Disruptive Strategy

DISRUPTIVE STRATEGY WITH CLAYTON CHRISTENSEN:

Aligning with Innovation and Disruption

KEY TAKEAWAYS

• There are three main types of innovation: sustaining innovation, low-end

disruptive innovation, and new-market disruptive innovation
• New technology is not intrinsically disruptive; it depends on how it is deployed
into the market relative to the business models for existing products or services
o Incumbents typically win sustaining battles
o Entrants typically win disruptive battles
• Start innovating today—even while your core business is strong; disruption is
typically an opportunity long before it is a threat
o Spot disruption in your industry early by studying customers who stopped
using your product or service
• An organization cannot disrupt itself
o Disruptive business models must be separated from the core business

CASE STUDY
WR Hambrecht founder, Bill Hambrecht, pioneered a disruptive model for initial public
offerings (IPOs) in the U.S., leveraging auctions to serve the “low-end” of the market.
When Google approached Bill about underwriting its 2004 IPO, one of the highest
profile IPOs in years, Bill and his team felt that they had finally made it. Should Bill
Hambrecht pursue the opportunity with Google, which would require a sustaining
business model, or should his firm continue focusing on smaller, low-end disruptive
IPOs?

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 PERFORMANCE CUSTOMERS BUSINESS
targeted targeted MODEL
performance of customers or impact on the
the product or market application required business
service model

SUSTAINING Performance The most attractive Improves or

INNOVATIONS improvement in (i.e., profitable) maintains profit
incumbents attributes most customers in the margins by
typically win valued by the mainstream exploiting the
industry’s most markets who are existing processes
demanding willing to pay for and cost structure
customers. These improved and by making
improvements may performance. better use of
be incremental or current competitive
breakthrough in advantages.
character.

LOW-END Performance that is Over-served Utilizes a new

good enough along customers in the operating or
DISRUPTIONS
the traditional low-end of the financial approach
entrants typically
metrics of mainstream market. or both to earn
win
performance at the attractive returns at
low-end of the the discount prices
mainstream market. required to win
business at the low-
end of the market.

NEW-MARKET Lower performance Targets non- Business model

in “traditional” consumption: must make money
DISRUPTIONS
entrants typically attributes, but customers who at lower price per
win improved historically lacked unit sold, and at
performance in new the money or skill unit production
attributes-typically to buy and use the volumes that
simplicity and product. initially will be
convenience. small. Gross
margin dollars per
unit sold will be
significantly lower.

© Copyright 2020 President and Fellows of Harvard College. All Rights Reserved. 2
 g ress Overshoots What Customers Can Use
Pro
lo g ic al
ec hno Performance
e of T Surplus
PERFORMANCE

Pac
Performance
that Customers
sorb
ons Can Utilize or Ab
novati s
gI n t ion
st ainin n n ova
Su e I
pt iv
D i sr u
d
- En
Low

TIME

Existing Consumers

ns
at io
nov
g In
PERFORMA NCE

ta inin Performance
Sus Surplus
Performance
ns that Customers
vat io Can Utilize or
Absorb
e Inno
ptiv
isru
-E nd D
L ow

TIME

Different measure of performance

PERFORMANCE

that Customers
Per formance
Absorb s
Can Utilize or on
ovati
e Inn
r uptiv
t Dis
M arke
N ew
TIME

Current Non-Consumers

© Copyright 2020 President and Fellows of Harvard College. All Rights Reserved. 3
Disruptive Strategy
DISRUPTIVE STRATEGY WITH CLAYTON CHRISTENSEN:
Discovering Customer Jobs to be Done

KEY TAKEAWAYS

• A “job” is a problem a person is trying to solve. Customers don’t really buy

products; they “hire” them to get a job done
o A jobs to be done perspective focuses on what causes a customer to buy
a product rather than relying on the attributes (such as age, gender, or
income) that are merely correlated with buying behavior
o “Jobs” are not adjectives or adverbs. A job to be done typically starts with
the words, “Help me...” “Help me avoid...” or “I need to…”
• Products and technology come and go, but “jobs” persist over time
o Companies integrated around a “job” can achieve market differentiation
and avoid disruption
• Jobs to be done generally have two dimensions:
o Functional: the practical role the product or service fulfills
o Emotional/social: the feeling one gets from owning or using the product or
service
• Ideas for discovering jobs to be done:
o Reflect deeply on personal experiences
o Observe current customers
o Discover why former customers left
o Identify the workarounds or compensating behaviors customers use to get
the job done today

CASE STUDY
Walt Disney theme parks are known as a place for families to escape into an immersive
experience with all their favorite characters. Since opening its gates in Southern
California in 1955, Disneyland has been intensely integrated around this job to be done
and has achieved superior returns. When Disney created a new park next door to
Disneyland to attract more “multi-day” visitors and bolster hotel revenue, the company
lost its focus on the job to be done, and guests noticed. After investing $1B to build
California Adventure, the park didn’t have the “magic” of Disneyland and attendance
was well below projections. CEO Bob Iger called it a “brand withdrawal” and was faced
with a critical decision connected to the jobs to be done: What should he do to turn
California Adventure around?

© Copyright 2020 President and Fellows of Harvard College. All Rights Reserved. 4
 CORRELATION CAUSALITY

PRODUCT VIEW CUSTOMER ATTRIBUTES VIEW JOB TO BE DONE VIEW

Newspaper market Example segment: Example Job to Be Done:

Intellectuals age 60+ “Help me stay informed”

Milkshake market Example segment: Example Job to Be Done:

Males age 18-35 “Help me avoid getting bored or
hungry on my commute”

Theme park market Example segment: Example Job to Be Done:

Families with small children “Help me escape reality into a
story-telling experience with my family”

PURPOSE BRAND
How can we create a brand that customers
immediately think to “hire” for a “job”?

INTEGRATION
What and how must we integrate in order to provide
these experiences in purchasing and using the product?

EXPERIENCE
What are the experiences in purchasing and using the product
that we need to provide in order to get the “job” done perfectly?

JOB TO BE DONE
What “job” do customers need to get done or what problem are they trying to solve?
Customers don’t really buy products or services; they “hire” them to do a “job.”

© Copyright 2020 President and Fellows of Harvard College. All Rights Reserved. 5
Disruptive Strategy
DISRUPTIVE STRATEGY WITH CLAYTON CHRISTENSEN:
Organizing for Innovation

KEY TAKEAWAYS

• Every organization has resources, processes, and a profit formula that determine
what the organization can and cannot do
• Many innovations fail because the wrong resources, processes, and profit
formulas are used
o Set up a separate business unit for disruptive innovations so it can
develop the resources, processes, and profit formula needed to win
o Fold sustaining innovations into the core business unit
• Managers must be able to anticipate the resources, processes, and profit formula
their organization will need in the future

CASE STUDY
A giant in the industry, Nypro Manufacturing excelled at delivering high-volume,
complex injection-molded plastics products at a low cost. As Nypro’s industry evolved,
CEO Gordon Lankton saw an opportunity to grow his company by serving an entirely
new set of customers—those seeking simple, low-volume products with higher
customization. Serving these customers would require new, simpler technology and a
new business model. After securing the technology to serve these customers, Gordon
had to decide how to implement the technology so the new business model could
flourish. There was a risk the organization would “kill” the new model to protect the
“core” business. How should he deploy the technology and organize his team for
success?

© Copyright 2020 President and Fellows of Harvard College. All Rights Reserved. 6
 RESOURCES
Things that can be hired and fired,
bought and sold, depreciated or built.
Most resources are visible and measureable,
so managers know what they have.
Flexible and transferrable.

EXAMPLES
Technology, people, products,
facilities, equipment, brands, cash

PROCESSES PROFIT FORMULA

The criteria used in an organization to
prioritize one option over another, guiding
decisions such as which proposal to fund,
which customer to call on, or which
product feature to develop first.

EXAMPLES EXAMPLES
Product development, procurement, Gross margin targets,
market research, budgeting, ROI/ROA thresholds,
employee development utilization goals, type of
orders or customers

© Copyright 2020 President and Fellows of Harvard College. All Rights Reserved. 7
Disruptive Strategy
DISRUPTIVE STRATEGY WITH CLAYTON CHRISTENSEN:
Maintaining a Disruptive Scope

KEY TAKEAWAYS

• Never regard your strategy as the “right” strategy. If you’re successful then you
temporarily have a good strategy
• Companies must “skate” to where the performance defining component or
system will be because therein are the most attractive profits found (the
performance defining component is the component in the value chain that has
the functionality that customers care most about)
• The architecture of an industry or product ranges from purely interdependent to
purely modular. Most industries and products are somewhere between these two
extremes
o In the early stages of a new industry, products tend to be interdependent
o As industries mature and interfaces become more defined, products tend
to be modular
• The architecture (interdependent or modular) of your industry will determine
1) the basis of competition and 2) what type of strategy should be deployed
o Organizations need to integrate far enough forward in the value chain to
account for all of the independencies in design and manufacturing
o As interfaces become more modular organizations need to dis-integrate
and become more specialized
• There are three main types of interdependence: functional interdependence,
profit formula interdependence, and marketing or brand interdependence
• Identifying and building around the job to be done builds a barrier of entry
around a company. Companies who excel at building around the job to be done
consistently produce the performance-defining component or system

© Copyright 2020 President and Fellows of Harvard College. All Rights Reserved. 8
CASE STUDY
In the early 2000’s, MediaTek entered the mobile phone market by designing a chipset
with 2G functionality. However, MediaTek struggled to find clients because large
incumbents like Nokia already had large, integrated teams to design its own chipsets.
Further, the incumbents were chasing 3G – not 2G. MediaTek decided to target
emerging markets like China where its 2G chipsets would be viewed as “good enough.”
At the time of the case, the interfaces within the mobile phone had become highly
defined and modular. Despite this, there were no mobile phone companies in China.
How would MediaTek make it easy for Chinese companies to enter the market and
produce mobile phones?

The Natural Process of Modularity

Performance
Surplus Be fast, flexible,
and responsive

Performance
PERFORMANCE

Gap

Performance
that Customers
sorb
Can Utilize or Ab

Optimize functionality
and reliability
TIME

© Copyright 2020 President and Fellows of Harvard College. All Rights Reserved. 9
 DEFINITION BASIS OF OPTIMAL
what it means? COMPETITION STRATEGY
what metrics are what’s the best
important? strategy?

INTERDEPENDENT When there are In an An integrated

interfaces across interdependent strategy works best
ARCHITECTURE
which there are world the overall when there is a
unpredictable functionality of a performance gap
interdependencies product or service because it gives
– if the way one isn’t “good enough” organizations
component is and the basis of maximum flexibility
designed and made competition is to evolve the
depends on the functionality and product or service
way the other is reliability to wring out the
being designed and most performance
made

MODULAR When an interface In a modular world A specialized

is clean – in which the overall strategy works best
ARCHITECTURE
there are no functionality of the when there is a
unpredictable product is “good performance
interdependencies enough” and the surplus because
across components basis of competition organizations can
or stages of the is now speed to increase the rate of
value chain. When market, innovation for
components work convenience, individual
together in well- customization, and components
understood and price. because
highly defined organizations can
ways. specialize and thus
optimize the
performance of
their one
component.

© Copyright 2020 President and Fellows of Harvard College. All Rights Reserved. 10
Disruptive Strategy
DISRUPTIVE STRATEGY WITH CLAYTON CHRISTENSEN:
Managing the Strategy Development Process

KEY TAKEAWAYS

• There are two simultaneous but fundamentally different strategy development

processes: deliberate strategy process and emergent strategy process
• It is the profit formula (not senior managers) that controls the resource allocation
process. There are two main factors in most companies’ profit formulas that
dictate resource allocation
o The company’s cost structure determines the gross profit margin that it
must earn to cover overhead costs and make a profit
o The size threshold that new opportunities must meet in order to be
considered interesting to the company
• There are three main phases of business growth and each phase requires a
unique approach to strategy development
o Market-creating Phase: When a profitable strategy is not yet known, an
emergent strategy needs to be cultivated to allow the right ideas to
surface
o Sustaining Phase: Once a profitable strategy is clear it must become the
deliberate strategy, because in those circumstances effective execution
often spells the difference between success and failure
o Efficiency Phase: The mainstream business must be allowed to thrive
through a deliberate strategy while new waves of disruptive growth are
discovered through an emergent strategy
• The type of funding a new initiative receives can greatly influence its success
o In the nascent stages of a business “good” money will be patient to allow
the company to find a profitable strategy
o Once a winning strategy is discovered “good” money will push the
company to grow quickly

© Copyright 2020 President and Fellows of Harvard College. All Rights Reserved. 11
CASE STUDY
General Motors (GM) was widely known as the preeminent vehicle manufacturer by
volume from the 1950s – 2000s. With revenues of approximately $200 billion, GM was
continually searching for opportunities to grow. In the 1990s GM sees an opportunity to
install a technology called OnStar into the car that allows them to develop an on-going
relationship with car owners. OnStar CEO Chet Huber must delicately balance
deliberate and emergent strategy processes to help a very innovative idea thrive
inside a large organization. Chet Huber wrestles with questions like, what should
OnStar actually do for customers? What is the right distribution channel? Which new
initiatives should be pursued and which should be left behind? How should the OnStar
brand be built?

Imp
Deliberate ro
wha ved un
t wo d
Strategy rks a erstan
nd w ding
hat of
doe
sn ’t

Profit Resource Strategic Actions

Actual
Allocation New products, services,
Formula Process processes, acquisitions
Strategy

arise
hich
n i ti es w
u
port sses
a te d op d succe
n
Emergent nticip sa
Una problem
Strategy from

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 DEFINITION SITUATION STRATEGY
what it means? when is it EXECUTION
appropriate? how to execute
the strategy?

DELIBERATE Conscious and A winning strategy The strategy must

thoughtful has become clear, make as much
STRATEGY
organized action. because in those sense to all
Generated from circumstances employees as they
rigorous analysis of effective execution view the world from
data on market often spells the their own context
growth, segment difference between as it does to top
size, customer success and failure. management, so
needs, competitors’ that they will all act
strengths and appropriately and
weaknesses, and consistently.
technology
trajectories.
Implemented
“top-down”

EMERGENT Unplanned actions When the future is Ensure that

from initiatives that hard to read and it employees are
STRATEGY
bubble up from is not clear what empowered to
within the the right strategy surface and elevate
organization. The should be. This is new ideas.
product of typically during the
spontaneous early phases of a
innovation and day- company’s or
to-day prioritization product’s life or
and investment when the
decisions made by competitive
middle managers, landscape is
engineers, sales changing.
people, and
financial staff
(decisions made by
people who aren’t
typically in a
visionary, futuristic,
or strategic state of
mind).

© Copyright 2020 President and Fellows of Harvard College. All Rights Reserved. 13