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Creating New Growth Through

Disruptive Innovation

Rory McDonald

Harvard Business School

Lessons from Business History

Across diverse industries, leading companies failed

to stay atop their markets

Common explanations

Managerial incompetence

Technological complexity

(Source: Christensen & Raynor, 2003)

7%

12%

18% S

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lity

1980 1975 1985 1990

25–30%

1995

Disruptive Innovation (1)

Pace of technological progress outstrips markets’

demand for higher-performing technologies

Firms can over-serve the market by producing more

advanced, feature-rich products than customers

need—leaving a gap at lower tiers of the market

Disruptive Innovation (2)

Sustaining innovations: improve products and

services along dimensions of performance that

mainstream customers care about

Disruptive innovations: are initially inferior on the

historic performance dimensions, but offer a novel

mix of attributes that appeal to fringe customers

Disruptive Innovation (3)

Existing customers and established profit models

constrain firms’ investments in new innovations

Incumbents are typically not motivated to pursue

disruptive innovations that promise lower margins

and target smaller markets

Pe

rfo

rma

nc

e

Time

Disruptive

innovations

Incumbents nearly always win

Entrants nearly always win

Disruptive Innovation Model

(Source: Christensen, Raynor, McDonald 2015)

Types of Disruptions

Low-end disruptions come in at the bottom of the

market and take hold within an existing value network

before moving up-market and attacking incumbents

Incumbents retreat

Types of Disruptions

New market disruptions take hold in a completely

new value network and they compete against

non-consumption

Incumbents ignore

Example:

Godrej: Business group faced a shrinking share of

refrigerator market due to foreign appliance makers

Decision:

1. Aggressively compete in conventional market

2. Innovation aimed at unserved customer segment

Built a low-cost refrigerator for bottom-of-the-market

“Instead of competing with global powerhouses for the

15% of the market that purchased refrigerators, Godrej

decided to go for the 85% that did not.”

Example:

Looked at drivers of non-consumption—an important

but unsatisfied problem consumers couldn’t address

Rural Indian households couldn’t store food, so they had

to buy daily (time consuming, expensive)

Intermittent electricity (rules out normal refrigerator)

Godrej developed a “good enough” solution:

chotuKool portable fridge, which had a low price,

operated on battery power, and used post offices as a

sales channel / new distribution chain

Example:

Won five global innovation awards

At $69, chotuKool was 1/3 the price of Godrej's least

expensive refrigerator

Result of a unique innovation strategy guided by new

market disruption

Video Game Industry

(Source: Anthony, 2008)

Health Care

Accounting Services

Word Processing

Looking into the future

Looking into the future

Finance

Looking into the future

Software-based financial advisor

New market disruption serving those who can’t afford the

high minimums of traditional financial advisors

Appeals to fringe customers

Looking into the future

Hospitality

Looking into the future

Sharing service that allows people to rent out lodging

Started out offering short-term living quarters for people

who couldn’t afford a hotel (or couldn’t book one)

Now has 2M listings in 192 countries

Looking into the future

Higher Education

Looking into the future

“Elite business schools still look like a fair deal. Few expect

the luster of an MBA from Harvard, Wharton, or Stanford to

fade…Schools with names that send a less sexy signal,

though, may be in trouble.”

“Is time running out for business schools that aren’t quite elite?”

-The Economist (2011)

Other challenges of innovation

“Listen to your customers”

“Understand your customers”

Understand your customers

If we understand the customer, we can develop

better products

When can this get us into trouble?

An alternative approach: Jobs-to-be-done

In many industries, the products and services are

built around customer attributes and characteristics

For business customers, it is corporate demographics

(i.e. industry verticals, customer size etc.)

But what causes us to buy a product is that we have

jobs that arise in our lives that we need to get done

When customers have a job-to-be-done, they hire a

product to do it for them

An alternative approach: Jobs-to-be-done

(Source: Christensen, 2011)

Problem: Increase sales of milkshakes

Company had sophisticated demographic profiles of

the customers that bought each product

Quintessential milkshake customer

A job arises in people’s lives on occasion that

causes them to hire a milkshake from McDonald’s

What’s the job?

What time did he buy the milkshake?

What was he wearing?

Did he buy other food with it or just the milkshake?

Was he alone or with other people?

Did he eat it in the restaurant or get in the car and leave?

Findings

Half were sold before 8:30 in the morning

Customer was always alone

Only thing they bought

Always got in the car and drove off

“Think about the last time you were in the same

situation and needed to get the same job done, but

you didn’t come here to hire a milkshake. What did

you hire instead?”

(Source: Christensen, 2011)

Job

Need something to

do during a long,

boring commute

Milkshake

Viscous

Staves off hunger

Convenient

Implications

1. Competition

2. Product improvement

Implications

1. Competitors are not Burger King milkshakes

2. Must improve product on dimensions of

performance that are relevant to the job-to-be-done

Implications

3. One reason why promising technologies often fail

Don’t help customers do a job they need to get done

Implications

Before digital photography

People had the best intentions to arrange photos in

albums, but most were viewed once and put a shoebox

But most people would ask for double prints so they could

mail the best photos to a family member

Implications

When digital cameras were adopted

Consumers changed their behavior but not the

fundamental job they wanted from the photos

Still share with friends/family, but now through email

Despite all the systems for online photo albums

Dominant consumer behavior is to share via email/phone

Albums didn’t do very well – tried to perform a job that

most consumers weren’t trying to do

Example: Bolster sales of new condos

Detroit-area builder targeting downsizers

Reasonably priced condos with high-end touches

(“squeakless” floors, triple-waterproof basements, granite

counters, stainless steel appliances)

Experienced sales team available 6 days per week

Generous marketing with elegant, well-placed ads

Units got lots of traffic but few visits converted to

sales (so try adding a slew of features)

Implications

No impact but lots of speculation about reasons:

Bad weather

Underperforming salespeople

Uncertain economic climate

Holiday slowdowns

Condos’ location

Implications

New approach: For actual buyers, what job were

they hiring the condominiums to do?

What did not explain which downsizers were most

likely to buy:

Demographic or psychographic profile (no clear profile)

A definitive set of features (none tipped the decision)

All prospective buyers wanted a big living room, large 2nd

bedroom for guests, and a breakfast bar to make

entertaining easy and casual

Implications

One unexpected factor did matter: The dining

room table

“As soon as I figure out what to do with my dining room table,

then I’m free to move.”

Implications

Most were well-used and out-of-date (donate, take

to local dump)

But every birthday and holiday spent around table

Homework was spread out on it

Table more than a piece of furniture, it represented family

What was stopping buyers was not a feature the

company had failed to offer but rather crippling

anxiety that came with giving up something that

had profound meaning

Implications

Decision to buy a six-figure condo hinged on a

family member’s willingness to take custody of

clunky piece of used furniture

Implications

We’re not in “new-home construction”; we’re in the

business of “moving lives.”

1. Create extra space for dining room table

2. Ease anxiety of move

Provide moving services and two years’ worth of storage

Create a sorting room in condo development so new owners could

take their time making decisions about what to discard

Trying new things is hard

An anthropologist once visited a remote tribe. She observed

that each morning, before sunrise, members of the tribe

sacrificed a goat in order to make the sun rise. Since the tribe

was poor, the anthropologist believed that this was a wasteful

practice. As a result, the anthropologist proposed that they

should avoid sacrificing a goat for one day, to see if the sun

would nevertheless rise.

And there are many barriers to change

In response, the locals looked at her and said, gravely, “In

these matters one cannot afford to experiment.”