash Product designsInformationbrandsrelationships
31 ProcessesPatterns 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 waysBoth formal and informal
32 ValuesThe standards by which employees set priorities that enable them to judge whether:an order is attractive or unattractiveA customer is more important or less importantAn idea for a new product is attractive or marginal
33 Two values that affect innovation Acceptable profit marginsTend to rise over timeToyota Corona – Honda et al. enteredCamry, 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 interestingA company’s stock price represents its discounted present value of its projected earnings stream.Most managers feel compelled to maintain a constant rate of growthFor a $40 million company to grow by 10%, they need $4 million in new business this yearFor 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 oneAs 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 Task BUse a heavyweight team within the existing organizationCUse a heavyweight team in a separate spinout organizationPoorAUse a lightweight or functional team within the existing organizationDDevelopment in-house through a heavyweight team, but commercialization usually requires a spinoutFit with an organization’s processesGoodGoodSustainingPoorDisruptiveFit with an organization’s valuesWill the organization commit the required resources?
36 DefinitionsA functional team works on function-specifc issues, then passes the project on to the next functionA 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 ShopsValue-adding process businessFacilitated user networks
38 Solution Shops Built to diagnose and solve unstructured problems ConsultingAdvertisingR&DDeliver value primarily through people
39 Value-adding process businesses Transform inputs of recourses into outputs of greater valueRepetitiveCapabilities are built more into its processes than its resourcesFocus on process excellence – high quality, low costRetailing, restaurants, automobile manufacturing
40 Facilitated user networks The same people buy and sell and deliver and receive things to and from each otherSuccessful business are those who can facilitate the effective operation of the network and its user transactionsTelecommunications, stock exchanges, bank activities
41 Health care? Hospitals and physician practices: Solution shops Rely on intuition of highly skilled professionalsBut 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 mixSimplify the processWhere is “the bottom”?Minute Clinic: value adding process businessFacilitated user networks?User networks shift care of chronic diseases out of intuitive based practices (solution shops)
43 Challenges to new business models FragmentationSome of this innovation could create more fragmentation – carving out focused factoriesCoordination is criticalInteroperable health information technologyPCMH
44 Challenges to new business models Lack of a retail marketConsumers need the proper incentives to shopHealth Savings Accounts?Population Health Management?Regulatory barriersCON and other laws make innovation difficultIncumbents will often use regulation as a cover“What’s good for GM is good for America”
45 Challenges to new business models ReimbursementFirst, think about what this term impliesCutting 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
51 What do we take away? Disruptive, Sustaining, Efficiency Innovation Disruptive innovation makes the complex simpleStarts at “the bottom”The lack of response of incumbent is not typically the result of stupidity, but result of change in values -- LEADERSHIP?