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A Body of Theory about Management
Clayton ChristensenHarvard Business School
Dis
ru
pti
on
The
Job
to B
e D
one
The
Cap
italis
t’s D
ilem
ma
Pu
rp
os
e B
ra
nd
s
Wha
t is
a b
usin
ess
mod
el –
and
how
is
it b
uilt?
Inte
rdep
ende
nce,
mod
ular
ity,
and
Mon
ey
Org
aniz
atio
nal D
esig
n
Mer
gers
& A
cqui
sitio
ns
Delibe
rat
e & E
merg
ent
Strate
gy
Good Money & Bad Money
A ProblemR
esou
rce
Allo
catio
n Pr
oces
s
Filte
ring
for
Lea
ders
hip
Wha
t is C
ultu
re?
What Motivates Employees?
Theo
ry o
f Met
rics
Theo
ry o
f Lea
ders
hip
Theo
ry o
f Org
aniza
tiona
l Des
ign
The S
choo
ls of
Exp
erien
ce
A Shelf of Theories
12/3/2015 Copyright Clayton M. Christensen 3
7%
4%12%
8%
18% 22%
% of tons
Stee
l Qua
lity
19801975 1985 1990
25–30%55%
Predictable Up-Side Surprises for Analysts
© 2007 Innosight LLC 4
Market Understanding that Mirrors how Customers Experience Life
“The customer rarely buys what the company thinks it is selling him.” - Peter Drucker
12/3/2015 Copyright Clayton M. Christensen 5
The right product architecture depends upon the basis of competition
Perf
orm
ance
Time
Compete by improvingfunctionality &reliability
Compete by improvingspeed, responsiveness and customization
Insurance?
Insurance?
The ResourceAllocation Process:Decisions about what gets resources: what
to do & what not to do
Deliberate Strategy:Analytical project
followed byimplementation
Emergent InitiativesResponses to
unforeseen opportunitiesand problems
Stream of newproducts, services,
processes andacquisitions
Actual strategythat is implemented
Processes of Strategy Formulation and Implementation
Priorities embedded in company’s profit model
Specialist physicians
Personal physicians
Nurse practitioners
Pharmacists
Clinics
Offices
Homes
The decentralization that follows centralizationis only beginning in healthcare
Retail Clinics
Family care
What types of innovation might an organization be incapable of doing?
Customers’ job to be done
Resources
ProcessesProfit Formula
The uniqueness of IHCResources
ProcessesProfit formula
Customers’ job to be done
Disruptive Innovations
Time
Sustaining innovations
Efficiency Innovations
- Create corporate & economic growth;- Create jobs- Need capital
Eliminates jobsIncreases free
cash flow-
Focus of management- Sustain margins Creates little net growth
A manager’s view of growth
New doctrine in Finance
The high priests: business professors; partners in private
equity, venture and hedge funds
1. Return on net assets (RONA)
2. Return on capital employed (ROCE)
3. Internal rate of return (IRR)
4. Earnings per share (EPS)
5. Gross margin percentage
6. Economic value-added (EVA)
7. Marginal cost / marginal revenue
8. Debt/Equity9. Net present
value10.Revenue per
employee
~
Thou shalt measure success by:
Disruptive Innovations
Time
Sustaining innovations
Efficiency Innovation
s- Creates corporate & economic growth;- Creates jobs- Needs capital
- Increases freecash flow
- Eliminatesjobs
Focus of management Creates little net growth
A financial view of growth
Capital superabundance:
• “The growth rate of the real economy of goods and services has been slowing in recent decades, while growth in the financial sector has been accelerating. Bain estimates that total financial assets are today almost 10 times the value of the global output of all goods and services, and that the development of financial sectors in emerging economies will cause global capital to expand by half again by 2020. We are awash in capital”
A World Awash in Money: Capital Trends through 2020, Bain & Company
• Cost of capital is approximately zero
• We struggle to invest it.
Disruptive Innovations
Time
Sustaining innovations
Efficiency Innovations
- Create corporate & economic growth;- Create jobs- Need capital
Eliminates jobsIncreases free
cash flow-
Focus of management- Sustain margins Creates little net growth
A manager’s view of growth
12/3/2015 Copyright Clayton M. Christensen 15
1980 1990
Market-creating innovation and macroeconomic growth
12/3/2015 16
SamSung, 1970
SamSung, DRAM,
1995
SamSung, SmartPhone, 2010
Many more can own & use refrigeration.
And be distributors.
Hire more to make them.
More people start new businesses that are enabled by refrigeration.
And to sell them.
Peltier-Effect refrigeration
Competing against non-consumption of refrigeration
We need to re-think finance
• We are awash in capital– This is not a temporary phenomenon
• Cost of capital is nearly zero– But the cost of distributing capital is not zero.– The Law of Conservation of Modularity– Can we waste capital? What is scarce and costly?
• Central banks’ monetary policies have little traction– The interest rate is irrelevant to investment choice
The Law of Conservation of Modularity
• There are no modular technologies that are slow.
• There are no interdependent technologies that are fast.
• Silicon Valley is big and has money. But it is not the world.
12/3/2015 20
Honda next targeted
American disruption: new customers, new dealers, etc.
Third stage: increasingly focused on sustaining innovation.
Honda began with domestic customers, domestic capital, domestic dealers, etc.
The most attractive growth markets are those that are filled with non-consumption.(Honda)
Non-consumptionof English
12/3/2015 Copyright Clayton M. Christensen 23
Disruptive opportunities
Disruptive Dermatology
Skokie
Fayetteville
RevereBurnsville
San Antonio
Disruptive Disney World
12/3/2015 Copyright Clayton M. Christensen 24
Much of the investment from USA into Mexicohas not been an engine for macro-economic growth
Eliminate non-consumption
Process Technology
Market-creating innovation
Where market-creating innovations comef r o m
Cop yr ight C lay ton M . Ch r i sten sen 2 5
12/3/2015 Copyright Clayton M. Christensen 26
Disruptive Technologies:A driver of leadership failure and the source of new growth opportunities
Perf
orm
ance
Time
Disruptive technologies
Incumbents nearly always win
Entrants nearly always win
Finance becomes not a function of
management, but an independent system
Managers choose same metrics (IRR, ROCE) to
compare and select pension investment firms
Agreement on how to keep score on each provider and competitor, analysts’ spreadsheets enable them to make bets on the scores.
The profession of management becomes the sourcing, assembly, and the shipping of numbers. Growth slows;
unfunded liabilities grow
Finance develops ratios (IRR & ROCE) in
order to compare firms in different
industries.
We’ll do anything for
anybody.
•Overhead = 85% of total
•Overhead increases 30% for each doubling of complexity
•Variable quality
12/3/2015 Copyright Clayton M. Christensen 29Po
lishi
ng D
ept.
Annealing furnace
Turning machines
Tapping equipment
De-burringCut
-off
saw
s
Shipping Department Office areaStorage
Hobbing department
Boring machines
Stampingmachines
Assembly
Shouldice Hospital: Hernia surgery
Dave Snow, asthmaCEO, Medco
National Jewish Medical CenterPulmonary & Respiratory Diseases
Typical hospitals are not complicated. They are impossible.
Fee For service
• Consulting firms• R&D organizations• Diagnostic & intuitive activities of hospitals
solution shops
Fee For outcome
• Manufacturing• Education•Construction• Medical procedures
process Businesses
• Telecommunications• Insurance• EBay• D-Life; Crohns.org
Facilitated networks
Fee For memBership
12/3/2015 Copyright Clayton M. Christensen 31
7%
12%
18%Stee
l Qua
lity
19801975 1985 1990
25–30%
The Flee or Fight Response to Profit
1995
12/3/2015 Copyright Clayton M. Christensen 32
Decentralization is disruptive, and is hard to catch
Perfo
rman
ce
Time
Time
Incumbents dominate sustaining battles
Entrants typically win at disruption
• It occurs when the new is good enough.
• Disruption competes vs. non-consumption;
• What matters on the vertical axis changes.
• Customers & applications are pulled from the old into the new, not vice-versa.
Discovery-Driven Planning is a better way to manage the flow of projects through the development funnel
Platform-based planning
1. Make Assumptions
2. Build projections based upon assumptions
3. Make decisions to invest based upon projections
4. Implement the deliberate strategy
Discovery-driven planning
1. Make Projections
2. What assumptions must prove true for the projections to happen?
3. Implement a plan to learn -- to test whether the critical assumptions are reasonable
4. Move to the next stage when key assumptions prove valid
12/3/2015 33Copyright Clayton M. Christensen
Integrating correctly to get the job done means:
• IKEA• TurboTax;
QuickBooks• Disney• Mayo Clinic• SAS• Zara• NxStage• OnStar• Hilti• Sawzall; Holehawg
12/3/2015 Copyright Clayton M. Christensen 35
• Jobs are very stable over long periods; they are not vulnerable to product life cycles
• Whereas products are easy to copy, integration around a job creates defensible differentiation.
• Less vulnerable to disruption
• Customers are happy to pay a profitable price, instead of negotiation towards a zero-sum relationship.
What’s the job-to-be-done? (Each job has functional, emotional & social dimensions)
Four levels in the architecture of a job
12/3/2015 Copyright Clayton M. Christensen 36
What experiences in purchase & use must we provide to do the job perfectly?
What and how to integrate?
Purpose Brand
12/3/2015 Copyright Clayton M. Christensen 37
Over time, the organizational structure comes to mirror the established product’s architecture.
Organization units created to beresponsible for each aggregate
What’s the job-to-be-done? (Each job has functional, emotional & social
dimensions)
What experiences in purchase & use must we provide to do the job
perfectly?
What and how to integrate?
Purpose Brand
No responsibility for any customer’s experience
X
12/3/2015 Copyright Clayton M. Christensen 38
Original Technology Pure-play deployedagainst non-consumption
Hybrid when deployedas a sustaining technology against consumption
A Theory of Hybrids
12/3/2015 Copyright Clayton M. Christensen 39
A Theory of Hybrids
Perfo
rman
ce
Time
TimePeapod: Are there customers that would love a car that won’t go far, and won’t go fast?
Competing on cost, design, reliability, and
performance on the California Freeway
Tesla $100,000
Prius Hybrid
Outsourcing often sets in motion disruptive business model liquidation
Mother boards
Computer assembly
Supply chain& logistics
Product design
Brand
Dell AsusTek
Simple circuit boards
Mother boards
Computer assembly
Supply chain& logistics
Product design
Brand
12/3/2015 40Copyright Clayton M. Christensen
NASSCO, Avondale
Pharmaceutical Cos.
Petroleum Majors
Auto companies
IT departments
Customer Supplier
Keppel
Quintiles (CROs)
Halliburton,Schlumberger
Tier One Suppliers
TCS, Infosys, Wipro
12/3/2015 41Copyright Clayton M. Christensen
Wall Street Analysts Bloomberg
Outsourcing often sets in motion disruptive business model liquidation
Disruption
Undifferentiable products
Complexity
High infant mortality
Near sightedness
Trajectories; pursuit of profitability; cost allocation
Corporate Disorders
Mental and physical atrophy
Modularity; Listening to customers
Marginal vs. Full costing; listening to customers
Prisoners’ dilemma; processes for management development
Inadequate nourishment of theory
ROCE; Core competence focus
Surg
ical
su
ites
High-speed multi-channel
testers
Imaging: MRI, CT, PET Scanners
Specialist physicians
Personal physicians
Nurse practitioners
Pharmacists
Clinics
Offices
Homes
The reason why many Americans cannot afford health care is not because they are poor. It is because health care is too expensive.
Disruption breaks the trade-offs. Higher quality andlower costs
Trade-offs are binding: Higher quality requires higher costs
12/3/2015 Copyright Clayton M. Christensen 44
The advantage of focuing on a job-to-be-done.
New York Times
AutoTrader.comR
ealtor.comM
etro
Bloomberg
Buy or sell stuff.
Buy or sell a car. Find a job
or fill a job
Sell or buy a home
Keep me productive while I wait
Keep me deeply informed
Up-to-date business news
Help me unwind
12/3/2015 Copyright Clayton M. Christensen 45
Apprenticeship
Tradition
Salesmanship
Decapitation
Religion
Broadconsensus
No consensus
Extent to which there is pre-existing consensus about what actions will lead to the needed results
No consensus Broad consensus
PowerTools
ManagementTools
LeadershipTools
CultureTools
MeasurementSystems
Training
Standard operatingprocedures
Strategic planning
Financialincentives
Negotiation
Exte
nt to
whi
ch th
ere
isC
onse
nsus
on
wha
t we
wan
t
Rituals
Democracy
FolkloreReligion
VisionCharisma
Role modeling
Salesmanship
Coercion
FiatThreats
Role definition
ControlSystems
Decapitation
The Tools of Cooperation
12/3/2015 Copyright Clayton M. Christensen 46
7%
4%12%
8%
18% 22%
% of tons
Stee
l Qua
lity
19801975 1985 1990
25–30%55%
Evaluating investments on marginal rather than full costs biases incumbent leaders to leverage what they have, instead of building what they need
$320
255
65
Minimill
$320
45
275
Marginal
$320
310
10
Existing
Price
Cost
Net
© 2007 Innosight LLC 47
Market Understanding that Mirrors how Customers Experience Life
“The customer rarely buys what the company thinks it is selling him” - Peter Drucker
Ongoing disruption
• American cars (Kia)• US Mail (Internet)• Airbus & Boeing
(Embraer)• Oracle (Salesforce)• Defense (terrorism)• Universities (online)• Suburban Malls
(Amazon)
• Cisco (Hwawei; blade servers)
• Keppel• Align (orthodontists)• Architects (Autodesk)• Construction• Banks (telecom firms)• Kellogg’s (store brands)• Fighters, bombers
(Unmanned aircraft)
12/3/2015 Copyright Clayton M. Christensen 49
Decentralization is disruptive, and is hard to catch
Perfo
rman
ce
Time
Time
Incumbents dominate sustaining battles
Entrants typically win at disruption
40% 20% on $2,000
45% on$250,000
60% on$500,000
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