professor clark gilbert harvard business school

© 2004, Clark Gilbert, Harvard Business School

Professor Clark Gilbert Harvard Business School

A New Path to Growth

Using Disruption to Drive New Growth at McNeil


Sustaining versus Disruptive InnovationP

rod

uc

t P

erf

orm

an

ce

Time

Performance that customers

can utilize or absorb

New performance trajectory

Disruptive InnovationDisruptive Innovation

Pace of Technological

Progress

Sustaining Innovation

Breakthrough

Incremental

Source: The Innovator’s Dilemma


Disconnect with Resource Allocation

Dis

rup

tive

P

rop

osa

l

•Targets Different Customers in New Ways

•Introduces Different Performance Criteria

•Under Valued by Leading Customers

•Lowers Performance along Traditional Trajectory

•Lowers Gross Margins

Marketing Manager

Production

Budgeting Committee


Pe

rfo

rman

ce

E-mail applications

Home-use Applications

Disruptive technology: digital film

Children’s Game Toys

Applications for Silver Halide Film

Technology

Established players force new technology into old markets

Disruption in digital

photography

Kodak’s Response ($1B in R&D)


Definition of a Fanatic:

Someone who doubles his speed when he has lost his direction

--George Santayana


The Benefit of Staged Learning

Discovery of New Market and Business Model

Replication of Old Market and Business Model


Different Types of Innovations

Low-End Disruption

New Market Disruption


CUSTOMERSCUSTOMERS•Overserved customers in low-end of existing

market

•New customers or new contexts of use

•Most profitable customers in existing

markets

BUSINESS MODEL

BUSINESS MODEL

•New financial or operational model that earns attractive returns

at low prices

•New business model, often lower price points,

new sales model & distribution channels

•Similar to existing model, improves or maintains margins

TECHNOLOGYTECHNOLOGY•“Good enough” on

traditional metrics but lower prices

•Improved performance on new attributes (e.g., simplicity, convenience)

•Improvements along dimensions valued by

current customers







Steel Minimills: A Low-End Disruption


7%

4%

Quality of m

inimill-produced steel

12%

8%

18% 22%

% of Tons

Ste

el

Qu

alit

y

19801975 1985 1990

Rebar

Angle iron; bars & rods

Structural steel

Sheet steel

25–30%55%

% of Margin

Steel Minimills: A Low-End Disruption


Different Types of Innovations

Low-End Disruption



CUSTOMERSCUSTOMERS•Overserved customers in low-end of existing

market


•Most profitable customers in existing

markets

BUSINESS MODEL

BUSINESS MODEL

•New financial or operational model that earns attractive returns

at low prices



•Similar to existing model, improves or maintains margins

TECHNOLOGYTECHNOLOGY•“Good enough” on

traditional metrics but lower prices


•Improvements along dimensions valued by

current customers


Minicomputers: A New Market Disruption

The DEC Programmable Data Processor 8: 1965


Established Markets Continue to Grow even as the Disruptive Markets Take Root

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

11000

12000

13000

14000

15000

1965 1975 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001

Source: ITI, Industry Statistics Programs; U.S. Microcomputer Statistics Committee Forecast, Data Analysis Group

Mainframe Computer Market

Minicomputer Market

First Revenue Lead

Sustained Revenue Lead

Minicomputers Disrupt Mainframes

Dollars ($billions)

Phase I Phase II Phase III


Disruption in Print Media“All the News that Fit to Pixel”


Dis

rup

tive

P

rop

osa

l

•Targets Different Customers in New Ways

•Introduces Different Performance Criteria

•Under Valued by Leading Customers

•Lowers Performance along Traditional Trajectory

•Lowers Gross Margins

Marketing Manager

Production

Budgeting Committee

Disconnect with Resource Allocation


Missing Revenue: Online Advertising Market

0

20

40

60

80

100

120

Online Newspaper Typical Online Entrant

E-mail

Demographic

Usage Targeting

Sectionals

ROS

45%

15%

20%

10%

Old Business Models Make It Very Difficult to Realize

45% Missing!


Online Revenue Per Unique User

$7.93

$17.12

$1.00

$3.00

$5.00

$7.00

$9.00

$11.00

$13.00

$15.00

$17.00

$19.00

Newspapers Pure-Plays


The Irony of Disruptive InnovationGrowth Starts in New, Not Established Markets

Pro

du

ct

Pe

rfo

rma

nc

e

Time

Performance that customers

can utilize or absorb

New Net Growth


EstablishedBusiness

EstablishedBusiness

DisruptiveBusinessDisruptiveBusiness

Net NewGrowthNet NewGrowth

Starts Outside

Established Business

Starts Outside

Established Business

Displacement

Displacement

"Overall, the newspaper industry's involvement with the Internet has been one where it had a lot to lose and it's been trying not to lose it, as opposed to starting from scratch and having a lot to win."

--Steve Yelvington, President of Online Newspaper Division

Finding New Market Growth


Why is this so difficult for otherwise successful

firms?


RPV: Strengths Become Weaknesses

• Hiring & Training

• Product development

• Manufacturing

• Planning & Budgeting

• Market Research

• Resource allocation

• People

• Technology

• Products

• Equipment

• Information

• Cash

• Brand

• Distribution

ProcessesResources Values

• Ethics

• Cost structure/income statement

• Size of opportunity

The criteria by which prioritization decisions are made

Core Competence vs. Core Rigidity


Capabilities in One Context Become Disabilities in Another

Bigenough to beinteresting?

Processes:Processes:How?How?

WhatMargins AreAttractive?

Cost structure

Product Quality

Resource Allocation

Customer Feedback

Planning Cycles

MarketResearch

Values:Values:Why?Why?

“OrganizationalDNA”


Disruption through Portable Ultrasound

“ I had a call with a nephrologist where I literally told the sales rep to take the product out of the bag and show it to the physician. He didn’t do it. And I’m the President of the company…

...We have all of these sales leads, but some of my reps are afraid of cannibalizing sales of higher-end hand carried systems.”

President, Hand-Carried Ultrasound Company

“ I need to look at the kidney myself and see what’s going on. Every time I want to look I have to send the radiologist a patient…

That’s not good. It doesn’t help me get my job done. I want to do it myself.”

Nephrologist


Develop Separate Business Development Processes

Pe

rfo

rman

ce

Time


Separate Disruptive Ventures

Integrated Sites

Millions of Page Views / Month

Separated Sites

Separated sites had nearly 4 million more page views

0

2

4

6

8

10

12 Penetration

6.5

10.4


Implications Disruptive technologies attack an established business, but provide enormous opportunities for new net growth

Focusing on your core market can lead to organizational rigidity – Trying Harder Can Be Part of the Problem!

Identifying these opportunities requires different lenses:

•Reconsidering technologies viewed as “inferior” in your core market

•Targeting “overshot” where the primary alternative is non-consumption

Developing these opportunities requires different tools:

•A different development, review, and funding process than the core business

•A venture process that is patient for growth, not for proof of concept

•A willingness to look outside of core business—venture autonomy, talent, partnerships, and acquisitions

Disruption can provide competitive advantage is the search for growth


Managing Uncertaintyin New Venture Creation

Clark GilbertHarvard Business School


HBS Definition of Entrepreneurship

Pursuit of Opportunity Without Regard to Resources Currently Controlled

Managing Uncertainty

1. Identify Critical Risks

2. Design Experiments

3. Stage Investment


• Technical

• Operating

• Market

• Distribution /Pricing

• Team

• Environmental

Which is the most important risk to understand and remove?

Deal Killers, Path Dependencies, Costs, Investor Needs, Greatest Uncertainty

1) Identify Key Sources of Risk

Total Venture Risk


Driver 3Driver 3

Driver 2Driver 2

Business Models: Fishbone Diagrams

profitsprofits

costscosts

revenuesrevenues

Driver 1Driver 1

Driver 2Driver 2

Driver 3Driver 3

Driver 1Driver 1

Driver 2Driver 2

Driver 3Driver 3

Driver 1Driver 1

Driver 2Driver 2

Driver 3Driver 3

Using the toolUsing the tool 1. Draw the key drivers of revenue and costs1. Draw the key drivers of revenue and costs 2. Identify key drivers and assumptions2. Identify key drivers and assumptions 3. Test sensitivity to changes in key drivers3. Test sensitivity to changes in key drivers 4. Analyze how reasonable key assumptions are4. Analyze how reasonable key assumptions are 5. Use the tool to surface key assumptions, 5. Use the tool to surface key assumptions, logical inconsistencies, critical sources of logical inconsistencies, critical sources of uncertainty and important questions to askuncertainty and important questions to ask


2) Types of Experiments

• Partial experiments – buy information on “deal killer” source of uncertainty

• good when you know you don’t know something, risk of failure is high– case examples

• customer research before introduce product (Parenting, Tally Up)• hire as consultant before hiring full time (Tally Up)• background check on job candidate

• Holistic experiments – test entire model on small scale

• good to reveal ignorance-I.e., things you didn’t know you didn’t• good to tests interaction between variables

– case examples • introduce product in trial before full launch (Onset vs. Knight Ridder) • develop prototype with development partner (Tally Up’s beta version, E

Ink)• projection and reflection (ONSET ask VCs evaluate whole plan)


2) Risks of Experiments

• Experiments can be expensive– (Knight Ridder, E Ink, Segway)

• They can take too long– What if you finally get it right, only to find out that the

market has moved or someone else has beat you to the punch?

• They can perpetuate– “Given the pace of our expansion, I don’t think we

made mistakes fast enough and we didn’t learn from them often enough. The problem wasn’t just turning them on, sometimes it’s turning them off.”

» -Bob Ingle, Executive Editor, San Jose Mercury News


2) The Value of Experiments

Value greatest when:– Significant cost of failure– Significant probability of failure– Cost of the experiment is a small percentage of the total

investment– The experiment yields fairly accurate results

• You can increase the value when:– Minimize both costs and timing– You impose variance on key questions, but control for other

variables (Onset)– Have key milestones and ways of measuring progress– Change behavior as a resultenter vs. exit, product adaptation,

adaptation subsequent roll-out


3) Staging Investment

Lock-in on Early

AssumptionsMarket and Business Model

Discovery of New


3) Staging Investment

• Only spend significant sums of money after big risks have been reduced.

• Examples– R&R doesn’t place manufacturing order

until after K-Mart order is received– Knight Ridder waits on registration until

execution and sales risk are reduced


SUCCESSSUCCESS

INVEST NOWINVEST NOW

FAILUREFAILURE

SUCCESSSUCCESSPayoffPayoff - Investment - Cost of Test- Investment - Cost of TestGOOD RESULTSGOOD RESULTS

INVESTINVEST

-- InvestmentInvestment - Cost of Test- Cost of TestFAILUREFAILURERUN AN EXPERIMENTRUN AN EXPERIMENT

ABANDONABANDON- Cost of Test- Cost of Test

BADBAD RESULTSRESULTS

ABANDONABANDON

Payoff - InvestmentPayoff - Investment

- Investment- Investment

11

11(1-P(1-PGG))

11

PPGG

PPSS

(1-P(1-PSS))

PPS|GS|G

(1-P(1-PS|GS|G))

3) Staged Investments and Value of Information


Capital

Funding to Milestonesaka “Old-Fashioned Venture Capital”

Risk (ß)

Valuation

Idea isFeasible

TechnologyWorks

A CustomerBuys

SeedFunding

R&DCapital

Go-to-MarketCapital

ExpansionCapital

P(success) = 30%Req’d IRR = 100%




Source: Lou Mazzucchelli, Ridgewood Capital


The “Fully Funded” Folly

A CustomerBuys

FullyFund

IPO(……….pray……………….)

Capital

Risk (ß)

Valuation

Idea isFeasible

TechnologyWorks

Source: Lou Mazzucchelli, Ridgewood Capital


Implications Risk is inversely related to value

Entrepreneurial managers don’t take risk, the manage risk

New ventures will:

•Develop in an highly iterative and staged process

•Employ a series of risk reducing experiments

•Business models will change multiple times

Reviewing of new ventures requires that board members can:

•Considered plans that will change considerably

•Demand results, but on different metrics—opportunity recognition and milestone achievement

•Identify risks, stage investment, and value risk reducing experiments

•Embrace outside perspectivesCreating the right context for reviewing new ventures is key—simply having powerful ideas and opportunities is not enough

professor clark gilbert harvard business school

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