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Innovation

The Role of Innovation in a Companys Life Cycle

Introduction

Rarely does an idea for a new-growth product or business emerge fully formed in an creative persons mind

No matter how well articulated a concept or insight might be, it must be shaped and modified, often significantly, as it gets fleshed out into a business plan to win funding
A dearth of good ideas is rarely the core problem in a company that struggles to launch exciting new-growth businesses The problem is in the shaping process. Potentially innovative new ideas seem inexorably to be recast in attempts to make existing customers happier while missing opportunities to acquire new customers Ideas that emerge from this shaping process most often result in me-too innovations that could just as readily be reshaped into business plans that created truly disruptive growth

Two Primary Types of Innovation


SUSTAINING INNOVATION

DISRUPTIVE INNOVATION

Improve performance of established products Meet demands of mainstream customers in major markets

Generally underperform established products in mainstream markets Have new features that fringe / new customers value

Vary in difficulty, cost, time, etc.


Established firms dominate

Cheaper, simpler, smaller, more convenient to use


Entrant firms dominate

Sustaining Innovation

Improves the performance of established products along dimensions of performance that mainstream customers in major markets have historically valued

Customer relationships, cost structures, and organizational dynamics are unchanged


Does the same, for the same people, only better in ways these people understand Sustaining innovation can be improvements that are incremental or breakthrough in character Sustaining innovation is the most common type of innovation While sustaining innovation is important, all companies are susceptible to disruptive innovation

Sustaining Innovation

MEASURE OF PERFORMANCE

Range of performance that customers can utilize

TIME

Disruptive Innovation Theory

Disruptive Innovation, a term of art coined by Harvard Business School associate professor Clayton Christensen in his 1997 book The Innovators Dilemma, describes a process which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors

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.

Market Need vs. Technology Improvement

Performance

Overshot Customers

Undershot Customers
Time

Technologies can progress faster than demand

Suppliers eventually give customers more than they need or are willing to pay
Allows room for underperforming disruptive technologies
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Disruptive Innovation

Bring a different value proposition to the market Initially under performs established products in mainstream market But, the products improve at a rapid rate Superior in ways that are not valued by the established market more reliable, easier to use, or cheaper

Disruptive innovation creates high growth for the entrant disruptor


Disruptive innovation results in declining growth for the disruptee

Sustaining Innovation vs. Disruptive Innovation

MEASURE OF PERFORMANCE

Range of performance that customers can utilize

DISRUPTIVE TECHNOLOGIES TIME

Disruptive Innovation Case Study One: Steel Industry

Historically, most of the worlds steel has come from massive integrated steel mills that do everything from reacting iron ore, coke, and limestone in blast furnaces to rolling finished products. It costs about $8 billion to build a new integrated mill Mini-mills, in contrast, melt scrap steel in electric arc furnaces, which are small and energy efficient compared to blast furnaces used in integrated mills Using straightforward technology, mini-mills can make steel for 20 percent less than integrated mills Initially in the mid-1960s mini-mills could only produce the lowest quality steel product which is rebar Low quality steel products such as rebar also have the lowest profit margin, so incumbent integrated steel producers offered little resistance and gave up their least valued customers to mini-mills. The integrated mill were happy to be rid of that commodity business By leveraging the foothold established in the rebar market, mini-mills reinvested in R&D to advance technology which allowed them to produce higher quality steel products.

Eventually mini-mills, such as Nucor, became increasingly able to produce higher and higher quality steel products, and at higher profit margins possible with integrated mills
Nucors market capitalization now dwarfs that of the largest integrated steel company, US Steel. Bethlehem Steel went bankrupt
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Disruptive Innovation Case Study One: Steel Industry


The Up-Market Migration of Steel Mini-mills
% of Total Steel Production
25 - 30% Gross Margins

Steel Quality

55%

22%
18% Gross Margins

8% 4%

12% Gross Margins 7% Gross Margins

1975

1980

1985

1990

Time

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Case Study Two: Angioplasty Disrupts Cardiac Bypass Surgery

Prior to the early 1980s, the only people with heart disease who could receive interventional therapy were those who were at high and immediate risk of death. Most people who suffered from heart disease simply went untreated Angioplasty enabled a new group of providers, cardiologists, to treat coronary artery disease by threading a catheter into a partially clogged artery and puffing up a balloon Angioplasty was often ineffective with half of the patients suffering a reclogging of the artery within a year But because the procedure was simple and inexpensive, more patients with partially occluded arteries could begin receiving treatment The cardiologists benefited too, because even without being trained in surgery they could keep the fees for themselves, and had to refer fewer patients to the heart surgeons Angioplasty thereby created a huge new growth market in cardiac care As cardiologists pursued the high profits that came from better services they discovered they could insert stents (eventually medicine coated) to prop open even difficult-to-open arteries This disruption has been underway for three decades and now that the disruption is apparent, there is little that the surgeons can do

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Case Study Two: Angioplasty Disrupts Cardiac Bypass Surgery


Number of Angioplasty and Cardiac Bypass Surgery Procedures

Procedures (000s)

Balloon Angioplasty

Bypass

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Companies and Products Whose Roots Were in Disruption


1870 Kodak Bell Telephone Merrill Lynch Ford Plastics (DuPont, Dow, etc.) Sony Honda motorcycles Minicomputers IDEC, etc.) Xerox Toyota, Nissan Ultrasound soft Beef processing (Swift, Armour) Department stores (Marshall Fields, Macys) Catalog retailing (Sears, JC Penney, Montgomery Ward)

1950
1960

McDonalds Black & Decker consumer power tools

Discount department stores (Kmart, Wal-Mart, Target) Japanese steel companies

History

1980

Endoscopic surgery Southwest Airlines Credit scoring in consumer lending Flat-panel displays Fidelity (self-service Charles Schwab Vanguard index mutual funds investment management) Blended plastics Barnes & GE Capital Personal computers Community colleges Seiko Noble Kodak Funsaver Portable diabetes digital watches single-use camera glucose meters University of MCI, Sprint Toys R Us Phoenix Sun Circuit City Microsoft Bloomberg Microsystems Home Depot Wireless telephony Oracle Canon photocopiers Dell Staples Cisco Intuit Quickbooks (accounting) Computer Best Buy and Turbo Tax software MBNA Ink-jet printers Quartz microwave ovens Digital animation (Pixar et al) Hyundai, Kia Veritas, Network Appliance & air conditioners E-mail eBay Unmanned military aircraft Microsoft SQL database software ECNs

Palm Pilot, RIM Blackberry


2000

Concord School of Law Google Linux Digital printing Online Salesforce.com 802.11 stockbrokers

Amazon.com
On-line travel agents JetBlue

New Market

Low End
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