1. Creating new growth and Managing it more effectively
Clayton Christensen
Harvard Business School
4/10/2017
Copyright Clayton M. Christensen

2. Principles we teach that aren’t always true:
Focus investments where returns are most attractive
Understanding the customer is the key to successful innovation
Big markets generate bigger businesses than small markets
Outsource low value-adding activities that aren’t your core competence
Ignore sunk and fixed costs; make decisions based upon marginal costs and marginal revenues

3. Decentralization is disruptive, and is hard to catch
$500,000
Incumbents dominate sustaining battles
DEC
Data General
Prime
Wang
Nixdorf
Hewlett Packard
Honeywell
Pace of performance improvement
45% on
$250,000
Sustaining innovations
Ability to use improvements
Performance
Disruptive Innovations
Time
Time
40% %
on $2,000
Entrants typically win at disruption
4/10/2017
Copyright Clayton M. Christensen

4. Little boys beat giants by disruption
% of tons
25–30%
55%
Steel Quality
Sheet steel
18%
22%
Structural Steel
Quality of integrated mills’ steel
12% 8%
Angle iron; bars & rods
Quality of minimill-produced steel 7% 4%
Rebar
1975
1980
1985
1990
2017/4/10
Copyright Clayton M. Christensen

5. Disruption generates repeated upside surprise
Quality of minimill-produced steel
Steel Quality
1980
1975
1985
1990
Rebar
Angle iron; bars & rods
Structural Steel
Sheet steel
Index of 30 successful (Ex Post ) disruptors: 46% per year for 10 years post-IPO
Performance of Disruptive Innovation Fund (ex ante) : 29% per year
Nucor share price (adjusted for splits) $1 $2 $4 $8
$16
$32
27% CAGR
2017/4/10
Copyright Clayton M. Christensen

6. Expensive failure almost always results when disruption is crammed into direct competition with established technology
Path being taken by:
Electric vehicles
Solar electricity
Wind power
Biofuels
Tabletop Radios, Floor-standing TVs
Performance
Path taken by
vacuum tube manufacturers
Different measure
Of Performance
Non-consumers or Non-consuming
occasions
Time
Portable TVs
Pocket radios
Hearing Aids
Time
4/10/2017
Copyright Clayton M. Christensen

7. What is a business model, and how is it built?
THE VALUE PROPOSITION:
A product that helps customers do more effectively, conveniently & affordably a job they’ve been trying to do
RESOURCES:
People, technology, products, facilities, equipment, brands, and cash that are required to deliver this value proposition to the targeted customers
PROCESSES:
Ways of working together to address recurrent tasks in a consistent way: training, development, manufacturing, budgeting, planning, etc.
PROFIT FORMULA:
Assets & fixed cost structure, and the margins & velocity required to cover them
4/10/2017
Copyright Clayton M. Christensen

8. Evaluating investments on marginal rather than full costs biases incumbent leaders to leverage what they have, instead of building what they need
$350
340 10
Existing
Price
Cost
Net
$350
285 65
Minimill
$350 15
335
Marginal
% of tons
25–30%
55%
Steel Quality
Sheet steel
18%
22%
Structural Steel
Quality of integrated mills’ steel
12% 8%
Angle iron; bars & rods
Quality of minimill-produced steel 7% 4%
Rebar
1975
1980
1985
1990

9. Outsourcing often sets in motion disruptive business model liquidation
AsusTek
Brand
Brand
Product design
Product design
Supply chain
& logistics
Supply chain
& logistics
Computer assembly
Computer assembly
Mother boards
Mother boards
Simple circuit boards

10. Outsourcing often sets in motion disruptive business model liquidation
Customer
Supplier
IT departments
TCS, Infosys, Wipro
Auto companies
Tier One Suppliers
Petroleum Majors
Halliburton,
Schlumberger
Pharmaceutical Cos.
CROs.
Wall Street Analysts
Bloomberg

11. The right product architecture depends upon the basis of competition
IBM Mainframes, Microsoft Windows
Proprietary, interdependent architectures
Compete by improving
functionality &
reliability
Performance
Compete by improving
speed, responsiveness and customization
Modular open architectures
Dell PCs, Linux
Time
2017/4/10
Copyright Clayton M. Christensen

12. Changes in product architecture have profoundly changed the architecture of the computer industry
Present
Teradyne, Nikon, Canon, Applied Materials, Millipore, etc.
Equipment
Monsanto, Sumitomo Metals, Shipley, etc.
Materials
Intel, Komag, etc.
Components
IBM
Compaq, Dell, Gateway
Product design & assembly
Operating system & applications software
Control Data
Digital Equipment
Microsoft
Apple Computer
Sales & distribution
Best Buy
Field service
Geek Squad

13. Integrated companies with proprietary products typically commoditize their suppliers
Commoditizer
Commoditizee
IBM
Applied Magnetics
General Motors
Dana Corp.
P&G
Dow Corning
Performance
Modular Architectures
Interdependent Architectures
Time

14. The law of conservation of attractive profits
De-Commoditization: services & products
that make use of the product more effective
Add features
Commoditization thru modularity, over-shooting
Copy features
De-Commoditization: sub-systems that drive
the performance of the modular product

15. So what should the Harvard Business School Do?
2017/4/10
Copyright Clayton M. Christensen

16. Market Understanding that Mirrors how Customers Experience Life
SatComs – reliable, secure, dependable 1s and 0s…not that they want a satellite not a copper wire…
Robotics – segment in terms of military activities –
DUALITIES POINT – Job of Lockheed Martin (mission of the future) vs. segmenting by Army, Navy, etc. or by Gov’t versus Commercial
“The customer rarely buys what the company thinks it is selling him” Peter Drucker

17. Three levels in the architecture of a job
What and how must we integrate in order to provide these experiences?
What are the experiences in purchasing, using and living with the product that we need to provide in order to get the job done perfectly?
What’s the job-to-be-done – the basic problem the customer is facing, and the result that she needs?
(Each job has functional, emotional & social dimensions)
4/10/2017
Copyright Clayton M. Christensen

18. Targeting the job enables precision in product development
Product category
Too many features; wrong features
Job to be done
Proper integration of all needed experiences
Customer category
One-size-fits-none product
4/10/2017
Copyright Clayton M. Christensen

19. Companies that segment markets by job find:
The market is much larger
Their share is smaller
Their real competitors aren’t in their product category
Growth potential is greater, because non-consumption is usually a major competitor
They can integrate properly
Building a valuable brand is straightforward

20. Copyright Clayton M. Christensen
Integrating correctly to provide the experiences that get the job done is the essence of defensible differentiation
Ikea vs. Levitz
SAS vs. (_____)
Zara vs. H&M
Federal Express vs. Emery Air Freight, UPS
Disney vs. Six Flags
OnStar vs. Toyota, Volvo
Hilti power tools
4/10/2017
Copyright Clayton M. Christensen

21. Principles we teach that aren’t always true:
Focus investments where returns are most attractive
Understanding the customer is the key to successful innovation
Big markets generate bigger businesses than small markets
Outsource low value-adding activities that aren’t your core competence
Ignore sunk and fixed costs; make decisions based upon marginal costs and marginal revenues