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Disruptive Innovation: Creating and Capturing New
Growth
Rory McDonald
Harvard Business School
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Lessons from Business History
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Across diverse industries, leading companies failed to stay atop their markets
Common explanations
Managerial incompetence
Technological complexity
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(Source: Christensen & Raynor, 2003)
7%
12%
18% S
tee
l Q
ua
lity
1980 1975 1985 1990
25–30%
1995
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Disruptive Innovation (1)
Pace of technological progress outstrips markets’ demand for higher-performing technologies
Firms can over-serve the market by producing more advanced, feature-
rich products than customers need—leaving a gap at lower tiers of the
market
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Disruptive Innovation (2)
Sustaining innovations: improve products and services along dimensions of performance that mainstream customers care about
Disruptive innovations: are initially inferior on the historic performance
dimensions, but offer a novel mix of attributes that appeal to fringe
customers
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Disruptive Innovation (3)
Existing customers and established profit models constrain firms’ investments in new innovations
Incumbents are typically not motivated to pursue disruptive innovations
that promise lower margins and target smaller markets
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Pe
rfo
rman
ce
Time
Disruptive
innovations
Incumbents nearly always win
Entrants nearly always win
Disruptive Innovation Model
(Source: Christensen, Raynor, McDonald 2015)
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Example: Video Rental Industry (late 1990’s)
Market leader: Blockbuster
Movie rentals were impulse decisions (“movie night”)
70% of U.S. population lives within 10 minute drive
Experiencing dramatic growth, record profits (2002)
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Example: Video Rental Industry (late 1990’s)
Launched home delivery of DVDs through the mail
Website: search engine, queue of movies
3-5 days to get your movie
Not valued by mainstream customers, but appealed to some fringe
customer groups
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Example: Video Rental Industry (late 1990’s)
By honing operations over time, they improved rapidly. 90% of subscribers reached within 1 day
Offered convenience, value, and selection
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Comparison of Business Models
Blockbuster
5,000 stores
New releases (70%)
Local inventory
Late fees (10-15%)
Netflix
No stores
New releases (30%)
National inventory
No late fees
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Blockbuster’s fate
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Types of Disruptions
Low-end disruptions come in at the bottom of the market and take hold within an existing value network before moving up-market and attacking
incumbents
Incumbents retreat
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Types of Disruptions
New market disruptions take hold in a completely new value network and they compete against non-consumption
Incumbents ignore
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Example:
Godrej: Business group faced a shrinking share of refrigerator market due to
foreign appliance makers
Decision:
1. Aggressively compete in conventional market
2. Innovation aimed at unserved customer segment
Built a low-cost refrigerator for bottom-of-the-market
“Instead of competing with global powerhouses for the 15% of the market that
purchased refrigerators, Godrej decided to go for the 85% that did not.”
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Example:
Looked at drivers of non-consumption—problem consumers couldn’t address
Rural Indian households couldn’t store food, so they had to buy daily (time
consuming, expensive)
Intermittent electricity rules out normal refrigerator
Godrej developed a “good enough” solution: chotuKool portable fridge,
which had a low price, operated on battery power, and used post offices as a
sales channel / new distribution chain.
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Example:
Won five global innovation awards
At $69, chotuKool was 1/3 the price of Godrej's least expensive refrigerator
Result of a unique innovation strategy guided by new market disruption
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Video Game Industry
(Source: Anthony, 2008)
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Health Care
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Accounting Services
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Word Processing
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Looking into the future
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Looking into the future
Software-based financial advisor
New market disruption serving those who can’t afford the high minimums of
traditional financial advisors
Appeals to fringe customers
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Looking into the future
Sharing service that allows people to rent out lodging
Started out offering short-term living quarters for people who couldn’t afford a
hotel (or couldn’t book one)
Now has 2M listings in 192 countries
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Looking into the future
“Elite business schools still look like a fair deal. Few expect the luster of an MBA
from Harvard, Wharton, or Stanford to fade…Schools with names that send a less
sexy signal, though, may be in trouble.”
“Is time running out for business schools that aren’t quite elite?” -The Economist (2011)
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Other challenges of innovation
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“Listen to your customers”
“Understand your customers”
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An alternative approach: Jobs-to-be-done
In many industries, the products and services are built around customer attributes and characteristics
For business customers, it is corporate demographics (i.e. industry verticals,
customer size etc.)
But what causes us to buy a product is that we have jobs that arise in our lives that we need to get done
When customers have a job-to-be-done, they hire a product to do it for
them
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An alternative approach: Jobs-to-be-done
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(Source: Christensen, 2011)
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Problem: Increase sales of milkshakes
Company had sophisticated demographic profiles of the customers that bought each product
Quintessential milkshake customer
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A job arises in people’s lives on occasion that causes them to hire a milkshake from McDonald’s
What’s the job?
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What time did he buy the milkshake?
What was he wearing?
Did he buy other food with it or just the milkshake?
Was he alone or with other people?
Did he eat it in the restaurant or get in the car and leave?
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“Think about the last time you were in the same situation and needed to get the same job done, but you didn’t come here to hire a milkshake.
What did you hire instead?”
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“Think about the last time you were in the same situation and needed to get the same job done, but you didn’t come here to hire a milkshake.
What did you hire instead?”
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(Source: Christensen, 2011)
Job
Need something to do
during a long, boring
commute
Milkshake
Viscous
Staves off hunger
Convenient
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Implications
1. Competition
2. Product improvement and differentiation
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Implications
1. Competitors are not Burger King milkshakes
2. Must improve product on dimensions of performance that are relevant to the job-to-be-done
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Implications
3. One reason why promising technologies often fail
Don’t help customers do a job they need to get done
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Implications
Before digital photography
People had the best intentions to arrange photos in albums, but most were
viewed once and put a shoebox
But most people would ask for double prints so they could mail the best photos
to a family member
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Implications
When digital cameras were adopted
Consumers changed their behavior but not the fundamental job they wanted
from the photos
Still share with friends/family, but now through email
Despite all the systems for online photo albums
Dominant consumer behavior is to share via email/phone
Albums didn’t do very well – tried to perform a job that most consumers weren’t
trying to do
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Trying new things is hard
An anthropologist once visited a remote tribe. She observed that each morning,
before sunrise, members of the tribe sacrificed a goat in order to make the sun rise.
Since the tribe was poor, the anthropologist believed that this was a wasteful
practice. As a result, the anthropologist proposed that they should avoid sacrificing a
goat for one day, to see if the sun would nevertheless rise.
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And there are many barriers to innovation
In response, the locals looked at her and said, gravely,
“In these matters one cannot afford to experiment.”