Meeting the Challenge of

Disruptive Change

Clayton M. Christensen and Micheal Overdorf

Presented By: Group-4 Mahendra Pratap Singh (WMP6026)

Rakesh Thukral (WMP6036)

Ravi Prakash Chamria (WMP6038)

Rishabh Garg (WMP6039)

Contents

Where the Capabilities Reside

The migration of Capabilities2

Creating Capabilities to Cope with Change4

1

Sustaining versus Disruptive innovation3

Introduction

Why do so few established companies innovate successfully? Of hundreds of department stores, for instance, only DaytonHudson became a discount-retailing leader. And not one minicomputer company succeeded in the personal-computer business.

What’s going on?

It’s not that managers in big companies can’t see disruptive changes coming. Usually they can. Nor do they lack resources to confront them. Most big companies have talented managers and specialists, strong product portfolios,first-rate technological know-how, and deep pockets. What managers lack is a habit of thinking about their organization’s Capabilities as carefully as they think about individualpeople’s capabilities.

Where the Capabilities Reside

Resources

Processes Values

Where the Capabilities Reside

When they ask the question,“What can this company do?” the place most managers look for the answer is in its resources —

- Tangible - People, Equipment, Technologies, Cash

- Intangible - Product design, Information, Brands

But Resource analysis does not tell the whole story.

Resources Resources

Where the Capabilities Reside

- The Patterns of Interaction, Coordination, Communication, and Decision making that lead to the company’s output

One of the dilemmas of management is thatprocesses, by their very nature, are set up sothat employees perform tasks in a consistentway, time after time. They are meant not tochange or, if they must change, to changethrough tightly controlled procedures.

Process that creates the capability to execute one task concurrently defines disabilities in executing other tasks

ProcessesProcesses

Where the Capabilities Reside

- Organization's values not just ethical values but with broader meaning - as the standards by which you judge one order, one customer or market opportunity to be more important than another.

- First value – the way the company judges acceptable gross margin.

- Second value – how big a business opportunity has to be before it can be interesting

ValuesValues

Where the Capabilities Reside

- Toyota’s Case

Entered American market with Corona model for lower end of market. With competition, its margins eroded. To makeup, it developed Camry and Lexus for higher tiers. The subsequent overhead costs forced Toyota to exit the lower market.

Values (Example)Values (Example)

The migration of Capabilities

In the start-up stages of an organization, muchof what gets done is attributable to resources—people, in particular. The addition or departureof a few key people can profoundly influenceits success. Over time, however, the locusof the organization’s capabilities shifts towardits processes and values.

Hence, the factors that define an organization’scapabilities and disabilities evolve overtime—they start in resources; then move to visible,articulated processes and values; and migratefinally to culture.

The migration of Capabilities

Avid Technology, a producer of digital-editingsystems for television, is an apt case in point.On the back of its star product, Avid’s stock rose from$16 to $49 in 1995. However, the strains of being a one product company soon emerged as Avid faced a saturated market and increasing competition. Avid’s lack of effective processes for consistently developing new products and for controlling quality, delivery, and service Ultimately tripped the company.

Avid TechnologyAvid Technology

The migration of Capabilities

By contrast, at McKinsey & Company, the processes and values have become so powerful that it almost doesn’t matter which people get assigned to which project teams.

Hundreds of MBAs join the firm every year, and almost as many leave. But the company is able to crank out high quality work year after year because its core capabilitiesare rooted in its processes and valuesrather than in its resources.

McKinsey & CompanyMcKinsey & Company

Digital’s Dilemma

- Digital Equipment’s fall from grace was not the result of misreading the market.

- Digital was leader in mini-computers market. Clearly, Digital had the resources to succeed in personal computers. The company had plenty of cash, a great brand, good technology, and so on. - But it processes of in-house component development was not suitable for PC market.

- And its values of higher margins was not suitable for low margin PC Business

Sustaining Versus Disruptive innovation

- - Sustaining technologies are innovations that make a product or service perform better in ways that customers in the mainstream market already value.

Ex) Compaq’s early adoption of Intel’s 32-bit 386 microprocessor instead of the 16-bit 286 chip

Merrill Lynch’s introduction of its Cash Management Account, which allowed customers to write checks against their equity accounts.

Sustaining InnovationsSustaining Innovations

Sustaining Versus Disruptive innovation

- Disruptive innovation, a term of art coined by Clayton Christensen, describes a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves ‘up market’, eventually displacing established competitors.

Ex) Early personal computers were a disruptive innovation relative to mainframes and minicomputers.

Disruptive InnovationsDisruptive Innovations

Sustaining Versus Disruptive innovation

Disruptive InnovationsDisruptive Innovations

Creating Capabilities to Cope with Change

Creating New Capabilities Internally

Creating Capabilities Through a Spinout Organization

Creating Capabilities Through Acquisitions

- Create new organizational structures within corporate boundaries in which new processes can be developed

- Managers need to Pull the relevant people out of the existing organization and drawing a boundary around the new group (Heavy Weight Teams)

Creating New Capabilities InternallyCreating New Capabilities Internally

Creating Capabilities to Cope with Change

- Chrysler (Component -> automobile platform) At Chrysler, for example, the boundaries of the groups within its product development organization historically had been defined by components — power train, electrical systems, and so on. But to accelerate auto development, Chrysler needed to focus not on components but on automobile platforms—the minivan, small car, Jeep, and truck, for example—so it created heavyweight teams.

- HP’s Kitty Hawk 1.3 inch disk drive We were basically a startup business with the speed and flexibility of entrepreneurs but with also the financial and technical backing of a successful high-tech company – Team member with Bruce Spenner

Creating New Capabilities Internally(Ex)Creating New Capabilities Internally(Ex)

Creating Capabilities to Cope with Change

- When a disruptive innovation requires a different cost structure in order to be profitable and competitive, or when the current size of the opportunity is insignificant relative to the growth needs of the mainstream organization, then — and only then—is a spinout organization required.

Ex)

Creating Capabilities Through a Spinout OrganizationCreating Capabilities Through a Spinout Organization

Creating Capabilities to Cope with Change

Hewlett-Packard

Laser Printer

Ink - JetProcesses to develop both printers same but different values due to margins.

Acquiring managers begin by asking,“What created the value that I just paid for? Did I justify the price because of the acquisition’s resources or is it processes and values?”

If the capabilities being purchased are embeddedin an acquired company’s processes and values, then the last thing the acquiring manager should do is integrate the acquisition into the parent organization.

If, however, the acquired company’s resources were the reason, then integrating it into the parent can make a lot of sense.

Creating Capabilities Through AcquisitionsCreating Capabilities Through Acquisitions

Creating Capabilities to Cope with Change

Ex)

- IBM + Rolm ( Failed ) IBM’s acquired telecommunications company Rolm in 1984.

It was Rolm’s processes for developing and finding new markets for PBX products that mattered. In 1987, when IBM integrated Rolm into its corporate structure, Rolm’s core processes and values were destroyed.

- Cisco System + StrataCom ( Success ) Cisco let StrataCom stand alone and infused Cisco’s substantial resources into StrataCom’s organization to help it grow more rapidly.

Creating Capabilities Through AcquisitionsCreating Capabilities Through Acquisitions

Creating Capabilities to Cope with Change

Fitting The Tool To The Task

BUse a heavyweight team within the existing organi-zation

CUse a heavyweight team in a separate spinout organi-zation

AUse a lightweight or func-tional team within the ex-isting organization

DDevelopment may occur in-house through a heavy-weight team, but commer-cialization almost always requires a spinout

Poor

Good

Good Poor(sustaining innovation) (disruptive innovation)

Fit

wit

h O

rgan

izat

ion

’s P

roce

sses

Fit with Organization’s Values

SELECTING THE RIGHT STRUCTURE FOR YOUR INNOVATION

SELECTING THE RIGHT STRUCTURE FOR YOUR INNOVATION

Managers whose organizations are confrontingchange must ask two questions – 1. Does the organization have the resources

required to succeed? 2. Does the organization have the processes

and values it needs to succeed in this new situation?

What we hope this framework introduces into managers’ thinking is the idea that the very capabilities that make their organizations effective also define their disabilities.

Conclusion