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Confidential – For Classroom Use Only 1
Driving Technological Change:The Process of Innovation
Types of Innovation
Confidential – For Classroom Use Only 2
Reprise: Technological Change
Technology is a socio-economic complex including material,
energy source, artifacts/hardware, layout, procedures
(programs, software), knowledge/skills/qualified people, work
organization, management techniques, organizational
structure, cost/capital, industry structure (suppliers, users,
promoters), location, social relations, culture
Technological change can be understood using an
evolutionary model – variation, selection, retention– From the myriad inventions made, some are selected to become part of
the made world and to become the foundation for new inventions
– The mechanisms of selection include knowledge, fantasy, science,
culture, and economics
Confidential – For Classroom Use Only 3
Invention and Innovation
Schumpeter drew the distinction between invention and
innovation
– Invention is a new combination of pre-existing knowledge
– Innovation includes both a technological change new to both
enterprise and the economy and a change that has diffused
into the economy and is adopted by the firm
• Can refer to the process by which individuals or organizations arrive at
a technical solution
• Can also refer to a product or service, i.e. the output of the process of
innovation
V.K. Narayanan, Managing Technology and Innovation, (Prentice-Hall, 2001)
Confidential – For Classroom Use Only 4
Invention and Innovation: Another ViewInnovation is the use of new knowledge to offer a new product or service
that customers want. It is invention + commercialization. It is, according to
Porter, “a new way of doing things (termed invention by some authors) that is
commercialized. The process of innovation cannot be separated from a firm’s
strategic and competitive context.”
The new knowledge can be technological or market related:
– Technological knowledge is knowledge of components, linkages between components.
methods, processes, and techniques that go into a product or service.
– Market knowledge is knowledge of distribution channels, product applications, and
customer expectations, preferences, needs, and wants. The product or service is new
in that its cost is lower, its attributes are improved, it now has new attributes it never
had before, or it never existed in that market before.
– Often the new product or service itself is called an innovation, reflecting the fact that it
is the creation of new technological or market knowledge.
Allan Afuah, Innovation Management, (Oxford University Press: 2003).
Confidential – For Classroom Use Only 5
Two Main Types of Innovation1. Product
– Refers to elements of technology embodied in the goods and services of a firm
– Refers to the output of a firm
2. Process– Pertains to techniques for producing and marketing goods and services
– Refers to the way an organization conducts its business
– Also includes work methods, equipment, distribution, and logistics
– Embedded in a firm’s value chain
– Designed to produce and market goods and services faster, more efficiently, or in
greater volume
The distinction between process and product technology depends on the nature of the
firm (although process technologies are much less visible in the marketplace)– E.g., laser scanning technology is a process for a supermarket but the product for the
manufacturer
As outputs, all technological innovations have three components that form a system:
1. Hardware, consisting of the material or physical aspects of the innovation
2. Software, consisting of the information base that is needed to use the innovation
3. Evaluation of information, consisting of the information that accompanies an
innovation that enables firm or individuals to evaluate its usefulnessV.K. Narayanan, Managing Technology and Innovation, (Prentice-Hall, 2001)
Confidential – For Classroom Use Only 6
Other Ways of Categorizing InnovationsIncremental
– Minor improvements or changes to the elements of an existing product or organizational technologies and
practices
– Require little new organizational knowledge because they are aligned with existing organizational capabilities
– Exploits the potential of the established design and often reinforces the dominance of established firms
– E.g., the next generation micro-processor
Component (modular)
– Significant changes in elements of products, organizational practices, and technologies without significant
changes to the existing configuration of the elements
– No significant new organizational knowledge is required
Architectural
– Use existing organizational practices and technologies but reconfigure them in new or different ways
– Significant new organizational knowledge is required
– E.g. the effects of miniaturization on key radio components
Radical
– Represent revolutionary changes that require clear departures from existing organizational practices and
technologies
– Typically not aligned with the organization's capabilities and thus require significant new organizational
knowledge
– Usually based on a different set of engineering and scientific principles and often opens up whole new
markets and potential applications
– E.g. wireless communicationsRebecca Henderson and Kim Clark, “Architectural Innovation” in Administrative Science Quarterly 35 (1990).
Confidential – For Classroom Use Only 7
Architectural and Component Knowledge
Architectural innovations change the way in which the components of a
product are linked together while leaving the core design concepts and
thus the basic knowledge underlying the components untouched
– A component is a physically distinct portion of the product that embodies a
core design concept and performs a well-defined function
The distinction between the product as a system and the product as a
set of components underscores the idea that successful product
development requires two types of knowledge
– Component knowledge, or knowledge about each of the core design
concepts and the way in which they are implemented in a particular component
– Architectural knowledge, or knowledge about the ways in which the
components are integrated and linked together into a coherent wholeRebecca Henderson and Kim Clark, “Architectural Innovation” in Administrative Science Quarterly 35 (1990).
Confidential – For Classroom Use Only 8
Henderson-Clark Model
Incremental Architectural
Modular Radical
Enhanced
Destroyed
Enhanced Destroyed
Architectural Knowledge
Component Knowledge
Allan Afuah, Innovation Management, (Oxford University Press: 2003).
From their research, Henderson and Clark suggested that since products are normally made up of components connected together, building them must require two kinds of knowledge: knowledge of the components and knowledge of the linkages between them, which they call architectural knowledge. An innovation, then, can impact either component knowledge or architectural knowledge, or both, with different consequences for the firm adopting it. They went on to define four kinds of innovations. If the innovation enhances both component and architectural knowledge, it is incremental; if it destroys both component and architectural knowledge, it is radical. However, if only the architectural knowledge is destroyed and the component knowledge enhanced, the innovation is architectural. The last case, where component knowledge is destroyed but architectural knowledge enhanced, is called modular innovation.
With these definitions it became clear why firms had problems with what appeared to be incremental innovation. They may have mistaken architectural innovation for incremental innovation. While the component knowledge required to exploit the innovations had not changed (and therefore the semblance of incremental innovation), architectural knowledge had changed. Architectural knowledge is often tacit and embedded in the routines and procedures of an organization, making changes in it difficult to discern and respond to.
Confidential – For Classroom Use Only 9
More on the Henderson-Clark Model
Incremental Innovations:Product technology:
486 microprocessors
Process technology:Continuous improvement
Modular Innovations:Product technology:
Digital telephones
Process technology:Quality circles
Architectural Innovations:Product technology:
Plain paper copiers
Process technology:Just-in-Time Inventories
Radical Innovations:Product technology:
VCR
Process technology:Robotics in manufacturing
Unchanged
Changed
Reinforced Overturned
Core Concepts
Linkage between core concepts and
components
Radical innovation establishes a new dominant design, and therefore, a new set of core design concepts embodied in components that are linked together in a new architecture
Incremental innovation refines and extends an established design
Rebecca Henderson and Kim Clark, “Architectural Innovation” in Administrative Science Quarterly 35 (1990).
Confidential – For Classroom Use Only 10
Multi-Level Multi-Player InnovationThe difficulty of defining technological innovation reveals the great diversity of its forms. To expose the nature of
this diversity and understand its implications, I first, paradoxically, need to simplify. Therefore, I divide the
many forms of innovation into two categories, new products and the new know-how upon which they are
based, and further stratify both know-how and products into three levels, as I explain in the following.
For any new product, the underlying know-how ranges from high-level general principles, to mid-level
technologies, to ground-level context-specific heuristics or rules of thumb. In microprocessors, for instance,
high-level know-how includes the laws of solid-state physics; mid-level, the circuit designs and chip layouts; and
ground-level, the tweaking of conditions in a specific semiconductor fabrication plant to maximize the quality and yield
of the microprocessors produced.
Individual forms of technological innovation, especially at the high level, usually have limited economic or
commercial value unless they are complemented by lower-level innovations. A breakthrough in solid-state
physics has value in the semiconductor industry only to the degree that it is accompanied by the development of new
microprocessor designs; and the new designs may be useless without the development of plant-level tweaks for large-
scale production of the microprocessor. Similarly, realizing the value of a new high-level microprocessor may require
the development of new mid-level motherboards and ground-level computers. At the same time, high-level innovations
often provide the building blocks, and a reason for lower-level innovations. A breakthrough in solid-state physics may,
for instance, provide the motive and the means for developing new microprocessor designs, and a new microprocessor
may stimulate the development of new motherboards and computers. In other words, the different forms of
innovation interact in complicated ways, and it is these interconnected, multilevel advances that create
economic value. Amar Bhide, The Venturesome Economy (Princeton University Press: 2008).
Confidential – For Classroom Use Only
Multi-Level Multi-Player Innovation
11
Know-how:
High-level
Mid-level
Ground-level
Microprocessors
Solid state physics
Circuit designs
Management of specific fabrication
plant
Motherboards
Signal processing and power systems
theory
Placement and routing of board
components
Production plans and schedules
Laptop Computers
Concept of clamshell design
Model blueprints and bill of materials
Selection and ongoing
management of suppliers
High-level
Mid-level
Ground-level
Amar Bhide, The Venturesome Economy (Princeton University Press: 2008).
Confidential – For Classroom Use Only
Multi-Level Multi-Player Innovation
12
Know-how:
High-level
Mid-level
Ground-level
Coffee Beans
Plant genetics
Formula for mixing fertilizers
Harvesting schedules for a
plantation
Coffee Roasters
Laws of thermodynamics
Design of roaster drums
Roast operators’ “master taste”
Cup of Espresso
Principle of high-pressure brewing
Knowledge of optimal pressure and fineness of coffee grinds
“Pulling a Shot” on a specific machine
High-level
Mid-level
Ground-level
Amar Bhide, The Venturesome Economy (Princeton University Press: 2008).
Confidential – For Classroom Use Only 13
Abernathy-Clark Model
Regular Revolutionary
Niche Architectural
Preserved
Destroyed
Preserved Destroyed
Technical Capabilities
Market Capabilities
Allan Afuah, Innovation Management, (Oxford University Press: 2003).
The Abernathy-Clark model offers one explanation why incumbents may outperform new entrants in the face of some “radical” innovations. The model suggests that there are actually two kinds of knowledge that underpin an innovation: technological and market. Thus a firm’s technological capabilities could become obsolete while its market capabilities remain intact. If such market capabilities are important and difficult to acquire, an incumbent whose technological capabilities have been destroyed can use the market ones to its advantage over a new entrant. Focusing on the perspective of the innovating firm, the model classifies innovations according to their impact on the existing technological and market knowledge of the manufacturer. An innovation is regular if it conserves the manufacturer’s existing technological and market capabilities, niche if it conserves technological capabilities but obsoletes market capabilities, revolutionary if it obsoletes technological capabilities but enhances market capabilities, and architectural if both technological and market capabilities become obsolete.
Confidential – For Classroom Use Only 14
Technological DiscontinuitiesThe authors …[postulate] that most community change occurs soon after a
discontinuous technological innovation. Furthermore, they hypothesize that these
discontinuities affect the community differently depending on the competence-enhancing or
competence-destroying qualities of the technological innovation.
– Competence-enhancing innovations exploit existing skills and knowledge
within the community. These innovations serve to consolidate industry leadership in
the larger organizations and hinder the development of new organizational forms.
– Competence-destroying innovations spur the creation of new organizational
forms that can quickly acquire and utilize the new technologies. Large, well-
established organizations with too much inertia to adopt the new innovations suffer
and lose their dominance.
Technology evolves through periods of incremental changes punctuated by technological
breakthroughs that either enhance or destroy the competence of firms in an industry.
Competence-destroying discontinuities are initiated by new firms and cause environmental
turbulence, competence-enhancing discontinuities are initiated by existing forms and reduce
turbulence.M. L. Tushman and P. Anderson, "Technological Discontinuities and Organizational
Environments", Administrative Science Quarterly, 31 (1986), 439-65.
Confidential – For Classroom Use Only 15
S-Curves and Dominant Designs
Confidential – For Classroom Use Only 16
Technological Discontinuities and Dominant DesignTechnological change can be fruitfully characterized as a sociocultural evolutionary process of variation, selection, and retention.
Variation is driven by stochastic technological breakthroughs. Technological discontinuities initiate substantial
technological rivalry between alternative technological regimes. Social, political, and organizational dynamics select
single industry standards or dominant designs from among technological opportunities. Positively selected variants
then evolve through relatively long retention periods, marked by incremental technical change and increased interdependence
and enhanced competence within and between the communities of practitioners.
Technological advance may, then, be driven by the combination of chance or random events (variation), the direct social, political
action of individuals and organizations in selecting between rival industry standards (selection), and the incremental,
competence-enhancing, puzzle-solving actions of many organizations that are learning by doing (retention).
Tushman and Anderson (1986) highlighted a powerful source of variation by demonstrating that the core technology of
an industry evolves through long periods of incremental change punctuated by technological discontinuities. This
paper extends that work by exploring the other key punctuating event in the evolution of a technology: the emergence
of a dominant design after a technological discontinuity.
We argue that a breakthrough innovation inaugurates an era of ferment in which competition among variations of the original
breakthrough culminates in the selection of a single dominant configuration of the new technology. Successful variations are
preserved by the incremental evolution of this standard architecture until a new discontinuous advance initiates a new cycle of
variation, selection, and retention. The key punctuation points are technological discontinuities and dominant designs; these
delimit eras of ferment and eras of incremental change.
At rare and irregular intervals in every industry, innovations appear that "command a decisive cost or quality advantage and that
strike not at the margins of the profits and the outputs of the existing firms, but at their foundations and their very lives"
(Schumpeter, 1942: 84). Such innovations depart dramatically from the norm of continuous incremental innovation that
characterizes product classes, and they may be termed technological discontinuities. These discontinuities either affect
underlying processes or the products themselves. Philip Anderson and Michael L. Tushman, “Technological discontinuities and dominant designs: a cyclical model of technological change” in Administrative Science Quarterly (Dec, 1990).
Confidential – For Classroom Use Only 17
Model of Dominant Designs
The Technology Cycle
Era of
Ferment
Era of
Incremental Change
TechnologicalDiscontinuity 1
TechnologicalDiscontinuity 2
DominantDesign 1
Anderson and Tushman’s 1990 model of dominant design:
Johann Murmann and Michael Tushman, From the Technology Cycle to the Entrepreneurship Dynamic.
Confidential – For Classroom Use Only 18
Technology S-Curves
Both the rate of a technology’s performance
improvement and the rate at which technology is
adopted in the marketplace have repeatedly been
shown to conform to an S-curve
The S-curve model suggests that technological
change is cyclical
Each new S-curve ushers in an initial period of turbulence,
followed by rapid improvement, then diminishing returns,
and ultimately is displaced by a new technological
discontinuity
Rate of performance and rate of adoption (i.e.
diffusion) are fundamentally different processes
Rate of diffusion plots number of adopters against
time
Emergence of a new technological discontinuity can
overturn the existing competitive structure of an
industry, creating new leaders and new losers
Schumpeter called this process creative destruction
and argued that it was the key driver of progress in
capitalist societies
“In capitalist reality, as distinguished from its textbook
picture it is not [price] competition which counts but the
competition from the new commodity, the new
technology…which strikes not at the margins to the profits
of the existing firms, but at their…very lives.”
Effort
Per
form
ance
Physical Limit of Technology
Melissa Schilling, Managing Technology (New York: Norton, 1995).
Allan Afuah, Innovation Management, (Oxford University Press: 2003).
Effort
Rat
e o
f te
chno
logi
cal P
rogr
ess
Speed of light
Communications bottlenecks
Single-processor computer
Multi-processor computer
Confidential – For Classroom Use Only 19
Technology CyclesPeriods of variation (eras of ferment) are initiated by technological discontinuities and closed by the selection
of a dominant design– After a dominant design emerges (i.e. one design captures of 50% of new sales), subsequent innovation extends
the selected variant’s technological trajectory
Eras of incremental change are, in turn, broken by subsequent technological discontinuities, and the next
cycle of variation, selection, and retention processes begin
Eras of ferment are fundamentally more uncertain than eras of incremental change– Dominant designs are, then, a key transition point between eras of ferment and eras of incremental change
because they signal a reduction in uncertainty about the direction of the technology
As proposed by Abernathy and Utterback:
In the initial more fluid phase, there is considerable uncertainty about both the new technology and its market– Products or services based on the technology might be crude, unreliable, or expensive, but might suit some market
niches
Eventually, producers and customers arrive at some consensus about the desired product attributes and a
dominant design emerges
In the specific stage, the dominant design establishes a stable architecture for the technology and alternate
designs are no longer considered
The dominant design enables– firms to focus their efforts on process innovations that make production of the design more effective and efficient
– firms to focus on incremental innovations to improve components within the architecture
– complementary products and services are developed
Johann Murmann and Michael Tushman, From the Technology Cycle to the Entrepreneurship Dynamic.
Melissa Schilling, Managing Technology (New York: Norton, 1995)
Confidential – For Classroom Use Only 20
Technologies as Systems:Architecture and Components
In a model of dominant design, technologies are conceptualized as
– systems (e.g. the entire automobile)
– multiple levels of subsystems (e.g. the engine, a first order subsystem, and at a lower
level, the cylinder, a second-order subsystem)
– linking mechanisms (e.g. the auto chassis)
– basic components (e.g. screws)
Some subsystems are core and others are peripheral
– One way in which subsystems become core is if they serve as the link to many other
subsystems
– A second way in which component and subsystem technologies become core is by
constituting a bottleneck in the overall performance of the system
Strictly speaking, a dominant design for the overall system only emerges if all
lower-level subsystems and components are in an era of incremental changeJohann Murmann and Michael Tushman, From the Technology Cycle to the Entrepreneurship Dynamic.
Confidential – For Classroom Use Only 21
Emergence of Dominant Designs
Dominant designs emerge through a variety of selection mechanisms
– Except for simple, non-assembled products (e.g. cement), uncertainty about
the potential of certain designs cannot be adjudicated by technology alone
– Rather, dominant designs emerge out of a sociopolitical, economic
process of compromise and accommodation played out in the
community
– This means that the best technology does not necessarily win the competition
between alternative designs
Coalitions of different actors, government intervention, and the power of
large users all can have a decisive influence on what design variant will
become the dominant one
– Because the selection of a dominant design in any non-simple technology
involves sociopolitical processes, entrepreneurial activity can shape what
design emerges and which becomes the dominant oneJohann Murmann and Michael Tushman, From the Technology Cycle to the Entrepreneurship Dynamic.
Confidential – For Classroom Use Only 22
Entrepreneurs and the Emergence of Dominant Designs
In the market process, being first in the market, signing up large customers
early, and forming alliances with other producers are often the decisive factors
– When standards are negotiated, forming coalitions with other entrepreneurs and
organizations is an important strategy for making a particular design the winner
Entrepreneurs and entrepreneurial organizations have many more
opportunities in the eras of ferment than in the eras of incremental change
– In the eras of incremental change, incumbent firms have built-up capabilities to refine
the dominant design in line with the requirements of existing users
– After a technological discontinuity, entrepreneurial ventures can exploit the fact that
existing organizations often find their capabilities rendered obsolete (competence-
destroying innovations), or even when their capabilities retain their value (competence-
enhancing innovations), existing players are frequently more inert and cannot respond
as quickly as entrepreneurs
– Entrepreneurial opportunities are greater after a technological discontinuity
– General proposition: entrepreneurial activities will be significantly higher in eras of
ferment than in eras of incremental changeJohann Murmann and Michael Tushman, From the Technology Cycle to the Entrepreneurship Dynamic.
Confidential – For Classroom Use Only 23
Summary: Innovation and Dominant Design
Technological change is cyclical with periods of incremental change punctuated by
technological discontinuity and a subsequent period of technological ferment, followed by the
emergence of a dominant design
– Variation is driven by random technological breakthroughs, and technological
discontinuities initiate technological rivalry between alternative technological regimes
– Major technological advances require not just one innovation but a cluster of
innovations
– Technological innovations (outcomes) are the result of product, process, and market
development
Dominant design emerges from market demand which is affected by combination of
technological possibilities and individual, organizational and governmental factors
– Most adopters will await the emergence of a dominant design before investing in the
new technology
– Emergence of a dominant design is a prerequisite to mass adoption, i.e. sales and
volume production of next generation technology will peak after the era of ferment
– Dominant design permits companies to design standardized and interchangeable
parts to optimize organizational processes, volumes and efficiency
Confidential – For Classroom Use Only 24
Disruptive TechnologyA disruptive technology or disruptive innovation is a technological innovation, product, or
service that eventually overturns the existing dominant technology or status quo product
in the market.
Disruptive innovations can be broadly classified into lower-end and new-market disruptive
innovations. A new-market disruptive innovation is often aimed at non-consumption, whereas a
lower-end disruptive innovation is aimed at mainstream customers who were ignored by
established companies.
Sometimes, a disruptive technology comes to dominate an existing market by either filling a role in
a new market that the older technology could not fill or by successively moving up-market
through performance improvements until finally displacing the market incumbents (as digital
photography has begun to replace film photography).
By contrast, "sustaining technology or innovation" improves product performance of established
products. Sustaining technologies are often incremental; however, they can also be radical or
discontinuous.
The term disruptive technology was coined by Clayton M. Christensen and introduced in his 1995
article Disruptive Technologies: Catching the Wave, which he coauthored with Joseph Bower. He
describes the term further in his 1997 book The Innovator's Dilemma. In his sequel, The Innovator's
Solution, Christensen replaced disruptive technology with the term disruptive innovation because
he recognized that few technologies are intrinsically disruptive or sustaining in character. It is the
strategy or business model that the technology enables that creates the disruptive impact. http://en.wikipedia.org/wiki/Disruptive_technology
Confidential – For Classroom Use Only 25
Theories of Innovation:Christensen’s Model
Confidential – For Classroom Use Only 26
Introduction to Christensen Model
According to the disruptive technological change model, advanced by Professor Clayton Christensen, incumbents fail to
exploit disruptive technologies not so much because these firms do not “get it,” as suggested by the architectural innovation
model, or because the technologies are competence destroying to them, as suggested by the incremental-radical model.
Rather, incumbents fail because they spend too much time listening to and meeting the needs of their existing
mainstream customers who, initially, have no use for products from the disruptive technology. Disruptive
technologies have the following four characteristics:
1. They create new markets by introducing a new kind of product or service.
2. The new product or service from the new technology costs less than existing products or services from the old technology.
3. Initially, the products perform worse than existing products when judged by the performance metrics that mainstream
existing customers value. Eventually, however, the performance catches up and addresses the needs of mainstream customers.
4. The technology should be difficult to protect using patents.
To understand the disruptive technological change model, consider a firm that has been successful in exploiting an existing
technology to offer products to its mainstream customers. The firm’s capabilities—what it can or cannot do—are a function
of its resources, processes, and values. Its resources are assets such as product designs, brands, relationships with
suppliers, customers, distribution, people, plants and equipment, technologies, and cash reserves. Its processes are the
systems that the firm has put in place to transform resources into better customer value. These systems are designed to
make task performance more efficient and are difficult to change, especially when they have been embedded into
organizational culture. Allan Afuah, Innovation Management, (Oxford University Press: 2003).
Confidential – For Classroom Use Only 27
Examples of Disruptive Innovations
Unresolved examples of technologies promoted as 'disruptive innovations'1. Music downloads and file sharing vs. compact discs 2. ebooks vs. paper books 3. VoIP (and VoIP over 802.11) vs. traditional telephone and mobile phone service.
Disruptive Innovation
Displaced or Marginalized Technology
Notes
Agriculture and pastoralism
Hunting and gathering The development of food production technology led to other disruptive technologies such as cities, writing, metal working, wheeled vehicles, and much of the remainder of world civilization.
Container ships and containerization
“Break cargo” ships and stevedores
In addition to efficiency these also provide a great reduction in opportunities for pilferage and integrate well with both rail and truck transport.
Steamships Sailing ships The first steamships were deployed on inland waters where sailing ships were less effective, instead of on the higher profit margin seagoing routes. Hence steamships originally only competed in traditional shipping lines' "worst" markets.
Muskets Longbows and crossbows The development of firearms allowed essentially anyone to become an effective soldier with very little training. Earlier military units like bowmen and knights needed years of practice to master the skills.
Telephones Telegraphy When Western Union infamously declined to purchase Alexander Graham Bell's telephone patents for $100,000, their highest-profit market was long-distance telegraphy. Telephones were only useful for very local calls. Short-distance telegraphy barely existed as a market segment, if at all. So Western Union's decision was quite understandable at the time.
http://en.wikipedia.org/wiki/Disruptive_technology
Confidential – For Classroom Use Only 28
Wheel of Disruption
Factors that Power the Wheel:Market for talentCapital marketsProduct markets
InfrastructureIndustry dynamics
Research and development
Disruptive foothold established
Internal disruptive ideas get squashed
Growth occurs
Growth stalls
New businesses form
Managers leave and
Entrepreneurs coalesce
The Wheel of Disruption is a core micro-economic engine of macro-economic growth
There are six factors that encourage the wheel of disruption and interact to define an environment that is conducive to disruptive innovation
The best long-term growth prospects come from creating an environment that supports innovation through porous borders and active problem solving
Clayton Christensen, Seeing What’s Next, (Boston: Harvard Business School Press, 2004).
Confidential – For Classroom Use Only 29
Factors that Power the Wheel
1. Market for talent that is flexible, encourages entrepreneurialism and risk taking, and enable
mobility between firms
2. Capital markets that help new firms start and grow while targeting disruptive opportunities.
Capital market policies that encourage debt financing inhibit the wheel of disruption because
disruptive opportunities start out small and unpredictable.
3. Unconstrained product markets that provide ample motivation and ability (particularly
access to overshot customers or non-consumers) and the capacity to find or create new
distribution channels that support a disruptive business model.
4. Supporting infrastructure that has appropriate tax policies, encourages company formation,
and has intermediaries that provide “lubrication” to the process of disruptions, such as training
and education, market research, and verification and accreditation services.
5. Vibrant industry dynamics with market-based interactions and competition to spur new
business models.
6. R&D environment that protects intellectual property while directing research toward
breaking trade-offs and applying technology into new markets.Clayton Christensen, Seeing What’s Next, (Boston: Harvard Business School Press, 2004).
Confidential – For Classroom Use Only 30
Introduction: Dilemmas of Innovation
Capabilities of most organizations are far more specialized and context-specific than
most managers are inclined to believe
– This is because capabilities are forged within value networks
– Capabilities are defined and refined by the types of problem tackled in the past
In many instances, the information required to make large and decisive investments in
the face of disruptive technology simply does not exist
– It needs to be created through fast, inexpensive, and flexible forays into the market and the
product
– Managers who don’t bet the farm on their first idea, who leave room to try, fail, learn quickly, and
try again
Disruptive innovations entail significant first-mover advantages – leadership is
important
– Sustaining situations do not entail significant first-mover advantages
Because disruptive technologies rarely make sense during the years when investing in them
is most important, conventional managerial wisdom at established firms constitutes an
entry and mobility barrier that entrepreneurs and investors can bank on
Clayton Christensen, Seeing What’s Next, (Boston: Harvard Business School Press, 2004).
Confidential – For Classroom Use Only 31
Theories for Understanding Innovation
At the core of The Innovator’s Dilemma and The
Innovator’s Solution are three important theories that
untangle the messy process of innovation, of why
incumbent leaders fail and new firms arise to disrupt their
markets:
1. the disruptive innovation theory;
2. the resources, processes, and values theory; and
3. the value chain evolution theory.
Clayton Christensen, Seeing What’s Next, (Boston: Harvard Business School Press, 2004).
Confidential – For Classroom Use Only 32
The Disruptive Innovation Theory:Simple, Cheap, Revolutionary
The disruptive innovation theory points to situations in which new organizations can use
relatively simple, convenient, low-cost innovations to create growth and triumph over powerful
incumbents. The theory holds that existing companies have a high probability of beating
entrant attackers when the contest is about sustaining innovations. But established
companies almost always lose to attackers armed with disruptive innovations.
Sustaining innovations
– move companies along established improvement trajectories
– improve existing products on dimensions historically valued by customers
Disruptive innovations
– introduce a new value proposition
– create new markets or reshape existing markets
– two types:
1. low-end – can occur when existing products and services are “too good” and hence overpriced relative to
the value exiting customers can use
2. new market – can occur when characteristics of existing products limit the number of potential consumers
or force consumption to take place in inconvenient, centralized settings
Clayton Christensen, Seeing What’s Next, (Boston: Harvard Business School Press, 2004).
Confidential – For Classroom Use Only 33
Principles of Disruptive Innovation 1Companies depend on customers and investors for resources
– Managers think they control the flow of resources in their firms, but it is really customers and
investors who dictate how many will be spent because if they are not satisfied, companies do not
survive
– The best companies satisfy customers and investors and kill ideas that they do not want, and
thus do not invest in disruptive ideas
Small markets do not solve the growth needs of large companies
– Disruptive technologies typically enable new markets to emerge
– Many large companies adopt a strategy of waiting until new markets are “large enough to be
interesting”
– Small organizations can most easily respond to the opportunities for growth in a small market
Markets that do not exist cannot be analyzed
– Good management is characterized by sound market research and good planning followed by
execution according to plan – when applied to sustaining innovations, these skills are invaluable and
are the primary reason why established firms are better at introducing sustaining innovations
– In disruptive innovations, where we know least about the market, there are strong first-mover
advantages, but the right markets and the right strategies for exploiting them cannot be known in
advance
Clayton Christensen, The Innovator’s Dilemma, (new York: HarperCollins, 1997).
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Principles of Disruptive Innovation 2
An organization’s capabilities define its disabilities
– People are quite flexible in that they can be trained to do lots of different things
– But processes and values are not flexible
Technology supply may not equal technology demand
– Disruptive technologies, though they initially can only be used in small markets remote from the
mainstream, are disruptive because they subsequently can become fully performance-competitive
within the mainstream market against established products
– When the performance of two or more competing products has improved beyond what the market demands,
customers can no longer base their choice upon which is the higher performing product
– The basis of choice evolves from functionality to reliability to convenience to price
– The phenomenon in which product performance overshoots market demands is the primary mechanism
driving shifts in the phases of the product life cycle
– In their efforts to stay ahead by developing competitively superior products, many companies don’t realize the
speed at which they are moving up-market, over-satisfying the needs of their original customers as they race
the competition toward higher performance, higher margin markets
– In doing so, they create a vacuum at lower price points into which competitors employing disruptive
technologies can enterClayton Christensen, The Innovator’s Dilemma, (new York: HarperCollins, 1997).
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The Innovator’s Dilemma – Why Excellent Companies Fail
Simply put, when the best firms succeeded, they did so because they listened responsively to their
customers and invested aggressively in the technology, product, and manufacturing capabilities that
satisfied their customers’ next-generation needs.
– But paradoxically, when the best firms subsequently failed, it was for the same reasons – they listened
responsively to their customers and invested aggressively in the technology, products, and
manufacturing capabilities that satisfied their customers’ next-generation needs.
When faced with sustaining technology change that gave existing customers something more and
better in what they wanted, the leading practitioners of the prior technology led the industry in the
development and adoption of the new
– Purpose of advanced technology development in an industry is usually to sustain established
trajectories of performance improvement, to reach the higher-performance, higher-margin domains
– The incumbents were held captive by their customers and the high margins they offered
Disruptive technologies tend to be technologically straightforward
– They are usually developed and adopted by new entrants to the industry, serving current non-
consumers, overshot customers, and undershot customersClayton Christensen, The Innovator’s Dilemma, (new York: HarperCollins, 1997).
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The Resources, Processes, and Values Theory:The Building Blocks of Capabilities
Resources Processes Values
Things or assets that organizations can buy or sell, build or destroy.Examples:
Established ways companies turn resources into products or services.Examples:
Criteria by which prioritization decisions are made.Examples:
PeopleTechnologyProductsEquipmentInformationCashBrandDistribution channels
Hiring and trainingProduct developmentManufacturingPlanning and budgetingMarket researchResource allocation
Cost structureIncome statementCustomer demandsSize of opportunityEthics
Incumbent firms fail in the face of disruptive innovations because their values will not prioritize disruptive innovations, and the firm’s existing processes do not help them get done what they need to get done
Resources, processes, and values collectively define an organization’s strengths as well as its weaknesses
RPV Theory argues that organizations successfully tackle opportunities when they have the resources to succeed, when their processed facilitate what needs to get done, and when their values allow them to give adequate priority to that particular opportunity in the face of all other demands that compete for the company's resources this is why incumbent firms miss disruptive opportunities, because their resources, processes, and values compel them to focus on the needs of their current customers and the sustaining innovations their current customers demand
Incumbent firms master sustaining innovations because their values prioritize them, and their processes and resources are designed to tackle precisely those types of innovations
Clayton Christensen, Seeing What’s Next, (Boston: Harvard Business School Press, 2004).
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Value Chain Evolution Theory:Integrating to Improve What Is Not Good Enough
The final core theory of innovation – the value chain evolution (VCE) theory – assesses whether a company has made the right
organizational design decisions to compete successfully.
On the surface, the VCE theory is breathtakingly simple. The theory suggests companies ought to control any activity or
combination of activities within the value chain that drive performance along dimensions that matter most to customers.
Directly controlling, or integrating, an activity gives companies the ability to run experiments and push the frontier of what is possible.
Integration gives firms a full platform to run experiments to solve problems caused by unpredictable “interdependencies” between
activities. These same interdependencies can frustrate specialist firms that try to focus on a single piece of a product’s or service’s
value chain. When a specialist’s piece interacts unpredictably with components that other companies design and make, it typically
results in poorly performing, unreliable products.
The performance improvements that integration provides come at a cost, however. Integrated architectures tend to be
relatively inflexible. Integrated companies tend to react relatively slowly. Therefore, the theory suggests that companies
ought to outsource activities that don’t influence the characteristics of a product or service that customers deem (or will
deem) most critical. Specialists can better optimize those pieces of the value chain.
Modular architectures that facilitate (or permit) disintegration sacrifice raw performance in the name of speed to market,
responsiveness, and convenience. This sacrifice allows companies to customize their products by upgrading individual subsystems
without having to redesign an entire product. They can mix and match components from best-of-breed suppliers to respond
conveniently to individual customers’ needs.
EXAMPLE: Dell introduced convenience and customization to the personal computer market. It did this by tightly integrating across the
key interfaces in the supply chain, integrating across the interface with the customer, and outsourcing component design and
production to specialist providers. It followed the VCE theory’s golden rule: Integrate to improve what is “not good enough”
(speed, customization, and convenience) and outsource what is “more than good enough” (the computer’s architectural design).Clayton Christensen, Seeing What’s Next, (Boston: Harvard Business School Press, 2004).
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SummaryPer Christensen, there are three important theories that untangle the messy process of
innovation:
1. the disruptive innovation theory;
2. the resources, processes, and values theory; and
3. the value chain evolution theory.
Together they explain why great companies fail:
– Incumbent companies fail by focusing on existing customers and missing the threats posed by
disruptive innovations
– They miss disruptive opportunities, because their resources, processes, and values compel them to
focus on the needs of their current customers and the sustaining innovations their current customers
demand
– Companies are better able to spot disruptive opportunities when they organize to control any activity
or combination of activities within the value chain that drive performance along dimensions that matter
most to customers
• Therefore, the theory suggests that companies ought to outsource activities that don’t influence the
characteristics of a product or service that customers deem (or will deem) most critical
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ConclusionWhen can we reasonably expect innovation to lead to the emergence of new
companies or business models that could be harbingers of industry change?
The answer involves evaluating three customer groups:
1. Customers not consuming any product or consuming only in inconvenient settings (non-
consumers): People who lack the ability, wealth, or access to conveniently and easily accomplish an important job for
themselves; they typically hire someone to do the job fro them or cobble together a less than adequate solution
2. Consuming customers who are undershot: Consumers who consume a product, but are frustrated with its limitations; they display willingness to pay more
for enhancements along dimensions most important to them; and create an opportunity for existing firms to
profitably introduce up-market sustaining innovations which make good products better
3. Consuming customers who are overshot: Customers who stop paying for further improvements in performance that historically had merited attractive
price premiums; which introduces commoditization, the process that results in companies being unable to
profitably differentiate their products or services
The most predictable event is that after establishing an initial foothold, new firms experience
a strong incentive to improve, acquire more customers, and migrate into high-profit tiers of
their market. This ultimately sets up a battle between the new firms and an entrenched
incumbent. Clayton Christensen, Seeing What’s Next, (Boston: Harvard Business School Press, 2004).