Disruptive Innovation

Model of DisruptionSteel Industry

Two ways of making steel Massive integrated steel companies $10 billion to

start Mini Mills

Melt scrap in electric furnaces Don’t have to scale up the down stream process Make steel at any given quality 20% lower costs

Steel is a commodity If you were a integrated company would you adopt the

mini mill?

Flee or Fight

1975 1980 1985 1990 1995

Quality

Rebar

Bars and Rods

Structural Steel

Sheet Steel

Quality

of i

ntegra

ted m

ill’s

stee

l

Flee or Fight

Prior to the late 1960s, integrated mills were doing all types and were making buckets of money

Late 1960s mini mills came on to the market Melting scrap, quality was low and could only

participate in rebar market

Flee or Fight

1975 1980 1985 1990 1995

Quality

Rebar

Bars and Rods

Structural Steel

Sheet Steel

Quality

of i

ntegra

ted m

ill’s

stee

l

Quality of m

ini-mills

steel

7% GM

12% GM

Flee or Fight

Integrated mills were happy to get out of rebar Why fight for a 7% gross margin?

Profitability of integrated mills increased as they left rebar

Profitability of mini-mills increased as they entered rebar

Everyone was happyBut then in 1979 last integrated mill exited rebar

Price of rebar collapsed Competition drove prices down to where mini mills were barely

making money. Becoming more efficient only a recipe for survival Looked up!

Guess what happened?

1975 1980 1985 1990 1995

Quality

Rebar

Bars and Rods

Structural Steel

Sheet Steel

Quality

of i

ntegra

ted m

ill’s

stee

l

Quality of m

ini-mills

steel

7%gm

12% GM

18% GM

Flight or fight?

Same thing happenedIntegrated mills were happy to leaveMini-mills were 20% cheaper so made profitUntil 1984

Guess what happened?

1975 1980 1985 1990 1995

Quality

Rebar

Bars and Rods

Structural Steel

Sheet Steel

Quality

of i

ntegra

ted m

ill’s

stee

l

Quality of m

ini-mills

steel

7%gm

12% GM

18% GM

24% GM

Flight or fight?

Same thing happenedIntegrated mills were happy to leaveMini-mills were 20% cheaper so made profitUntil 1996

Guess what happened?

1975 1980 1985 1990 1995

Quality

Rebar

Bars and Rods

Structural Steel

Sheet Steel

Quality

of i

ntegra

ted m

ill’s

stee

l

Quality of m

ini-mills

steel

7%gm

12% GM

18% GM

24% GM

Eventually integrated mills only producing specialty steel

Mini mills 65% of marketAll but one integrated mill has gone bankrupt“stupid manager”?No stupidity involvedInnovators Dilemma

Innovator’s Dilemma

Firms have a choice: Make better products that we can sell for more profits to our current

customers? Or make worse products that none of our customers would buy and would ruin

our margins? Companies can put too much emphasis on customers' current needs, and fail to

adopt new technology or business models that will meet customers' unstated or future needs

How to defeat a giant? Go after best customers? Enter the bottom

Giant is motivated to flee rather than fight

Toyota Entered in the 1960s

Corona Ford GM, were happy to let them have it

Today Kia and Hyundia

Three types of Innovations

Disruptive InnovationSustaining InnovationEfficiency Innovation

Disruptive Innovation

Small $$$

Medium $$

Large $

Disruptive Innovation

MainframeP = $2,000,000GM=#1,200,000

Personal ComputerP=$2,000GM=$700

Disruptive Innovation

MainframeP = $2,000,000GM=#1,200,000

Personal ComputerP=$2,000GM=$700

Smartphone/TabletP=$200GM=$80

Disruptive Innovation

People making the early products tend not to make the new products: It doesn’t make sense to make products that don’t

make centsDisruptive innovation transform complicated

products into simple products Takes something that was very expensive and hard to

produce and only a few could afford, and converts it into something that is much simpler to produce, is cheaper, and many can afford it.

Disruptive innovations create jobs More people can buy them, need more people to make

them service them sell them Data show that almost all of the net jobs created in

our economy were created through disruptive innovation

Disruptive innovation requires capital

Sustaining Innovation

Making good products better Better mainframe computers Better personal computers The iPhone 4, 4s, 5, …..

On average, they don’t create jobs When we buy the new product, we stop buying the old

productDon’t use a lot of capital

Efficiency innovation

Sell the same products to the same customers for cheaper Walmart Process Improvement

Tend to eliminate jobsBut will free up capital

Prior to Toyota, it took 60 days for GM to assemble a car

Toyota did it in 2 days Frees up lots of capital (inventory)

The three together?

Disruptive Innovation

Sustaining Innovation

Efficiency Innovation

Disruptive Sustaining Efficiency

Jobs Creates Little Eliminates

Capital Uses Little Frees

How does this apply to Healthcare?

Most innovation in healthcare has been sustaining

To understand this first describe the basic components of a business model

Components of a business model

Value proposition Product or service that helps customers get a job done

more effectively, conveniently, and affordablyResources

People, supplies, intellectual property, equipment, cash required to deliver the value prop

Components of a business model

Processes As resources work together to produce the product,

process emerge and become ingrained in the business model

Profit Formula Defines the pricing, mark-ups, gross and net profit

margins, and volumes necessary to profitably cover the costs of the resources and processes that are required

The Business Model

Value Proposition

Resources

Processes

Profit Formula

Over time, the causation reverses:

Value Proposition

Resources

Processes

Profit Formula

Once the die is set…

Once the pieces are in place to deliver a particular value proposition Only value props that fit the existing recourses,

processes and profit formula of the organization can be successfully taken to market. Kodak

Where Capabilities Reside

Three factors determine what an organization can do: Resources Processes Values

Resources

Tangible People equipment technology cash

Intangible Product designs Information brands relationships

Processes

Patterns of interaction, coordination, communication, and decision making that employees use to transform resources into products and services of greater worth.

Designed not to change or to change in very prescribed ways

Both formal and informal

Values

The standards by which employees set priorities that enable them to judge whether: an order is attractive or unattractive A customer is more important or less important An idea for a new product is attractive or marginal

Two values that affect innovation

Acceptable profit margins Tend to rise over time Toyota Corona – Honda et al. entered Camry, Lexus – higher cost structure meant exiting

low end market. Its values had changed

Two values that affect innovation

How big an opportunity needs to be before it is interesting A company’s stock price represents its discounted present

value of its projected earnings stream. Most managers feel compelled to maintain a constant rate of

growth For a $40 million company to grow by 10%, they need $4 million in

new business this year For a $40 billion company, however, they need $4 billion in new

business. So an opportunity that excites a small company might not be big

enough to excite a large one As companies become large, they loose the ability to enter

small, emerging markets. This is a result of a change in values, not a change in resources

Fitting the Tool to the Task

B

Use a heavyweight team within the existing organization

C

Use a heavyweight team in a separate spinout organization

A

Use a lightweight or functional team within the existing organization

DDevelopment in-house through a heavyweight team, but commercialization usually requires a spinout

Fit with an organization’s valuesWill the organization commit the required resources?

Fit

wit

h a

n o

rgan

izati

on

’s

pro

cess

es

Poor

Good

PoorDisruptive

GoodSustaining

Definitions

A functional team works on function-specifc issues, then passes the project on to the next function

A lightweight team is cross-functional, but team members stay under the control of the respective functional managers – don’t need new processes.

A heavyweight team – members work solely on the project and are expected to behave like general managers, shouldering responsibility for the project’s success. Designing new processes and new ways of working together is required.

Typology of business models

Solution ShopsValue-adding process businessFacilitated user networks

Solution Shops

Built to diagnose and solve unstructured problems Consulting Advertising R&D

Deliver value primarily through people

Value-adding process businesses

Transform inputs of recourses into outputs of greater value Repetitive Capabilities are built more into its processes than its

resources Focus on process excellence – high quality, low cost

Retailing, restaurants, automobile manufacturing

Facilitated user networks

The same people buy and sell and deliver and receive things to and from each other

Successful business are those who can facilitate the effective operation of the network and its user transactions

Telecommunications, stock exchanges, bank activities

Health care?

Hospitals and physician practices: Solution shops

Rely on intuition of highly skilled professionals But over time many activities that are based on value

adding process or user network models. “Jumbled mixtures of multiple business models

struggling to deliver value out of chaos, incorporating indecipherable systems of cost accounting, excessive overhead, pervasive cross-subsidization, and an unacceptable amount of variability and medical error.”

Innovation in Health Care

The successful innovators are those who will be able to un-jumble the mix Simplify the process Where is “the bottom”? Minute Clinic: value adding process business Facilitated user networks?

User networks shift care of chronic diseases out of intuitive based practices (solution shops)

Challenges to new business models

Fragmentation Some of this innovation could create more

fragmentation – carving out focused factories Coordination is critical

Interoperable health information technology PCMH

Challenges to new business models

Lack of a retail market Consumers need the proper incentives to shop

Health Savings Accounts? Population Health Management?

Regulatory barriers CON and other laws make innovation difficult

Incumbents will often use regulation as a cover “What’s good for GM is good for America”

Challenges to new business models

Reimbursement First, think about what this term implies Cutting reimbursement as an attempt to force a

solution shop to figure out how to be more efficient will probably not get us very far in improving health care delivery

The ACA and Disruptive Innovation

The ACA and Disruptive Innovation

What do we take away?

Disruptive, Sustaining, Efficiency InnovationDisruptive innovation makes the complex

simple Starts at “the bottom” The lack of response of incumbent is not typically the

result of stupidity, but result of change in values -- LEADERSHIP?