Meeting the Challenge of Disruptive Change

MOT 석사세미나 1

TOC About the authors At the cover These are scary times for managers… Where Capabilities Reside The Migration of Capabilities Sustaining vs. Disruptive Innovation To Cope with Change In Conclusion

About the authorsClayton M. Christenson

Professor of business administration of Harvard Business School.Worked as a missionary for church in Korea (1971~1973). as a management consultant with BCGCofounder of consulting firm Innosight.Book : The Innovator’s Dilemma: When New Technologies Cause Greate Firms to Fail. The Innovator’s DNA

Michael Overdorf

Dean’s Research Fellow at Harvard Business School.Worked for Alcoa (managerial positions in operations & product development).Chairman and CEO of Innosight (Consulting & Research Services to Companies)Book : The Digital Enterprise and The HBR on Innovation. After the Gold Rush: Patterns of Success and Failures on the Internet.

At the cover

These are scary times for managers… Dealing with major, disruptive

change Not good even before the Internet, glob-

alization

Even harder for now and for the future …

Dayton Hudson Corpo-ration

(Founded in 1902)1902, Dayton Dry Goods Company, Minneapolis.1962, 1st Target store 2nd largest discount retailer in US.

Out of Hundreds of Dep’t Store

Minicomputer Companies Personal Computers

Medical & Business Schools Struggling(change curricula) & Failing

These are scary times for managers… Even in big companies

Not because … Managers can’t set disruptive changes coming.

Usually they can see it. They lack resources to confront them

Have talented managers, specialists, strong product portfolios, first-rate technological know-how, and deep pockets.

But because … Managers lack a habit of thinking about their or-

ganization’s capabilities as carefully as they think about individual people’s capabilities.

These are scary times for managers… Great managers are good at

Identify the right people for the right job and to train employees to succeed at the jobs they’ve given.

Right Peo-ple

Right Job

Train-ing

Suc-ceed at

their job

Organiza-tional Suc-

cess

Organiza-tional Fail-

ure

organiza-tions’ capa-

bilities

These are scary times for managers… Good managers need to be skilled to

…

Right Peo-ple

Right Job

Train-ing

Suc-ceed at

their job

Organiza-tional Suc-

cess

Organiza-tional Fail-

ure

organiza-tions’ capa-

bilities

AssessingPeoples (Re-

sources)

AssessingOrganization’s abilities/dis-

abilities

These are scary times for managers… If an organization faces major change

Make drastic adjustment to existing or-ganization destroy the company’s ca-pability

(disruptive innovation!)

Must understand what types of change the existing organization is capable and incapable of handling.

Where Capabilities Reside factors that affect to organization’s

capabilities Resources Processes Values

Where Capabilities Reside Resources

What can this company do? mostly looks for the answers in its resources people, equipment, technologies, cash, …

tangible Product designs, information, brands, rela-

tionships with suppliers, distributors, and customers less tangible

But, resource analysis doesn’t come close to telling the whole story.

Where Capabilities Reside Processes

The patterns of interaction, coordina-tion, communication, and decision mak-ing employees use to transform re-sources into products/services. Formal processes (visible, explicit)

Product development/manufacturing/budgeting process,

Informal processes (less visible) Routines or ways of working

Processes are meant not to change. Or change through tightly controlled proce-

dures.

Where Capabilities Reside Processes (cont.)

Develop capability for executing a task defines disabilities in executing an-other task.

The most important capabilities and concurrent disabilities are more likely to be embodied in the less visible pro-cesses (background processes). How market research is habitually done, How such analysis is translated into financial

projections, How plans and budgets are negotiated in-

ternally, …

Where Capabilities Reside Values

Narrow meaning: what corporate values. Johnson & Johnson ensure patient well-being Alcoa employee safety

Broad meaning: the standards by which employ-ees set priorities that enable them to judge whether an order attractive or unattractive, whether a customer is more important or less important, whether an idea for a new product is attractive or marginal, … Those decisions are made by employees at every

level.

Where Capabilities Reside Values (cont.)

The larger and more complex a com-pany becomes, the more important it is. Clear, consistent value should permeate the

organization. But it also define what an organization

cannot do. Company’s values reflects its cost structure

or its business model 40% of gross profit margin

Would kill ideas that promise gross margins below 40%

Eg) low-margin market such as e-commerce.

Where Capabilities Reside Two evolving values addressing dis-

abilities 1. Values for company’s acceptable

gross margins Narrow margins gross margins w/ premium

customers

Corona

Lower-end mar-ket

1960’

North AmericaToyota

HondaMazdaNissan

…

1982

Camry Lexus

1989

Sophisticated cars targets at higher tiers

Echo(Yaris)

1999

Entry tier

Where Capabilities Reside Two evolving values addressing dis-

abilities 2. Values relate to how big a business

opportunity has to be before it can be interesting Maintain a constant rate of growth!

$40 million (25% growth) additional $10 mil-lion market

$40 billion (25% growth) additional $10 billion market

As companies become large, they lose the ability to enter small, emerging markets.

Magnified companies by M&A suffer the same problems.

The Migration of Capabilities As organizations grows

Focus shift: Resources(people) Pro-cesses, values At early stage founder has a profound im-

pact1987

digital-editing system

product lack of consistent process to develop and manage

Avid Tech-nology

1993IPO: $16/

share

1995$49/share

2012$9/

share

saturatedmarket

1926managerial ac-

counting

people (managing director for 3yr) process, value

McKinsey & Com-pany

1935McKinsey left

company

1937McKinsey

die

2010$10 billion rev-

enue

Hundreds of MBAs

The Migration of Capabilities As successful company mature …

Employees begin to follow processes and decide priorities by assumption rather than by conscious choice, those processes and values come to constitute the organization’s culture.

Capability to change

Re-sources

Visible & artriculated processes & values

Cul-ture

easy diffi-cult

Company Sizesmall

Company Sizesmall large

Sustaining vs. Disruptive Innovation Evolutionary changes (sustaining in-

novation) Innovations that make a product/service

perform better in ways that customers in the mainstream market already value. Compaq early adoption: 16-bit CPU 32-bit

CPU Merril Lynch’s CMA introduction

Sustain the best customers by provide something better than had previously been available What successful companies are pretty good

at

Sustaining vs. Disruptive In-novation

Revolutionary changes (disruptive innovation) Create an entirely new market through the intro-

duction of a new kind of product/service, initially, can be judged as worse value by the performance metrics of mainstream customers. Charles Schwab’s bare-bones discount brokerage PC against mainframe & minicomputers

Disruptive don’t address the next-generation needs of leading cus-

tomers in existing markets improved so rapidly that they ultimately could address

the needs of customers in the mainstream of the market

Sustaining vs. Disruptive In-novation

Disruptive innovations occurs so in-termittenly… No company has a routine process for

handling them. Smaller, disruptive companies are more ca-

pable of. Nearly always promise lower profit mar-

gins and not attractive to the company’s best customers They’re inconsistent with the established

company’s value Larger companies often surrender with huge

resources.

To Cope with Change Change management, Reengineering

Program But, process are not as flexible or

adaptable as resources are – values are even less so.

Create a new organizational space where those capabilities can be de-veloped Create a new organizational structures

within Spin out an independent organization Acquire a different organization

To Cope with Change Creting new capabilities internally

Pull the relevant people out of the exist-ing organization and draw a new bound-ary around a new group Heavyweight teams

Team members are physically located together, and each member is charged with assuming per-sonal responsibility for the success of the entire project.

Strong atComponents

(powertrain, electrical sys-tem, …)

To accelerate auto develop-ment

(heavyweight teams)

ChryslerFocus on automobile plat-

formsDesign a process for inte-

grating various subsystems

To Cope with Change Through a Spinout Organization

When the mainstream organization’s values would render it incapable of allo-cating resources to an innovation project. Old-line companies to handle the Internet

challenge New project should not be forced to

compete for resources with mainstream organization’s projectHewlett-

PackardSpinou

t

Laser-printerDivisionink-jet project

Ink-jetDivi-sion

To Cope with Change Through Acquisitions

What created the value that I just paid so dearly for? Did I justify the price because of the acqui-sition’s resources ? Or was a substantial portion of its worth crated by processes and values? Process & Values don’t try to integrate the acquisi-

tion into the parent organization. (let them stand alone!)

Resources integrate it into parent. Plug acquired people, products, technology, and customers

into the parent’s processes as a way of leveraging the par-ent’s existing capabilities.

To Cope with Change Through Acquisitions (cont.)

Wall Street

Daimler

Strong processes/Few re-sources

(design & subsystem in-tegration)

Crysler Acquisi-tion, 1998

Pressure to consoli-

date

Siemens AG

IBM

Strong processes, PBX product

(develop & find new market)

ROLM Acquisi-tion, 1984

?

1987Full Integra-

tion(failure)

Half sold,1989

To Cope with Change Through Acquisitions (cont.)

Cisco Sys-tems

Acquisition, 1993~1997

(early-stage compa-nies)

Absorbed re-sources

Stratacom, 1996(larger & mature

company)

StrataCom(Multi-Service Switching

Business Unit)

In Conclusion Confronting changes …

First determine whether they have the resources required to succeed

Then ask, Does the organization have the processes

and values it needs to succeed in this new situation?

Are the processes by which work habitually gets done in the organization appropriate for this new problem?

Will the values of the organization cause this initiative to get high priority or to languish?

In Conclusion

The reason that innovation often seems to be so difficult for established companies is that they employ highly capable people and then set them to work within organizational struc-tures whose processes and values weren’t de-signed for the task at hand.