Transcript Document

A New Path to Growth
Using Disruption to Drive
New Growth at McNeil
Professor Clark Gilbert
Harvard Business School
© 2004, Clark Gilbert, Harvard Business School
Page 1
Product Performance
Sustaining versus Disruptive Innovation
Disruptive Innovation
Source: The Innovator’s Dilemma
© 2004, Clark Gilbert, Harvard Business School
Time
Page 2
Disconnect with Resource Allocation
•Targets Different
Customers in New Ways
•Introduces Different
Performance Criteria
•Under Valued by Leading Customers
•Lowers Performance along Traditional
Trajectory
•Lowers Gross Margins
Disruptive
Proposal
Budgeting Committee
Production
Marketing Manager
© 2004, Clark Gilbert, Harvard Business School
Page 3
Performance
Established players force new technology
into old markets
Applications for
Silver Halide Film
Technology
Disruption
Kodak’sin
digital
Response
photography
($1B in R&D)
Home-use Applications
E-mail applications
Children’s Game Toys
Disruptive technology: digital film
© 2004, Clark Gilbert, Harvard Business School
Page 4
Definition of a Fanatic:
Someone who doubles his speed
when he has lost his direction
--George Santayana
© 2004, Clark Gilbert, Harvard Business School
Page 5
The Benefit of Staged Learning
Replication of
Old Market and
Business Model
© 2004, Clark Gilbert, Harvard Business School
Discovery of
New Market and
Business Model
Page 6
Different Types of Innovations
Sustaining
Innovation
Low-End
Disruption
New Market
Disruption
CUSTOMERS
•Most profitable
customers in existing
markets
•Overserved customers
in low-end of existing
market
•New customers or new
contexts of use
TECHNOLOGY
•Improvements along
dimensions valued by
current customers
BUSINESS
MODEL
•Similar to existing
model, improves or
maintains margins
© 2004, Clark Gilbert, Harvard Business School
•“Good enough” on
traditional metrics but
lower prices
•New financial or
operational model that
earns attractive returns
at low prices
•Improved performance
on new attributes (e.g.,
simplicity, convenience)
•New business model,
often lower price points,
new sales model &
distribution channels
Page 7
Steel Minimills: A Low-End Disruption
© 2004, Clark Gilbert, Harvard Business School
Page 8
Steel Minimills: A Low-End Disruption
% of Margin
% of Tons
25–30%
Steel Quality
55%
22%
18%
8%
12%
4%
7%
1975
© 2004, Clark Gilbert, Harvard Business School
1980
1985
1990
Page 9
Different Types of Innovations
Sustaining
Innovation
Low-End
Disruption
New Market
Disruption
CUSTOMERS
•Most profitable
customers in existing
markets
•Overserved customers
in low-end of existing
market
•New customers or new
contexts of use
TECHNOLOGY
•Improvements along
dimensions valued by
current customers
•“Good enough” on
traditional metrics but
lower prices
BUSINESS
MODEL
•Similar to existing
model, improves or
maintains margins
© 2004, Clark Gilbert, Harvard Business School
•New financial or
operational model that
earns attractive returns
at low prices
•Improved performance
on new attributes (e.g.,
simplicity, convenience)
•New business model,
often lower price points,
new sales model &
distribution channels
Page 10
Minicomputers: A New Market Disruption
The DEC Programmable Data Processor 8: 1965
© 2004, Clark Gilbert, Harvard Business School
Page 11
Established Markets Continue to Grow even
as the Disruptive Markets Take Root
Minicomputers Disrupt Mainframes
15000
Sustained
Revenue Lead
First
Revenue
Lead
14000
13000
Minicomputer
Market
12000
11000
10000
9000
Dollars 8000
($billions)7000
Mainframe Computer
Market
6000
5000
4000
3000
2000
Phase I
Phase III
Phase II
1000
0
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
© 2004, Clark Gilbert, Harvard Business School
Page 12
Disruption in Print Media
“All the News that Fit to Pixel”
© 2004, Clark Gilbert, Harvard Business School
Page 13
Disconnect with Resource Allocation
•Targets Different
Customers in New Ways
•Introduces Different
Performance Criteria
•Under Valued by Leading Customers
•Lowers Performance along Traditional
Trajectory
•Lowers Gross Margins
Disruptive
Proposal
Budgeting Committee
Production
Marketing Manager
© 2004, Clark Gilbert, Harvard Business School
Page 14
Old Business Models Make It
Very Difficult to Realize
Missing Revenue: Online Advertising Market
120
100
80
45%
45%
Missing!
60
15%
E-mail
20%
10%
Demographic
Usage Targeting
Sectionals
40
ROS
20
0
Online Newspaper
© 2004, Clark Gilbert, Harvard Business School
Typical Online Entrant
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Online Revenue Per Unique User
$19.00
$17.00
$17.12
$15.00
$13.00
$11.00
$9.00
$7.00
$7.93
$5.00
$3.00
$1.00
Newspapers
© 2004, Clark Gilbert, Harvard Business School
Pure-Plays
Page 16
Product Performance
The Irony of Disruptive Innovation
Growth Starts in New, Not Established
Markets
New Net Growth
Time
© 2004, Clark Gilbert, Harvard Business School
Page 17
"Overall, the newspaper industry's involvement with the Internet has been
one where it had
a lot to lose
and it'sMarket
been trying not
to lose it, as opposed
Finding
New
Growth
to starting from scratch and having a lot to win."
--Steve Yelvington, President of Online Newspaper Division
Displacement
Established
Business
Net New
Growth
Disruptive
Business
Starts Outside
Established
Business
© 2004, Clark Gilbert, Harvard Business School
Page 18
Why is this so difficult
for otherwise
successful firms?
© 2004, Clark Gilbert, Harvard Business School
Page 19
RPV: Strengths Become Weaknesses
Core Competence vs. Core Rigidity
Resources
•
People
• Technology
• Products
• Equipment
• Information
• Cash
• Brand
• Distribution
© 2004, Clark Gilbert, Harvard Business School
Processes
Values
• Hiring & Training
The criteria by which
prioritization decisions
are made
• Product
development
• Manufacturing
• Ethics
• Planning &
Budgeting
• Cost structure/
income statement
• Market Research
• Size of opportunity
• Resource
allocation
Page 20
Capabilities in One Context
Become Disabilities in Another
Big
enough to be
interesting?
Market
Research
Planning
Cycles
Processes:
How?
Customer
Feedback
Values:
Why?
What
Margins Are
Attractive?
Cost structure
Resource
Allocation
© 2004, Clark Gilbert, Harvard Business School
“Organizational
DNA”
Product
Quality
Page 21
Disruption through Portable Ultrasound
“ 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
“ 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.”
© 2004, Clark Gilbert, Harvard Business School
President, Hand-Carried Ultrasound
Company
Page 22
Performance
Develop Separate Business Development
Processes
Time
© 2004, Clark Gilbert, Harvard Business School
Page 23
Separate Disruptive Ventures
Separated sites had nearly 4 million more page views
12
Penetration
10
Millions
of Page
Views /
Month
10.4
8
6
4
6.5
2
0
Integrated
Sites
© 2004, Clark Gilbert, Harvard Business School
Separated
Sites
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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
© 2004, Clark Gilbert, Harvard Business School
Page 25
Managing Uncertainty
in New Venture Creation
Clark Gilbert
Harvard Business School
© 2004, Clark Gilbert, Harvard Business School
Page 26
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
© 2004, Clark Gilbert, Harvard Business School
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1) Identify Key Sources of Risk
• Technical
• Operating
• Total
MarketVenture
• Distribution
Risk /Pricing
• Team
• Environmental
© 2004, Clark Gilbert, Harvard Business School
Which is the most
important risk to
understand and remove?
Deal Killers, Path
Dependencies, Costs,
Investor Needs, Greatest
Uncertainty
Page 28
Business Models: Fishbone Diagrams
Driver 1
Driver 1
revenues
Driver 2
Driver 2
Driver 3
Driver 3
profits
Driver 1
costs
Driver 2
Driver 3
© 2004, Clark Gilbert, Harvard Business School
Using the tool
1. Draw the key drivers of revenue and costs
2. Identify key drivers and assumptions
3. Test sensitivity to changes in key drivers
4. Analyze how reasonable key assumptions are
5. Use the tool to surface key assumptions,
logical inconsistencies, critical sources of
uncertainty and important questions to ask
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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)
© 2004, Clark Gilbert, Harvard Business School
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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
© 2004, Clark Gilbert, Harvard Business School
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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 resultenter vs. exit, product adaptation,
adaptation subsequent roll-out
© 2004, Clark Gilbert, Harvard Business School
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3) Staging Investment
Lock-in on
Early
Assumptions
© 2004, Clark Gilbert, Harvard Business School
Discovery of New
Market and
Business Model
Page 33
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
© 2004, Clark Gilbert, Harvard Business School
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3) Staged Investments and Value of
Information
SUCCESS
INVEST NOW
Payoff - Investment
PS
(1-PS)
- Investment
FAILURE
SUCCESS
GOOD RESULTS
1
INVEST
PG
1
PS|G
(1-PS|G)
Payoff - Investment - Cost of Test
- Investment - Cost of Test
FAILURE
RUN AN EXPERIMENT
(1-PG)
1
ABANDON
- Cost of Test
BAD RESULTS
ABANDON
© 2004, Clark Gilbert, Harvard Business School
Page 35
Funding to Milestones
aka “Old-Fashioned Venture Capital”
Idea is
Feasible
Technology
Works
A Customer
Buys
P(success) = 80%
Req’d IRR = 30%
Valuation
P(success) = 50%
Req’d IRR = 50%
P(success) = 30%
Req’d IRR = 100%
P(success) = 40%
Req’d IRR = 70%
Risk (ß)
Capital
Seed
Funding
R&D
Capital
Go-to-Market
Capital
Expansion
Capital
Source: Lou Mazzucchelli, Ridgewood Capital
© 2004, Clark Gilbert, Harvard Business School
Page 36
The “Fully Funded” Folly
Technology
Works
Idea is
Feasible
A Customer
Buys
Valuation
Risk (ß)
Capital
Fully
Fund
(……….pray……………….)
IPO
Source: Lou Mazzucchelli, Ridgewood Capital
© 2004, Clark Gilbert, Harvard Business School
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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 perspectives
Creating the right context for reviewing new ventures is key—simply
having powerful ideas and opportunities is not enough
© 2004, Clark Gilbert, Harvard Business School
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