© 2004, clark gilbert, harvard business school page 1 professor clark gilbert harvard business...
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© 2004, Clark Gilbert, Harvard Business School Page 1
Professor Clark Gilbert Harvard Business School
A New Path to Growth
Using Disruption to Drive New Growth at McNeil
© 2004, Clark Gilbert, Harvard Business School Page 2
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
© 2004, Clark Gilbert, Harvard Business School Page 3
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
© 2004, Clark Gilbert, Harvard Business School Page 4
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)
© 2004, Clark Gilbert, Harvard Business School Page 5
Definition of a Fanatic:
Someone who doubles his speed when he has lost his direction
--George Santayana
© 2004, Clark Gilbert, Harvard Business School Page 6
The Benefit of Staged Learning
Discovery of New Market and Business Model
Replication of Old Market and Business Model
© 2004, Clark Gilbert, Harvard Business School Page 7
Different Types of Innovations
Low-End Disruption
New Market Disruption
Sustaining Innovation
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
New Market Disruption
•New customers or new contexts of use
•New business model, often lower price points,
new sales model & distribution channels
•Improved performance on new attributes (e.g., simplicity, convenience)
© 2004, Clark Gilbert, Harvard Business School Page 8
Steel Minimills: A Low-End Disruption
© 2004, Clark Gilbert, Harvard Business School Page 9
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
© 2004, Clark Gilbert, Harvard Business School Page 10
Different Types of Innovations
Low-End Disruption
New Market Disruption
Sustaining Innovation
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
© 2004, Clark Gilbert, Harvard Business School Page 11
Minicomputers: A New Market Disruption
The DEC Programmable Data Processor 8: 1965
© 2004, Clark Gilbert, Harvard Business School Page 12
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
© 2004, Clark Gilbert, Harvard Business School Page 13
Disruption in Print Media“All the News that Fit to Pixel”
© 2004, Clark Gilbert, Harvard Business School Page 14
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
© 2004, Clark Gilbert, Harvard Business School Page 15
Missing Revenue: Online Advertising Market
0
20
40
60
80
100
120
Online Newspaper Typical Online Entrant
Demographic
Usage Targeting
Sectionals
ROS
45%
15%
20%
10%
Old Business Models Make It Very Difficult to Realize
45% Missing!
© 2004, Clark Gilbert, Harvard Business School Page 16
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
© 2004, Clark Gilbert, Harvard Business School Page 17
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
© 2004, Clark Gilbert, Harvard Business School Page 18
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
© 2004, Clark Gilbert, Harvard Business School Page 19
Why is this so difficult for otherwise successful
firms?
© 2004, Clark Gilbert, Harvard Business School Page 20
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
© 2004, Clark Gilbert, Harvard Business School Page 21
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”
© 2004, Clark Gilbert, Harvard Business School Page 22
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
© 2004, Clark Gilbert, Harvard Business School Page 23
Develop Separate Business Development Processes
Pe
rfo
rman
ce
Time
© 2004, Clark Gilbert, Harvard Business School Page 24
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
© 2004, Clark Gilbert, Harvard Business School Page 25
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 26
Managing Uncertaintyin New Venture Creation
Clark GilbertHarvard Business School
© 2004, Clark Gilbert, Harvard Business School Page 27
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 Page 28
• 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
© 2004, Clark Gilbert, Harvard Business School Page 29
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
© 2004, Clark Gilbert, Harvard Business School Page 30
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 Page 31
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 Page 32
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
© 2004, Clark Gilbert, Harvard Business School Page 33
3) Staging Investment
Lock-in on Early
AssumptionsMarket and Business Model
Discovery of New
© 2004, Clark Gilbert, Harvard Business School Page 34
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 Page 35
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
© 2004, Clark Gilbert, Harvard Business School Page 36
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%
P(success) = 40%Req’d IRR = 70%
P(success) = 50%Req’d IRR = 50%
P(success) = 80%Req’d IRR = 30%
Source: Lou Mazzucchelli, Ridgewood Capital
© 2004, Clark Gilbert, Harvard Business School Page 37
The “Fully Funded” Folly
A CustomerBuys
FullyFund
IPO(……….pray……………….)
Capital
Risk (ß)
Valuation
Idea isFeasible
TechnologyWorks
Source: Lou Mazzucchelli, Ridgewood Capital
© 2004, Clark Gilbert, Harvard Business School Page 38
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