10-1 Disruption Theory - Primer PrimarySource: Christensen & Raynor, The Innovators Solution, Harvard Busines School Press 2003

10-2 The Innovator’s Dilemma 1.The Innovator’s Solution: Creating and Sustaining Successful Growth. Clayton Christensen & Michael Raynor. HBS Press, Boston, Desire to Maintain High Margins Moving businesses toward higher- margin products and shedding less-profitable products at the low-end is something that good managers do in order to increase profits; however, this also opens the door to disruption. 1 Sustaining innovations are so important and attractive, relative to disruptive ones, that the very best sustaining companies systematically ignore disruptive threats and opportunities until it is too late. 1 Should we invest to protect the least profitable end of our business, so that we can retain our least loyal, most price-sensitive customers? Or should we invest to strengthen our positing in the most profitable tiers of our business, with customers who reward us with premium prices for better products? Innovator’s Dilemma Threat of Potential Disruptions

10-3 The Innovator’s Solution: Creating and Sustaining Successful Growth. Clayton Christensen & Michael Raynor. HBS Press, Boston, Disruptive Technologies The Innovator’s Solution: Creating and Sustaining Successful Growth. Clayton Christensen & Michael Raynor. HBS Press, Boston, 2003.

The Innovator’s Solution: Creating and Sustaining Successful Growth. Clayton Christensen & Michael Raynor. HBS Press, Boston, Innovation Management Sustaining Innovations: Making better products that can be sold for more money to attractive customer bases Sustaining innovations are required to stay competitive and should be aggressively pursued Industry incumbents almost always prevail New-market entrants almost always beat incumbents Disruptive Innovations: New products that are not as good as currently available products, but that are typically simpler, more convenient, and less expensive products that appeal to new or less-demanding customers. 1

10-5 Up-market Minimill Migration Historically, most steel came from massive integrated mills that molten ore, roll and finish steel Minimills became disruptive to integrated mills by targeting the low-end and migrating upward –Minimills melt scrap metal in small electric furnaces; yields ~20% cost advantage –Since minimills began by targeting low-end rebar (4% of market, with only 7% margins), integrated mills felt little pain initially Asymmetric Motivations: Steel Industry Source: The Innovator’s Solution 1.Continuous Casting Investments at USX Corporation. Clayton Christensen. HBS No

10-6 Creating New-Growth Businesses New-Market Disruptions:  Create a new value network, where it is non- consumption is targeted, not the incumbent  As performance improves, new market disruptors eventually pull customers out of the original value network into the new one Low-End Disruptions:  Low-end disruptions simply use low-cost business models that grow by picking off the least attractive customers  Examples: Steel minimills, discount retailers Low-end disruptions motivate incumbents to flee. It is hard for established firms not to flee from low-end disruptors. 1 Because new-market disruptions target non- consumption, market leaders feel little pain until... 1 Leaders Flee Leaders Ignore It is much easier to beat competitors when they are motivated to flee rather than fight 1 1.The Innovator’s Solution: Creating and Sustaining Successful Growth. Clayton Christensen & Michael Raynor. HBS Press, Boston, 2003.

10-7 Disruption Theory Sustaining IncumbentSucceed New EntrantFail Disruptive 1.Low End 2.New Market IncumbentSucceed* (*ONLY with enough autonomy) New EntrantSucceed The Innovator’s Solution: Creating and Sustaining Successful Growth. Clayton Christensen & Michael Raynor. HBS Press, Boston, 2003.