Disruptive Technology

A New Path to Growth
Using Disruption to Drive

New Growth at McNeil
Professor Clark Gilbert
Harvard Business School
2004, Clark Gilbert, Harvard Business School
Sustaining versus Disruptive Innovation
Product Performance
tion
a
v
no
In
ug
o
g
r
nin
kth
i
a
a
e
t
Br
S us
In
tal
n
e
crem
New
nce
a
m
for
r
e
p
ry
o
t
c
raje
ical
g
o
nol
h
c
f Te
o
e
Pac ress
g
Pro
at customers
Performance th
sorb
can utilize or ab
Disruptive Innovation
Source: The Innovators Dilemma

Time
Disconnect with Resource Allocation

Targets Different
Customers in New Ways
Introduces Different
Performance Criteria
Under Valued by Leading Customers

Lowers Performance along Traditional
Trajectory
Lowers Gross Margins
Disruptive
Proposal
Budgeting Committee
Production
Marketing Manager
Performance
Established players force new technology

into old markets
Applications for
Silver Halide Film
Technology
Disruption
Kodaksin
digital
Response
photography
($1B in R&D)
Home-use Applications
E-mail applications
Childrens Game Toys
Disruptive technology: digital film

Definition of a Fanatic:
Someone who doubles his speed
when he has lost his direction
--George Santayana
The Benefit of Staged Learning

Replication of
Old Market and
Business Model
Discovery of
New Market and
Business Model
Different Types of Innovations
Sustaining
Innovation
Low-End
Disruption
New Market
Disruption
CUSTOMERS
Most profitable
customers in existing
markets
Overserved customers
in low-end of existing
market
New customers or new

contexts of use
TECHNOLOGY
Improvements along
dimensions valued by
current customers
BUSINESS
MODEL
Similar to existing
model, improves or
maintains margins
Good enough on
traditional metrics but
lower prices
New financial or
operational model that
earns attractive returns
at low prices
Improved performance
on new attributes (e.g.,
simplicity, convenience)
New business model,
often lower price points,
new sales model &
distribution channels
Steel Minimills: A Low-End Disruption
Steel Minimills: A Low-End Disruption

% of Margin
% of Tons
2530%
Steel Quality
Sheet steel
18%
a
Qu
o
lity
i
m
i
n
mi
ce
u
d
o
r
ll-p
el
e
t
ds
12%
l
Structural stee
1980
22%
8%
ars &
Angle iron; b
rods
Rebar
7%
1975
55%
1985
1990
4%
Different Types of Innovations
Sustaining
Innovation
Low-End
Disruption
New Market
Disruption
CUSTOMERS
Most profitable
customers in existing
markets
Overserved customers
in low-end of existing
market
New customers or new

contexts of use
TECHNOLOGY
Improvements along
dimensions valued by
current customers
Good enough on
traditional metrics but
lower prices
BUSINESS
MODEL
Similar to existing
model, improves or
maintains margins
New financial or
operational model that
earns attractive returns
at low prices
Improved performance
on new attributes (e.g.,
simplicity, convenience)
New business model,
often lower price points,
new sales model &
distribution channels
Minicomputers: A New Market Disruption
The DEC Programmable Data Processor 8: 1965

Established Markets Continue to Grow even

as the Disruptive Markets Take Root
Minicomputers Disrupt Mainframes
15000
Sustained
Revenue Lead
First
Revenue
Lead
14000
13000
Minicomputer
Market
12000
11000
10000
9000
Dollars 8000
($billions)7000
Mainframe Computer
Market
6000
5000
4000
3000
2000
Phase I
1000
Phase III
Phase II
1965
1975
1981
1983
1985
Source: ITI, Industry Statistics Programs; U.S. Microcomputer

Statistics Committee Forecast, Data Analysis Group
1987
1989
1991
1993
1995
1997
1999
2001
Disruption in Print Media

All the News that Fit to Pixel
Disconnect with Resource Allocation

Targets Different
Customers in New Ways
Introduces Different
Performance Criteria
Under Valued by Leading Customers

Lowers Performance along Traditional
Trajectory
Lowers Gross Margins
Disruptive
Proposal
Budgeting Committee
Production
Marketing Manager
Old Business Models Make It

Very Difficult to Realize
Missing Revenue: Online Advertising Market
120
100
80
45%
60
45%
Missing!
15%
20%
10%
E-mail
Demographic
Usage Targeting
Sectionals
40
ROS
20
0
Online Newspaper
Typical Online Entrant
Online Revenue Per Unique User

$19.00
$17.00
$17.12
$15.00
$13.00
$11.00
$9.00
$7.00
$7.93
$5.00
$3.00
$1.00
Newspapers
Pure-Plays
Product Performance
The Irony of Disruptive Innovation

Growth Starts in New, Not Established
Markets
at customers
Performance th
sorb
can utilize or ab
New Net Growth

Time
"Overall, the newspaper industry's involvement with the Internet has been
one where it had
a lot to lose
and it'sMarket
been trying not
to lose it, as opposed
Finding
New
Growth
to starting from scratch and having a lot to win."
--Steve Yelvington, President of Online Newspaper Division
Displaceme
nt
Established
Business
Net New
Growth
Disruptive
Business
Starts
Outside
Established
Business
Why is this so difficult

for otherwise
successful firms?
RPV: Strengths Become Weaknesses

Core Competence vs. Core Rigidity
Resources
People
Technology
Products
Equipment
Information
Cash
Brand
Distribution
Processes
Values
Hiring & Training
The criteria by which

prioritization decisions
are made
Product
development
Manufacturing
Planning &
Budgeting
Market Research
Resource
allocation
Ethics
Cost structure/
income statement
Size of opportunity
Capabilities in One Context

Become Disabilities in Another
Big
enough to be
interesting?
Market
Research
Planning
Cycles
Processes:
How?
Customer
Feedback
Values:
Why?
What
Margins Are
Attractive?
Cost structure
Resource
Allocation
Organizational
DNA
Product
Quality
Disruption through Portable Ultrasound

I need to look at the kidney
myself and see whats
going on. Every time I want
to look I have to send the
radiologist a patient
Thats not good. It doesnt
help me get my job done. I
want to do it myself.
Nephrologist
I had a call with a nephrologist where I
literally told the sales rep to take the product
out of the bag and show it to the physician.
He didnt do it. And Im the President of the
company
...We have all of these sales leads, but some
of my reps are afraid of cannibalizing sales
of higher-end hand carried systems.
President, Hand-Carried Ultrasound

Company
Performance
Develop Separate Business Development

Processes
Time
Separate Disruptive Ventures
Separated sites had nearly 4 million more page views

12
Penetration
10
Millions
of Page
Views /
Month
10.4
8
6
4
6.5
2
0
Integrated
Sites
Separated
Sites
Implications
Disruptive technologies attack an established business, but provide
enormous opportunities for new net growth
Focusing on your core market can lead to organizational rigidity
Trying Harder Can Be Part of the Problem!
Identifying these opportunities requires different lenses:
Reconsidering technologies viewed as inferior in your core market
Targeting overshot where the primary alternative is non-consumption
Developing these opportunities requires different tools:

A different development, review, and funding process than the core business
A venture process that is patient for growth, not for proof of concept
A willingness to look outside of core businessventure autonomy, talent,
partnerships, and acquisitions
Disruption can provide competitive advantage is the search for growth

Managing Uncertainty
in New Venture Creation
Clark Gilbert
Harvard Business School
HBS Definition of Entrepreneurship
Pursuit of Opportunity
Without Regard to Resources

Currently Controlled
Managing Uncertainty
1. Identify Critical Risks
2. Design Experiments
3. Stage Investment
1) Identify Key Sources of Risk

Technical
Operating
Total
MarketVenture
Distribution
Risk /Pricing
Team
Environmental
Which is the most

important risk to
understand and remove?
Deal Killers, Path
Dependencies, Costs,
Investor Needs, Greatest
Uncertainty
Business Models: Fishbone Diagrams

Driver 1
Driver 1
revenues
Driver 2
Driver 2
Driver 3
Driver 3
profits
Driver 1
costs
Driver 2
Driver 3
Using the tool

1. Draw the key drivers of revenue and costs
2. Identify key drivers and assumptions
3. Test sensitivity to changes in key drivers
4. Analyze how reasonable key assumptions are
5. Use the tool to surface key assumptions,
logical inconsistencies, critical sources of
uncertainty and important questions to ask
2) Types of Experiments
Partial experiments
buy information on deal killer source of uncertainty
good when you know you dont know something, risk of failure is high
case examples
customer research before introduce product (Parenting, Tally Up)
hire as consultant before hiring full time (Tally Up)
background check on job candidate
Holistic experiments
test entire model on small scale
good to reveal ignorance-I.e., things you didnt know you didnt
good to tests interaction between variables
case examples
introduce product in trial before full launch (Onset vs. Knight Ridder)
develop prototype with development partner (Tally Ups beta version, E Ink)
projection and reflection (ONSET ask VCs evaluate whole plan)
2) Risks of Experiments
Experiments can be expensive
(Knight Ridder, E Ink, Segway)
They can take too long

What if you finally get it right, only to find out that the
market has moved or someone else has beat you to
the punch?
They can perpetuate

Given the pace of our expansion, I dont think we
made mistakes fast enough and we didnt learn from
them often enough. The problem wasnt just turning
them on, sometimes its turning them off.
-Bob Ingle, Executive Editor, San Jose Mercury News
2) The Value of Experiments

Value greatest when:
Significant cost of failure
Significant probability of failure
Cost of the experiment is a small percentage of the total
investment
The experiment yields fairly accurate results
You can increase the value when:

Minimize both costs and timing
You impose variance on key questions, but control for other
variables (Onset)
Have key milestones and ways of measuring progress
Change behavior as a resultenter vs. exit, product adaptation,
adaptation subsequent roll-out
3) Staging Investment
Lock-in on
Early
Assumptions
Discovery of New
Market and
Business Model
3) Staging Investment
Only spend significant sums of money after
big risks have been reduced.
Examples
R&R doesnt place manufacturing order
until after K-Mart order is received
Knight Ridder waits on registration until
execution and sales risk are reduced
3) Staged Investments and Value of

Information
SUCCESS
INVEST NOW
Payof - Investment
PS
(1-PS)
- Investment
FAILURE
GOOD RESULTS
PG
1
SUCCESS
INVEST
PS|G
(1-PS|G)
FAILURE
RUN AN EXPERIMENT
(1-PG)
BAD RESULTS
ABANDON
ABANDON
Payof - Investment - Cost of Test
- Investment - Cost of Test
- Cost of Test
Funding to Milestones
aka Old-Fashioned Venture Capital
Idea is
Feasible
Technology
Works
A Customer
Buys
P(success) = 80%
Reqd IRR = 30%
Valuation
P(success) = 50%
Reqd IRR = 50%
P(success) = 30%
Reqd IRR = 100%
P(success) = 40%
Reqd IRR = 70%
Risk ()
Capital
Seed
Funding
R&D
Capital
Go-to-Market
Capital
Expansion
Capital
Source: Lou Mazzucchelli, Ridgewood Capital
The Fully Funded Folly

Technology
Works
Idea is
Feasible
A Customer
Buys
Valuation
Risk ()
Capital
Fully
Fund
(.pray.)
IPO
Source: Lou Mazzucchelli, Ridgewood Capital

Implications
Risk is inversely related to value
Entrepreneurial managers dont take risk, the manage risk
New ventures will:
Develop in an highly iterative and staged process
Employ a series of risk reducing experiments
Business models will change multiple times
Reviewing of new ventures requires that board members can:
Considered plans that will change considerably
Demand results, but on different metricsopportunity recognition and
milestone achievement
Identify risks, stage investment, and value risk reducing experiments
Embrace outside perspectives
Creating the right context for reviewing new ventures is keysimply

having powerful ideas and opportunities is not enough

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A New Path to Growth

Using Disruption to Drive

2004, Clark Gilbert, Harvard Business School

Sustaining versus Disruptive Innovation

Source: The Innovators Dilemma

Disconnect with Resource Allocation

Under Valued by Leading Customers

2004, Clark Gilbert, Harvard Business School

Established players force new technology