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What is the Theory ofDisruption?

Your Future. Your Success.

Prof. Dr. Christian Schultz christian.schultz@hwtk.de

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We start with a simple question!

Why did Nokia fail?Task: Please brainstorm this question briefly with your partner and write thestrongest reason(s) in your opinion on your card!

Time: 2 Minutes

Verbal gathering of results: 1 Minute

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Another (not-so-simple) question ...

Why do good companies fail?NoteIt is easy to explain why poorly companies fail; but many of history‘s mostsuccessful and best-run firms have lost their positions of leadership, too. Why is it so hard to sustain success? Clayton M. Christensen, 2003, 1.

Christensen and Raynor (2003): The Innovator´s Solution – Creating andSustaining Successful Growth, Boston: HBR Press.

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The Innovator‘s Dilemma andThe Innovator‘s Solution

Central Question: Why do good companies fail?

Central Question: How can companies stay succesful?

Christensen, C.M. (1997): The innovator's dilemma: The revolutionary book that will change the way you do business, Boston: Harper Collins.

Christensen, C.M. and Raynor, M. (2003): The Innovator'ssolution: Creating and sustaining successful growth, Boston: Harvard Business Review Press.

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Prod

uct

Perfo

rman

ce

Disruptive innovationenables to transform a complicatedproduct into a simple product.

Incumbents nearly always win!

Entrants nearly always win!

§ High product performance§ High-margin/ low volume

segment of the market

§ Low product performance§ Low-margin/ low volume

segment of the market

§ Medium productperformance

§ Medium-margin/ high volume segment of themarket

Time

Source: Christensen, C.M. 1997, xiv; Christensen, C.M. and Raynor M.E. 2003, 33; with some additional information.

Disruptive innovation answers the question:Why do market leaders fail over time?

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Bene

fitCostco supermarketsLow-price airlinesSteel Minimills

Diff

eren

t mea

sure

ofpe

rform

ance

Telephone (1876)Cell phone, PC (1978) Photo copying (1950) e-Retail (1996)

Benefits the customer can experienceImprovement, product or process innovation

Source: Christensen, C.M. and Raynor, M.E. 2003, 44.

Compete againstnon-consumption

Address over-served customerswith a lower cost business model

Two paths of disruption

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Examples of Companies and Products Whose Roots Were in Disruption

-1870 KodakBell Telephone

Beef processing(Swift,Armour)

Departmentstores(Marshall Field’s,Macy’s)

Merrill Lynch Ford Catalog retailing(Sears JCPenney,MontgomeryWard)

Plastics(DuPont, Dow, etc.)

Sony HondamotorcyclesMcDonald’s

Minicomputers(DEC, Nixdorf, etc.) Xerox Black& Decker

Toyota, Nissan consumer power toolsDiscount department stores(Kmart, Wal-Mart, Target)Japanese steel companies

SteelminimillsUltrasoundsoft

Intel microprocessor tissue imagingCredit scoring in

Endoscopic surgery Southwest Airlines consumer lending BoxedbeefFlat-paneldisplays Fidelity (self-service Charles Schwab Vanguard indexmutual finds

investmentmanagement)Blended plastics Barnes & GE Capital

Personal computers Community colleges Seikodigitalwatches

Portable diabetes

(Himont, etc.) Noble

KodakFunsaversingle-use camera glucose meters

Toys ‘R UsUniversity of MCI, SprintPhoenix

Microsoft Bloomberg Embraer, SunCanadair Microsystems

Circuit City,HomeDepot,

Staples,BestBuy

Wireless telephony OracleCisco

Canon photocopiersIntuit Quick-Books (accounting)

and TurboTax (software)

DellComputer

MBNAInk-jet printers Hyundai, Kia

Veritas, NetworkAppliance Galanz microwaveovens Digital animation (Pixar etal.)& air conditioners E -mail

Unmannedmilitary aircraft Microsoft SQL database software ECNseBayPalmPilot, RIMBlackBerry Concord Schoolof Law Google Linux

Digital printing OnlineAmazon.com

Onlinetravelagencies JetBlue

Sonosite UltrasoundSalesforce.com 802.11 stockbrokers

-1950

-1960

-1980

-2000

History

Low EndNewMarket

Source: Christensen, C.M. and Raynor, M.E. 2003, 48.

7

Different case studyexamples of disruption

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Main reasons for incumbentsto suffer from disruption

•More product features than theaverage customer can absorb.

•Incumbent‘s focus is on thebest customers, who buy high-margin products.

•Ressource allocation dependson those customers and thecompany‘s investors.

Over-engineering

•Production of low-marginproducts becomesuninteresting.

•Only high growth markets areaddressed.

•Not overly profitable marketsegments are abandonded.

Profit Focus •High fixed cost percentage ofoverall cost.

•Risk aversion towards newtechnologies.

•New markets can not beanalyzed therefore noinvestment.

RiskAversion

Source: According to Christensen, C.M. 1997.

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New Market Disruption: The iPhone

Sustaining Innovation

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Some of Nokia‘s mistakes

§ Nokia missed the market change that customers began tomeasure and use an iphone differently than a traditional cellphone. A smartphone is rather a computer substitute than a conventional phone.

§ While Nokia still concentrates on their hardware developmentApple and Google develop new operating systems and createsoftware ecosystems of softwarer (apps) around their products.

§ Customers start buying more and more smartphones and ignoretraditional cell phones.

§ In the smartphone category Nokia is not able to offer competitiveproducts.

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Key points about disruption§ Disruption enables average customers to buy sophisticated products and services.§ Disruption is a process and not a single event.§ Not every company‘s failure can be attributed to disruption. Sometimes firms just go out of

business, because somebody else creates a better product.§ There are 2 disruptive paths:

o Low-end disruption: A disruptive innovation initially offers a lower performanceaccording to what the mainstream market has historically demanded. As theincumbents abandons low-margin products the entrant becomes better and betterand starts to offer products with high margins. Eventually, the entrant might displacethe former technology with its market leader (example: integrated steel mills vs. minimills).

o New market disruption: The entrant rather targets non-consumers and aims atcreating a new market. The product offers new performance attributes, which makesit prosper and eventually crowds out the old product (example: typewriter vs. PC).

§ An incumbent‘s failure through disruption is enabled through the success and thesustaining innovation of the incumbent („innovator‘s dilemma“). Success breeds arrogantmanagers, handicaps the innovation culture and makes the company averse to change.

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12

LiteratureChristensen, C. M. (1997): The Innovator's Dilemma: The

Revolutionary Book that Will Change the Way You Do Business. New York: Harper Collins.

Christensen, C.M. and Raynor, M.E. (2003): The Innovator´s Solution – Creating and Sustaining Successful Growth. Boston: HBR Press.

.

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Your Future. Your Success.

Prof. Dr. Christian Schultz Head of Distance Learning at HWTK

christian.schultz@hwtk.de