Meeting the challenge of Disruptive Change Flashcards
Disruptive Change
change that affects the entire value network, accessible to bottom of the pyramid customers
Introduction
• Big companies have a bad track record of dealing with major, disruptive change
- Only one department store, Dayton Hudson, became a leader in discount retailing
- None of the minicomputer businesses succeeded in the personal computer business
- Medical and business schools can’t change their curriculums fast enough to train the doctors and managers the markets need
• It’s not like they cannot see it coming or lack resources
– Often have talented managers and specialists, strong product profiles, first-rate technological knowledge and available cash
• The problem is that managers don’t think about the organization’s capabilities as much as they do about individual capabilities
– Often managers believe as long as the individual is well matched for the job, the organization is too
– However, if you put two equally capable people in two different
organizations, the results will be different
– This is because organizations have their own capabilities – abilities and disabilities
Where Capabilities Reside
- Resources
- Processes
- Values
- Resources
- Tangible – people, equipment, technologies, cash
- Intangible – product designs, information, brands, relationship with suppliers, customers and distributors
- Abundant, high quality resources = more likely can cope with change
- Processes
• Processes: patterns of interaction, coordination, communication and decision making employees use to transform resources into products and services of greater worth
- i.e. product development, manufacturing, budgeting
- Formal: explicitly defined and documented
- Informal: routines or ways of working that evolve over time
• Processes by nature are set up so employees perform tasks in a consistent manner
- They are not supposed to change and if they do it’s under tightly controlled procedures
- Used for a task it’s meant for = efficient, used for a different task = sluggish
- i.e. companies that focused on developing and winning FDA approval for drugs were inept at developing and winning approval for medical devices
• The most important abilities and disabilities are often in the less visible, background processes that support decisions about where to invest resources
– i.e. how market research is habitually done, how those analyses are translated into
- Values
• Values: the standards by which an employee sets priorities
– Prioritization decisions made by employees at every level
▪ For salespeople: which products to emphasise and de-emphasise to customers
▪ For senior executives: decisions to invest in new products, services, processes
• Clear, consistent values throughout organization is a good indicator of good management
– Important to train employees to make decisions about priorities that are in line with the strategic direction and business model of the company
• Consistent, broad management also shows what company cannot do
- Values are reflected in cost structures or business model – they are the rules employees are supposed to follow
- i.e. a company’s overheads require it to have a gross profit margin of 40%. Then, managers will not proceed with ideas that promise profit margins of less than 40% - cannot commercialise products of low profit margins (e-commerce)
• Different companies = different values
- Two sets of values that that tend to evolve in most companies
- The evolution of these two values is what makes companies progressively less capable of addressing change
- First value: dictates the way the company addresses acceptable gross margins
- Second value: a business opportunity has to be big enough to be interesting
- Problem becomes worse after mergers and acquisitions
- i.e. megamergers between huge pharmaceutical companies = more resources but also a loss of appetite for anything but the biggest, blockbuster drugs
- Becomes a disability in managing innovation
- High tech industries – Hewlett-Packard’s decision to split between two companies is in recognition of this problem
Migration of Capabilities
- Startup stages – resources (people) are the key
- Over time, locus shifts to processes and values
- In early to middle years, the founder has a huge impact on the processes and values
- As companies mature, employees assume the priorities and processes are the right way to do their work
• Migration of capabilities:
- Resources → visible processes and values → culture
- When processes and values are used for problems they were designed for, everything is straightforward
- Factors define what an organization can and cannot do – shows the problems companies face fundamentally
- Capabilities in resources = relatively easy to change
- Capabilities in processes/values/culture = change becomes difficult
Digital Equiment Corporation (DEC)
- Successful maker of minicomputers
- Did not have the processes to succeed in the personal computer business
- Made their components internally, designing took 2-3 years, made in batches, sold directly to corporate engineering organisations
- PC makers outsourced their components, completed in 6-12 months, made in assembly lines, sold through retailers
• Organisation was incapable of succeeding in the PC industry
– Had the resources but not the processes
• Value: more than 50% profit margin = good, less than 40% profit margin = bad
– PCs generated lower profit margins so the company set the priority to minicomputers
Sustaining Innovation
- Sustaining innovation: providing something better than what had been previously available
- They make a product or service that is already valued by the mainstream market perform better
- Some sustaining innovations are incremental improvements, others are breakthroughs or leapfrog products or services
- i.e. Compaq’s early adoption of Intel’s 23-bit 386 chip microscope (normal one was 16-bit 286 chip) OR Merill Lynch’s Cash Management Account allowing customers to write checks against their equity
- i.e. Apple and its iPhones – the iPhone is only getting more features, getting faster etc.
Disruptive Innovation
- Disruptive innovation: creating an entirely new market through the introduction of a new product – actually worse according to the KPI of the mainstream market
- Typically simpler, more convenient and less expensive than existing solutions and appeal to new or less-demanding customers
- i.e. Charles Schwab’s entry as a bare-bones discount broker vs. Merill Lynch’s full service brokers
- i.e. PCs vs. mainframes and minicomputers
- PCs not powerful to run all the applications available at the time
• Don’t address the next-generation needs of the leading customers in existing markets
– Had other attributes – then would improve so rapidly they ultimately met the needs of customers in the mainstream market
• i.e. NetFlix – Blockbuster changed business model from renting DVDs to a streaming on-demand video website
Sustaining Innovation vs Disruptive Innovation
• Arguable if Uber is disruptive or sustaining
- Is sustaining to customers because it is simply a more convenient taxi service
- Is sustaining to some taxi drivers if the cost to obtaining a taxi license is low
- Is disruptive to some taxi drivers if the cost to obtaining a taxi license is high i.e. French and English taxi drivers’ riots
• Industry leaders will always develop and introduce sustaining innovations but never introduce (or cope well with) disruptive innovation
– Industry leaders are organized to develop and introduce sustaining technologies – gain competitive advantage
o Fits the values of leading companies – higher profit margins from selling better products to leading edge customers
• Disruptive innovation is so rare and intermittent that companies don’t usually have routine processes for handling them
– They also yield lower profit margins per unit so they are not attractive
– Companies processes and values usually only support sustaining innovation – this becomes a disability when the disruptive innovation
starts picking up speed
• Larger companies are usually less capable at pursuing emerging growth markets – smaller, disruptive companies are more capable of pursuing them
- Start ups lack resources but their values embrace small markets and can accommodate low margins
- Managers can proceed intuitively – not every decision needs to be backed by careful research and analysis
- This is an advantage to embrace and initiate disruptive change
Creating Capabilities to Cope with Change
• Processes and values are not as flexible or adaptable as resources
• When an organization needs new capabilities – they need new values and processes
– Managers must then create a new organisational space where those capabilities can be developed
• 3 ways
1. Creating Capabilities to Cope with Corporate Boundaries
- Creating Capabilities Through Spinout
- Creating Capabilities Through Acquisition
- Creating Capabilities to Cope with Corporate Boundaries
- When a company’s capabilities reside in processes and the problem requires new processes – managers need to pull out the relevant people out of the current organization and draw new boundaries around this new group
- Originally organisational boundaries facilitate the operation of the existing processes – impede the creation of processes
- These new boundaries around the team will facilitate new patterns of working together and ultimately can create new processes
- These structures are called “Heavy Weight Teams”
- They’re entirely dedicated to the new problem, often physically located together, each member is charged with the personal responsibility of ensuring the success of the project
• Example: Chrysler – created a new team that focused on automobile platforms (not components like most of their other groups)
– Facilitated the definition of new processes which were much faster and efficient in integrating subsystems into new car designs
- Creating Capabilities Through Spinout
• When organisation’s values are incapable of allocating to resources to an innovation project
- They cannot be expected to allocate precious financial and human resources for a strong position in a small, emerging market
- Often companies with cost structures tailored for high end markets will find it difficult to be profitable in a low-end market
• Should only use a spinout organization when the disruptive innovation needs a different cost structure to be profitable/competitive or when the current size of the opportunity is insignificant to the growth of the mainstream company
(when the values are different)
• How separate? – doesn’t necessarily have to be a new physical location
– Main requirement: the new spinout can’t be forced to compete with the mainstream organisation’s projects for resources
– Projects not consistent with the company’s values will be given the lowest priority
o More important to have an independence from the normal decision-making criteria of the mainstream company
• Often managers think to develop a new operation they have to abandon the old one
– When dealing with disruptive change, should have two businesses run in tandem
—▪ One model attuned to the existing business
—▪ A new model to confront the change before it affects the mainstream market
o Example: Merill Lynch – should keep the existing planning, acquisition and partnership processes (there is still more profit to made under this model) but should also create additional processes to deal with the new problem (the online world)
• NEED personal, attentive oversight of the CEO
- CEO can ensure that the new organization is getting the required resources and is free to create new processes and values appropriate to face the new challenge
- If the CEO views the spinout as only a tool to deal with the disruption they will fail
Creating Capabilities Examples
• DaimlerChrysler – Chrysler was acquired for its processes for designing producing and integrating the efforts of its subsystem suppliers
- Wall Street pressurizing for integration
- Integration would lead to destroying the very processes that made Chrysler so attractive
• IBM’s acquisition of Rolm – Rolm was acquired for it’s processes for developing and finding new markets for PBX products
– IBM originally preserved Rolm’s informal and unconventional culture
– However, in 1987, they terminated Rolm’s subsidiary status and fully integrated Rolm into IBM
– IBM tried to push Rolm’s resources to IBM’s processes that had been honed in the large computer business, Rolm stumbled
– Impossible for IBM to get excited about the lower profit margins of Rolm (IBM used to 18% profit margins)
o Integration destroyed Rolm’s original worth
• Cisco – integrated smaller companies and let bigger companies stand alone
- Acquired smaller companies whose market value was primarily built on resources – the engineers and products
- –▪ Then plugged those resources into Cisco’s processes and threw away the unnecessary processes and values – those weren’t what they paid for
- Acquired larger, more matured organisations and infused Cisco’s resources into their organization to help it grow more rapidly
