WILLIAM R. AND ERLYN J.

GOULD DISTINGUISHED LECTURE ON

TECHNOLOGY AND THE QUALITY OF LIFE

Fourteenth Annual Address

Using Disruptive Innovation to Create New Growth

by

Clayton Christensen Robert 8c Jane Cizik Professor of Business Administration

Harvard Business School

DUMKE FINE ARTS AUDITORIUM SPONSORED BY: THE J. WILLARD MARRIOTT LIBRARY

UNIVERSITY OF UTAH 2005-06

Using Disruptive Innovation to Create New Growth

Clayton W . Christensen Robert 8c Jane Cizik Professor of Business Administration

Harvard Business School

Dumke Fine Arts Auditorium Marcia 8c John Price Museum Building

410 Campus Center Drive Sponsor: J. Willard Marriott Library

University of Utah March 29, 2006

Noon

Program

Welcome

Joyce L. Ogburn Director, J. Willard Marriott Library

Introduction

Michael K. Young President, University of Utah

2005-06 Gould Lecturer

Clayton M . Christensen Robert 8c Jane Cizik Professor of Business Administration

Harvard Business School

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About the Gould Endowment "T* T" T"illiam R. and Erlyn J. Gould 1 / 1 / established an endowment WW in their names in 1992 in

support of the activities conducted within the Utah Science, Engineering, and Medical Archives of the J. Willard Marriott Library.

In addition to supporting the archives, the endowment also funds the annual William R. and Erlyn J. Gould Distinguished Lecture on Technology and the Quality of Life. These annual lectures focus on technical and environmental topics, and how they relate to society as a whole.

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JR Erlyn and William Gould

William R. Gould, one of the world's leading engineers, businessmen, and entrepreneurs, has named the Marriott Library as repository of record for his professional and personal papers spanning more than forty years. As with many of the donors of collections housed in the Utah Science Archives, extensive oral history interviews have been conducted with Mr. Gould, as a supplement to his collection.

Through support by the Gould Endowment of the Gould Distinguished Lecture series, William and Erlyn have expressed their desire to share with the public their hope for the future: that through a more complete understanding of technology and its application, perhaps the humanity of which we are all a part may find a stronger path to greater social potential.

In their support of the Marriott Library, the Utah Science Archives, and the Gould Distinguished Lecture series, William and Erlyn Gould have established a durable marker by which we may more easily find our way.

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GOULD DISTINGUISHED LECTURE on

TECHNOLOGY AND THE QUALITY OF LIFE

Mission Statement

The William R. and Erlyn J. Gould Distinguished Lecture on Technology and the Quality of Life was inaugurated in October, 1992, at the University of Utah J. Willard Marriott Library.

In establishing the lecture series, William and Erlyn Gould both recognized the critical need for continuing public education about issues regarding modern technology and its impact on our daily lives.

Inherent to the advantage of technology is the importance of understanding the ramifications and responsibilities that accompany modern scientific discovery. Only through continuing public education can scientific fact and social philosophv be successfully merged.

This lecture series is intended to provide a forum for the discussion of problems, issues, experiences, and successful case histories of the regeneration and preservation of our communities through the application of modern technology.

It is hoped that an increased awareness of obligation in the public trust will emerge among practitioners of technology as they address the very important environmental and life-deteriorating problems facing society today.

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Through interaction between technologists and opinion leaders in communities that are the benefactors of their efforts, a synergism can develop through which society may see great benefit in the long-term future.

With this lecture series, it is intended that a dialogue be opened between the technologist, the philosopher, the humanist, the private citizen, and all who may wish to assert an active voice in our collective future.

In such an atmosphere of mutual interest and understanding, no one group will be singled out for exclusion or be blamed for society's ills; rather, through understanding, discourse, and public education the positive direction of our future may be shaped.

The Marriott Library's mission is to provide information resources that support the scholarship, teaching, and research programs the University of Utah offers to students, faculty, and citizens of the state.

In this light, this annual lecture will strive toward providing a greater public understanding of technology and the social potential that can be cultivated.

In conjunction with the Utah Science, Engineering, and Medical Archives program of the Marriott Library, this lecture series will provide the means of bridging the many disciplines of technology while meeting the needs of the public in understanding its rich and diverse technological heritage.

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Clayton M. Christensen Robert 8c Jane Cizik Professor of Business Administration

Harvard Business School

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Clayton M. Christensen Clayton M. Christensen is the Robert and Jane Cizik Professor

of Business Administration at the Harvard Business School, with a joint appointment in the Technology 8c Operations Management and General Management faculty groups. His research and teaching interests center on the management of technological innovation, developing organizational capabilities, and finding new markets for new technologies. Prior to joining the HBS faculty, Christensen served as chairman and president of CPS Corporation, a firm which he co-founded with several M I T professors in 1984 which is now a publicly traded company. CPS is a leading developer of products and manufacturing processes using advanced materials.

Christensen holds a B.A. in economics from Brigham Young University and an M.Phil, in economics from Oxford University, where he studied as a Rhodes Scholar. Christensen received an MBA from the Harvard Business School in 1979, graduating as a George F. Baker Scholar. He was awarded a DBA from the Harvard Business School in 1992. Christensen won the Production and Operations Management Society's 1991 William Abernathy Award, presented to the author of the best paper in the management of technology; the Newcomen Society's award for the best paper in business history in 1993; and the 1995 McKinsey Award for the best article published in the Harvard Business Review.

Professor Christensen is the author of four books: The Innovator's Dilemma, which received the Global Business Book Award for the best business book published in 1997; Innovation and the General Manager, a casebook; The Innovator's Solution, co-authored by Michael E. Raynor; and Seeing What's Next, co-authored by Scott D. Anthony and Erik A. Roth. Professor Christensen's writings have been featured in a variety of publications, and have won a number of awards over the years.

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Using Disruptive Innovation to Create New Growth

The theory of disruptive innovation is grounded in research that has revealed how simpler, cheaper, and "good enough" innovations can find application in low-end market tiers and non-consuming customer groups. These innovations inevitably improve, march up-market and "disrupt" incumbents by gradually pushing them out of ever more complex and margin-rich product segments. This presentation introduces the core concepts related to disruptive innovations, showing how they can be both threats and opportunities and what companies can do to encourage disruptive growth. Professor Christensen draws on examples from a vast array of industries to illustrate key concepts throughout the presentation. Notable examples come from industries including steel, personal computers, consumer goods, health care, electronics, software, education, telecommunications and semiconductors.

Professor Christensen discusses the following topics, described in more detail below:

1. Tackling the Innovator's Dilemma: Disruptive innovation basics

2. Assessing Capabilities: Resources, processes and values 3. Understanding the drivers of commoditization 4. Connecting with customer jobs to be done 5. Deploying the right kind of strategy at the right time 6. Creating a growth engine 7. Disruptive innovation applied to country strategy

1. Tackling the Innovators Dilemma: Disruptive innovation basics

There is a simple, important principle at the core of the disruptive innovation theory: companies innovate faster than customers' lives change. Because of this, most organizations end up producing products that are too good, too expensive, and too inconvenient for many customers. By only pursuing these

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"sustaining innovations," companies unwittingly open the door to entrants that can offer simpler, more convenient and lower-cost products to those customers who have no need to keep up with the accelerated pace of innovative change.

This phenomenon happens for a good reason: good managers are trained to seek higher profits by bringing better products to the most demanding customers in the marketplace. But in that pursuit of profits, companies end up "overshooting" less-demanding customers who are perfectly willing to take the basics at reasonable prices. And they ignore "nonconsumers" who may have a desire to get a job done, but who lack the skills, wealth or ability to consume existing solutions in order to satisfy that desire.

There are two types of disruptive innovations: low-end and new-market. Low-end disruptive innovations can occur when existing products and services are "too good" and hence overpriced relative to the value existing customers can use. Low-end disruptive innovators create business models that provide adequate quality to these "overshot" customers. The second type, new-market disruptive innovations, can occur when characteristics of existing products limit the number of potential consumers. Limiting factors might include the need to consume in inconvenient, centralized settings or the need to have expert training. The Kodak camera, Bell telephone, Sony transistor radio, Xerox photocopier, Apple personal computer, and eBay online marketplace were all new-market disruptive innovations. They all created new growth by making it easier for people to do something that historically required deep expertise or great wealth.

2. Assessing Capabilities: Resources, processes and values/priorities

The resources, processes, and values (RPV) theory explains why existing companies tend to have such difficulty grappling with disruptive innovations. The RPV theory holds that resources (what a firm has), processes (how a firm does its work), and values (what a firm wants to do) collectively define an organization's strengths as well as its weaknesses and blind spots.

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The RPV theory argues that organizations successfully tackle opportunities when they have the resources to succeed, when their processes facilitate what needs to get done, and when their values allow them to give adequate priority to that particular opportunity in the face of all other demands that compete for the company s resources. Incumbent firms master sustaining innovations because their values prioritize them and their processes and resources are designed to tackle precisely those types of innovations. Incumbent firms fail in the face of disruptive innovations because their values will not prioritize disruptive innovations and the firm's existing processes do not help them do what they need to get done.

3. Understanding the drivers of commoditization Industries tend to evolve from states of interdependence, where

individual firms are vertically integrated, to modularity, in which specialist firms that are responsible for critical pieces of the value chain and produce key product components can earn a dispropor-tionate share of value in an industry.

Before a product or service is good enough to meet mainstream customer needs, integrated firms that control the entire production and delivery process are best suited to coordinate the complexities developers will confront when trying to improve the product. Companies that solve these problems are rewarded with a dispro-portionate share of industry profit. To improve products, companies often must use new and unproven technologies or put existing technologies together in new ways, creating new patterns of interaction and new problems. Pushing the frontier of what is possible requires proprietary, interdependent architectures, and in this circumstance, integration gives firms a full platform to run engineering experiments to wring out continued improvements.

As companies overshoot their customers' needs, companies no longer need the benefits that integration brings. Instead, they increasingly compete based on speed, flexibility, or convenience. In an effort to develop products or services more quickly, companies tend to standardize interlaces between various parts of the product

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or service. These standards eventually morph into industry-wide standards and allow product architecture to become modular. Modular products or services allow companies to get to market more quickly because they can replace individual components without redesigning an entire product. Modularity also enables the creation of specialist firms capable of developing products that fit these interfaces. This change allows previously integrated firms to out source pieces of their product to vendors that meet their spec-ifications and allows specialist firms to earn a significant share of the profits.

4. Connecting with customer jobs to be done

The jobs-to-be-done theory holds that products are successful when they connect with a circumstance - with a job that customers find themselves needing to get done. Products that successfully match a job or circumstance end up being the real "killer applications." They make it easier for consumers to do something they were already trying to accomplish.

By identifying what jobs people really care about and developing products that make it easier to achieve these jobs, companies can identify new markets that they were previously unaware of and that could not be uncovered via traditional market segmentation schemes. Understanding those jobs that are not adequately satisfied by current products provides deep insight into what are and what will be the truly innovative products that delight existing customers and attract new customers from the sidelines of nonconsumption.

5. Deploying the right kind of strategy at the right time When pursuing new growth opportunities, companies have

two different ways to set strategy. They can follow a deliberate strategy, where they set a goal, define a set of steps to reach that goal, and then methodically act on each step. This process is very conscious and typically quite analytical. It involves assessment of market structure, competitive analysis, and detailed market research to determine customer needs.

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Companies that take the other approach - following an emergent strategy - try to retain flexibility and gather feedback from the marketplace on what works and what doesn't. They try to change their strategies on the fly to adapt to new information that emerges from the marketplace.

Emergent strategies work in highly uncertain situations, such as those that surround the pursuit of disruptive innovations. In these situations, operating managers tend to encounter problems that business planners didn't anticipate. Actions lead to unanticipated results. In such circumstances, following a rigorous deliberate strategy can lead companies to ignore market signals and not adapt their strategies. In other words, they can continue to stick to a strategy that clearly isn't working. Emergent strategies encourage managers to respond to problems in the most appropriate way, even if it results in deviating significantly from the deliberate course.

6. Creating a growth engine

If a company launches a sequence of growth businesses, if its leaders repeatedly use the disruptive innovation principles for shaping ideas or acquiring nascent disruptions, and if thev repeatedly use sound theories to make other key business-building decisions well, a predictable, repeatable process for identifying, shaping and launching successful growth can coalesce. A companv that embeds the ability to do this in a process would own a valuable growth engine.

Such an engine would have four critical components. First, it needs to operate rhythmically and by policy, rather than in response to financial developments. This would ensure that new businesses get launched while the corporation is still growing, and that new businesses would not be pressured to grow too big too fast. Second, the CEO or another senior executive who has the confidence and the authority to lead from the top when necessary must lead the effort. This is particularly important in the early years, when success still depends more on resources than on processes. Third, it would establish a small, corporate-level group - movers and shapers

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- whose members develop a practiced, repeatable system for shaping ideas into disruptive business plans that are funded and launched. Fourth, it would include a system for training and retraining people throughout the organization to identify disruptive opportunities and to take them to the movers and shapers.

7. Disruptive innovation applied to country strategy

The principles described above can be useful not only for a companys strategy, but for a country?, macroeconomic strategy as well. The "wheel' of disruption - firms establishing disruptive footholds, growing, seeing growth stall, squashing internal ideas and having managers leave or entrepreneurs coalesce to get funding and form new businesses to establish new disruptive footholds - is a core microeconomic engine of macroeconomic growth. Many writers who have suggested that American management was the way of the past and Japanese management the way of the future in the 1980s ascribed much of the United States' subsequent growth to American management. However, we cannot credit the economic success of the United States to the ascendance of American management any more than we can credit the economic struggles of Japan to the descent of Japanese management. The United States has not been able to continue moving along the wheel of disruption.

There are six factors that encourage the wheel of disruption: A market for talent that encourages entrepreneurialism and risk taking; Capital markets that help new firms start and grow while targeting disruptive opportunities; Unconstrained product markets that provide ample motivation and ability; a supporting infrastruc-ture that has appropriate tax policies and encourages company formation; Vibrant industry dynamics with market-based interactions and competition to spur new business models; and, a research and development environment that protects intellectual property. Countries that nurture a wheel of disruption can find great success.

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The Utah Science, Engineering, and Medical Archives The Utah Science, Engineering, and Medical Archives was

established in 1985 as a part of the Special Collections Department of the J. Willard Marriott Library.

Many individuals associated with Utah have made distinguished contributions to science and its application to business and industry. These advances cover a broad spectrum of creative theoretical contri-butions, important experimental work, and innovative technological applications ranging from chemical reactions to cosmic rays, commercial explosives to artificial organs, computer graphics to fossil fuels, sound reproduction to space engineering, laser technology to applied ecology, and more.

The Utah Science Archives provides a rich resource for researchers exploring diverse topics in science, medicine, and technology. These include the individual contributions of distinguished scientists and entrepreneurs to group and institutional research of development projects. The complex interactions of science, technology, government, and industry are well documented.

An on-going search is being conducted to identify materials appropriate for inclusion in the archives. Many prominent Utah-related scientists and entrepreneurs have been contacted and encouraged to deposit their personal and professional papers with the program. The response has been positive, and the archives presendy holds over 60 major collections, with additional collections committed.

As the archives and its funding base grows through generous private contributions, it will sponsor more special lectures, university courses, seminars, conferences, and major exhibitions. These educational programs will provide the means of bridging the many disciplines of a university campus while meeting the needs of the public in understanding its rich and diverse scientific and technological heritage.

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T h e Library and the University The University of Utah Libraries include the J. Willard Marriott

Library, the Spencer S. Eccles Health Sciences Library, and the S. J. Quinney Law Library. These libraries collectively constitute one of the foremost research centers in the intermountain area. The Marriott Library has over two and one-half million volumes and approximately 14,000 serial subscriptions.

The Marriott Library participates in the learning and teaching ventures of the university by building collections, establishing links to an increasingly global body of knowledge, and providing users with guidance in accessing a wide range of resources. The library is a shared asset of the academic community dedicated to teaching users how to find, evaluate, and incorporate knowledge in scholarly and research endeavors. With a welcoming environment, the library ties the academic community to varied cultural and scholarly traditions.

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NOTES

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NOTES

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Advisory Board 2005-06

William R. Gould, Chairman Emeritus, Southern California Edison Co., Rosemead, California

Floyd A. O'Neil, Advisory Board Chairperson, Director Emeritus, American West Center, University of Utah

Wayne R. Gould, Director, Natural Gas Resources, Puget Sound Energy

Gilbert R. Gould, Sr. Vice President, Underwriting, Aegis Insurance Services, Jersey City, New Jersey

David W. Pershing, Sr. Vice President for Academic Affairs, University of Utah

Michael K. Young, President, University of Utah

David W. Eckhoff, Sr. Consultant PSOMAS, Chairman of the Civil & Environmental Engineering Department Advisory Board, University of Utah

Joyce L. Ogburn, Director, J. Willard Marriott Library, University of Utah

Gregory C. Thompson, Assistant Director, Special Collections, J. Willard Marriott Library, University of Utah

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