Disruptive Innovation
Model of DisruptionSteel Industry
Two ways of making steel Massive integrated steel companies $10 billion to
start Mini Mills
Melt scrap in electric furnaces Don’t have to scale up the down stream process Make steel at any given quality 20% lower costs
Steel is a commodity If you were a integrated company would you adopt the
mini mill?
Flee or Fight
1975 1980 1985 1990 1995
Quality
Rebar
Bars and Rods
Structural Steel
Sheet Steel
Quality
of i
ntegra
ted m
ill’s
stee
l
Flee or Fight
Prior to the late 1960s, integrated mills were doing all types and were making buckets of money
Late 1960s mini mills came on to the market Melting scrap, quality was low and could only
participate in rebar market
Flee or Fight
1975 1980 1985 1990 1995
Quality
Rebar
Bars and Rods
Structural Steel
Sheet Steel
Quality
of i
ntegra
ted m
ill’s
stee
l
Quality of m
ini-mills
steel
7% GM
12% GM
Flee or Fight
Integrated mills were happy to get out of rebar Why fight for a 7% gross margin?
Profitability of integrated mills increased as they left rebar
Profitability of mini-mills increased as they entered rebar
Everyone was happyBut then in 1979 last integrated mill exited rebar
Price of rebar collapsed Competition drove prices down to where mini mills were barely
making money. Becoming more efficient only a recipe for survival Looked up!
Guess what happened?
1975 1980 1985 1990 1995
Quality
Rebar
Bars and Rods
Structural Steel
Sheet Steel
Quality
of i
ntegra
ted m
ill’s
stee
l
Quality of m
ini-mills
steel
7%gm
12% GM
18% GM
Flight or fight?
Same thing happenedIntegrated mills were happy to leaveMini-mills were 20% cheaper so made profitUntil 1984
Guess what happened?
1975 1980 1985 1990 1995
Quality
Rebar
Bars and Rods
Structural Steel
Sheet Steel
Quality
of i
ntegra
ted m
ill’s
stee
l
Quality of m
ini-mills
steel
7%gm
12% GM
18% GM
24% GM
Flight or fight?
Same thing happenedIntegrated mills were happy to leaveMini-mills were 20% cheaper so made profitUntil 1996
Guess what happened?
1975 1980 1985 1990 1995
Quality
Rebar
Bars and Rods
Structural Steel
Sheet Steel
Quality
of i
ntegra
ted m
ill’s
stee
l
Quality of m
ini-mills
steel
7%gm
12% GM
18% GM
24% GM
Eventually integrated mills only producing specialty steel
Mini mills 65% of marketAll but one integrated mill has gone bankrupt“stupid manager”?No stupidity involvedInnovators Dilemma
Innovator’s Dilemma
Firms have a choice: Make better products that we can sell for more profits to our current
customers? Or make worse products that none of our customers would buy and would ruin
our margins? Companies can put too much emphasis on customers' current needs, and fail to
adopt new technology or business models that will meet customers' unstated or future needs
How to defeat a giant? Go after best customers? Enter the bottom
Giant is motivated to flee rather than fight
Toyota Entered in the 1960s
Corona Ford GM, were happy to let them have it
Today Kia and Hyundia
Three types of Innovations
Disruptive InnovationSustaining InnovationEfficiency Innovation
Disruptive Innovation
Small $$$
Medium $$
Large $
Disruptive Innovation
MainframeP = $2,000,000GM=#1,200,000
Personal ComputerP=$2,000GM=$700
Disruptive Innovation
MainframeP = $2,000,000GM=#1,200,000
Personal ComputerP=$2,000GM=$700
Smartphone/TabletP=$200GM=$80
Disruptive Innovation
People making the early products tend not to make the new products: It doesn’t make sense to make products that don’t
make centsDisruptive innovation transform complicated
products into simple products Takes something that was very expensive and hard to
produce and only a few could afford, and converts it into something that is much simpler to produce, is cheaper, and many can afford it.
Disruptive innovations create jobs More people can buy them, need more people to make
them service them sell them Data show that almost all of the net jobs created in
our economy were created through disruptive innovation
Disruptive innovation requires capital
Sustaining Innovation
Making good products better Better mainframe computers Better personal computers The iPhone 4, 4s, 5, …..
On average, they don’t create jobs When we buy the new product, we stop buying the old
productDon’t use a lot of capital
Efficiency innovation
Sell the same products to the same customers for cheaper Walmart Process Improvement
Tend to eliminate jobsBut will free up capital
Prior to Toyota, it took 60 days for GM to assemble a car
Toyota did it in 2 days Frees up lots of capital (inventory)
The three together?
Disruptive Innovation
Sustaining Innovation
Efficiency Innovation
Disruptive Sustaining Efficiency
Jobs Creates Little Eliminates
Capital Uses Little Frees
How does this apply to Healthcare?
Most innovation in healthcare has been sustaining
To understand this first describe the basic components of a business model
Components of a business model
Value proposition Product or service that helps customers get a job done
more effectively, conveniently, and affordablyResources
People, supplies, intellectual property, equipment, cash required to deliver the value prop
Components of a business model
Processes As resources work together to produce the product,
process emerge and become ingrained in the business model
Profit Formula Defines the pricing, mark-ups, gross and net profit
margins, and volumes necessary to profitably cover the costs of the resources and processes that are required
The Business Model
Value Proposition
Resources
Processes
Profit Formula
Over time, the causation reverses:
Value Proposition
Resources
Processes
Profit Formula
Once the die is set…
Once the pieces are in place to deliver a particular value proposition Only value props that fit the existing recourses,
processes and profit formula of the organization can be successfully taken to market. Kodak
Where Capabilities Reside
Three factors determine what an organization can do: Resources Processes Values
Resources
Tangible People equipment technology cash
Intangible Product designs Information brands relationships
Processes
Patterns of interaction, coordination, communication, and decision making that employees use to transform resources into products and services of greater worth.
Designed not to change or to change in very prescribed ways
Both formal and informal
Values
The standards by which employees set priorities that enable them to judge whether: an order is attractive or unattractive A customer is more important or less important An idea for a new product is attractive or marginal
Two values that affect innovation
Acceptable profit margins Tend to rise over time Toyota Corona – Honda et al. entered Camry, Lexus – higher cost structure meant exiting
low end market. Its values had changed
Two values that affect innovation
How big an opportunity needs to be before it is interesting A company’s stock price represents its discounted present
value of its projected earnings stream. Most managers feel compelled to maintain a constant rate of
growth For a $40 million company to grow by 10%, they need $4 million in
new business this year For a $40 billion company, however, they need $4 billion in new
business. So an opportunity that excites a small company might not be big
enough to excite a large one As companies become large, they loose the ability to enter
small, emerging markets. This is a result of a change in values, not a change in resources
Fitting the Tool to the Task
B
Use a heavyweight team within the existing organization
C
Use a heavyweight team in a separate spinout organization
A
Use a lightweight or functional team within the existing organization
DDevelopment in-house through a heavyweight team, but commercialization usually requires a spinout
Fit with an organization’s valuesWill the organization commit the required resources?
Fit
wit
h a
n o
rgan
izati
on
’s
pro
cess
es
Poor
Good
PoorDisruptive
GoodSustaining
Definitions
A functional team works on function-specifc issues, then passes the project on to the next function
A lightweight team is cross-functional, but team members stay under the control of the respective functional managers – don’t need new processes.
A heavyweight team – members work solely on the project and are expected to behave like general managers, shouldering responsibility for the project’s success. Designing new processes and new ways of working together is required.
Typology of business models
Solution ShopsValue-adding process businessFacilitated user networks
Solution Shops
Built to diagnose and solve unstructured problems Consulting Advertising R&D
Deliver value primarily through people
Value-adding process businesses
Transform inputs of recourses into outputs of greater value Repetitive Capabilities are built more into its processes than its
resources Focus on process excellence – high quality, low cost
Retailing, restaurants, automobile manufacturing
Facilitated user networks
The same people buy and sell and deliver and receive things to and from each other
Successful business are those who can facilitate the effective operation of the network and its user transactions
Telecommunications, stock exchanges, bank activities
Health care?
Hospitals and physician practices: Solution shops
Rely on intuition of highly skilled professionals But over time many activities that are based on value
adding process or user network models. “Jumbled mixtures of multiple business models
struggling to deliver value out of chaos, incorporating indecipherable systems of cost accounting, excessive overhead, pervasive cross-subsidization, and an unacceptable amount of variability and medical error.”
Innovation in Health Care
The successful innovators are those who will be able to un-jumble the mix Simplify the process Where is “the bottom”? Minute Clinic: value adding process business Facilitated user networks?
User networks shift care of chronic diseases out of intuitive based practices (solution shops)
Challenges to new business models
Fragmentation Some of this innovation could create more
fragmentation – carving out focused factories Coordination is critical
Interoperable health information technology PCMH
Challenges to new business models
Lack of a retail market Consumers need the proper incentives to shop
Health Savings Accounts? Population Health Management?
Regulatory barriers CON and other laws make innovation difficult
Incumbents will often use regulation as a cover “What’s good for GM is good for America”
Challenges to new business models
Reimbursement First, think about what this term implies Cutting reimbursement as an attempt to force a
solution shop to figure out how to be more efficient will probably not get us very far in improving health care delivery
The ACA and Disruptive Innovation
The ACA and Disruptive Innovation
What do we take away?
Disruptive, Sustaining, Efficiency InnovationDisruptive innovation makes the complex
simple Starts at “the bottom” The lack of response of incumbent is not typically the
result of stupidity, but result of change in values -- LEADERSHIP?
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