A New Path to Growth
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A New Path to Growth. Using Disruption to Drive New Growth at McNeil. Professor Clark Gilbert Harvard Business School. Pace of Technological Progress. Product Performance. Performance that customers can utilize or absorb.

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Professor clark gilbert harvard business school

A New Path to Growth

Using Disruption to Drive New Growth at McNeil

Professor Clark Gilbert Harvard Business School


Sustaining versus disruptive innovation

Pace of Technological Progress

Product Performance

Performance that customers

can utilize or absorb

New performance trajectory

Disruptive Innovation

Time

Sustaining versus Disruptive Innovation

Sustaining Innovation

Breakthrough

Incremental

Source: The Innovator’s Dilemma


Professor clark gilbert harvard business school

Disconnect with Resource Allocation

  • Under Valued by Leading Customers

  • Lowers Performance along Traditional Trajectory

  • Lowers Gross Margins

  • Targets Different Customers in New Ways

  • Introduces Different Performance Criteria

Budgeting Committee

Disruptive Proposal

Production

Marketing Manager


Professor clark gilbert harvard business school

Kodak’s Response

($1B in R&D)

Children’s Game Toys

Established players force new technology into old markets

Applications for Silver Halide Film Technology

Disruption in digital photography

Performance

Home-use Applications

E-mail applications

Disruptive technology: digital film


Professor clark gilbert harvard business school

Definition of a Fanatic:

Someone who doubles his speed when he has lost his direction

--George Santayana


The benefit of staged learning

The Benefit of Staged Learning

Replication of Old Market and Business Model

Discovery of New Market and Business Model


Different types of innovations

New Market Disruption

  • Improvements along dimensions valued by current customers

  • “Good enough” on traditional metrics but lower prices

  • Improved performance on new attributes (e.g., simplicity, convenience)

TECHNOLOGY

  • New customers or new contexts of use

  • Most profitable customers in existing markets

  • Overserved customers in low-end of existing market

  • Improved performance on new attributes (e.g., simplicity, convenience)

CUSTOMERS

  • New customers or new contexts of use

  • New business model, often lower price points, new sales model & distribution channels

Different Types of Innovations

Sustaining Innovation

Low-End Disruption

New Market Disruption

  • New financial or operational model that earns attractive returns at low prices

  • New business model, often lower price points, new sales model & distribution channels

  • Similar to existing model, improves or maintains margins

BUSINESS MODEL


Steel minimills a low end disruption

Steel Minimills: A Low-End Disruption


Steel minimills a low end disruption1

Steel Minimills: A Low-End Disruption

% of Margin

% of Tons

25–30%

55%

Sheet steel

22%

18%

Structural steel

Steel Quality

8%

Angle iron; bars & rods

12%

Quality of minimill-produced steel

4%

Rebar

7%

1975

1985

1980

1990


Different types of innovations1

  • Improvements along dimensions valued by current customers

  • “Good enough” on traditional metrics but lower prices

  • Improved performance on new attributes (e.g., simplicity, convenience)

TECHNOLOGY

  • Most profitable customers in existing markets

  • Overserved customers in low-end of existing market

CUSTOMERS

  • New customers or new contexts of use

Different Types of Innovations

Sustaining Innovation

Low-End Disruption

New Market Disruption

  • New financial or operational model that earns attractive returns at low prices

  • New business model, often lower price points, new sales model & distribution channels

  • Similar to existing model, improves or maintains margins

BUSINESS MODEL


Minicomputers a new market disruption

The DEC Programmable Data Processor 8: 1965

Minicomputers: A New Market Disruption


Professor clark gilbert harvard business school

15000

14000

13000

12000

11000

10000

9000

8000

7000

6000

5000

4000

3000

2000

1000

0

1965

1975

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

Established Markets Continue to Grow even as the Disruptive Markets Take Root

Minicomputers Disrupt Mainframes

Sustained Revenue Lead

First Revenue Lead

Minicomputer

Market

Dollars ($billions)

Mainframe Computer

Market

Phase III

Phase I

Phase II

Source: ITI, Industry Statistics Programs; U.S. Microcomputer

Statistics Committee Forecast, Data Analysis Group


Professor clark gilbert harvard business school

Disruption in Print Media

“All the News that Fit to Pixel”


Disconnect with resource allocation

Disconnect with Resource Allocation

  • Under Valued by Leading Customers

  • Lowers Performance along Traditional Trajectory

  • Lowers Gross Margins

  • Targets Different Customers in New Ways

  • Introduces Different Performance Criteria

Budgeting Committee

Disruptive Proposal

Production

Marketing Manager


Old business models make it very difficult to realize

45% Missing!

45%

Old Business Models Make It Very Difficult to Realize

Missing Revenue: Online Advertising Market

15%

20%

10%


Online revenue per unique user

Online Revenue Per Unique User


The irony of disruptive innovation growth starts in new not established markets

Product Performance

Performance that customers

can utilize or absorb

New Net Growth

Time

The Irony of Disruptive InnovationGrowth Starts in New, Not Established Markets


Professor clark gilbert harvard business school

Displacement

Net New

Growth

Established

Business

Disruptive

Business

Starts Outside Established Business

Finding New Market Growth

"Overall, the newspaper industry's involvement with the Internet has been one where it had a lot to lose and it's been trying not to lose it, as opposed to starting from scratch and having a lot to win."

--Steve Yelvington, President of Online Newspaper Division


Professor clark gilbert harvard business school

Why is this so difficult for otherwise successful firms?


Professor clark gilbert harvard business school

Processes

Resources

Values

The criteria by which prioritization decisions are made

  • People

  • Technology

  • Products

  • Equipment

  • Information

  • Cash

  • Brand

  • Distribution

  • Hiring & Training

  • Product development

  • Manufacturing

  • Planning & Budgeting

  • Market Research

  • Resource allocation

  • Ethics

  • Cost structure/income statement

  • Size of opportunity

RPV: Strengths Become Weaknesses

Core Competence vs. Core Rigidity


Capabilities in one context become disabilities in another

Market

Research

Big

enough to be

interesting?

Planning

Cycles

What

Margins Are

Attractive?

Customer

Feedback

Cost structure

Resource

Allocation

Product

Quality

Capabilities in One Context Become Disabilities in Another

Processes:

How?

Values:

Why?

“Organizational

DNA”


Disruption through portable ultrasound

“I need to look at the kidney myself and see what’s going on. Every time I want to look I have to send the radiologist a patient…

That’s not good. It doesn’t help me get my job done. I want to do it myself.”Nephrologist

Disruption through Portable Ultrasound

“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 didn’t do it. And I’m 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


Develop separate business development processes

Develop Separate Business Development Processes

Performance

Time


Professor clark gilbert harvard business school

Separate Disruptive Ventures

Separated sites had nearly 4 million more page views

Penetration

12

10

10.4

Millions of Page Views / Month

8

6

6.5

4

2

0

Integrated Sites

Separated Sites


Professor clark gilbert harvard business school

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 business—venture autonomy, talent, partnerships, and acquisitions

  • Disruption can provide competitive advantage is the search for growth


Professor clark gilbert harvard business school

Managing Uncertaintyin New Venture Creation

Clark Gilbert

Harvard Business School


Professor clark gilbert harvard business school

HBS Definition of Entrepreneurship

Without Regard to Resources Currently Controlled

Pursuit of Opportunity

Managing Uncertainty

  • Identify Critical Risks

  • Design Experiments

  • Stage Investment


1 identify key sources of risk

1) Identify Key Sources of Risk

  • Technical

  • Operating

  • Market

  • Distribution /Pricing

  • Team

  • Environmental

Which is the most important risk to understand and remove?

Deal Killers, Path Dependencies, Costs, Investor Needs, Greatest Uncertainty

Total Venture Risk


Professor clark gilbert harvard business school

Business Models: Fishbone Diagrams

Driver 1

Driver 1

Driver 2

Driver 3

Driver 3

revenues

Driver 2

Driver 3

profits

Driver 1

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

Driver 2

costs

Driver 2

Driver 3


Professor clark gilbert harvard business school

2) Types of Experiments

  • Partial experiments

    • buy information on “deal killer” source of uncertainty

      • good when you know you don’t 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 didn’t know you didn’t

      • 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 Up’s 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 don’t think we made mistakes fast enough and we didn’t learn from them often enough. The problem wasn’t just turning them on, sometimes it’s turning them off.”

-Bob Ingle, Executive Editor, San Jose Mercury News

2) Risks of Experiments


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 resultenter vs. exit, product adaptation, adaptation subsequent roll-out

2) The Value of Experiments


3 staging investment

3) Staging Investment

Lock-in on Early Assumptions

Discovery of New

Market and Business Model


3 staging investment1

Only spend significant sums of money after big risks have been reduced.

Examples

R&R doesn’t place manufacturing order until after K-Mart order is received

Knight Ridder waits on registration until execution and sales risk are reduced

3) Staging Investment


Professor clark gilbert harvard business school

3) Staged Investments and Value of Information

SUCCESS

Payoff - Investment

INVEST NOW

PS

(1-PS)

- Investment

FAILURE

SUCCESS

Payoff- Investment - Cost of Test

GOOD RESULTS

INVEST

PS|G

1

PG

(1-PS|G)

-Investment- Cost of Test

RUN AN EXPERIMENT

FAILURE

1

(1-PG)

ABANDON

- Cost of Test

1

BADRESULTS

ABANDON


Funding to milestones aka old fashioned venture capital

Funding to Milestonesaka “Old-Fashioned Venture Capital”

TechnologyWorks

A Customer

Buys

Idea isFeasible

P(success) = 80%

Req’d IRR = 30%

Valuation

P(success) = 50%

Req’d IRR = 50%

P(success) = 40%

Req’d IRR = 70%

P(success) = 30%

Req’d IRR = 100%

Risk (ß)

Capital

Seed

Funding

R&DCapital

Go-to-MarketCapital

ExpansionCapital

Source: Lou Mazzucchelli, Ridgewood Capital


The fully funded folly

The “Fully Funded” Folly

TechnologyWorks

A Customer

Buys

Idea isFeasible

Valuation

Risk (ß)

Capital

Fully

Fund

IPO

(……….pray……………….)

Source: Lou Mazzucchelli, Ridgewood Capital


Professor clark gilbert harvard business school

Implications

  • Risk is inversely related to value

  • Entrepreneurial managers don’t 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 metrics—opportunity 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 key—simply having powerful ideas and opportunities is not enough


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