A New Path to Growth

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© 2004, Clark Gilbert, Harvard Business School



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1

Professor Clark Gilbert
Harvard Business School

A New Path to Growth

Using Disruption to Drive
New Growth at McNeil

© 2004, Clark Gilbert, Harvard Business School



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2

Sustaining versus Disruptive Innovation

Product Performance

Time

Disruptive Innovation

Source: The Innovator’s Dilemma

© 2004, Clark Gilbert, Harvard Business School



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3

Disconnect with Resource Allocation

Disruptive
Proposal


Targets Different
Customers in New Ways


Introduces Different
Performance Criteria


Under Valued by Leading Customers


Lowers Performance along Traditional
Trajectory


Lowers Gross Margins

Marketing Manager

Production

Budgeting Committee

© 2004, Clark Gilbert, Harvard Business School



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4

Performance

E
-
mail applications

Home
-
use Applications

Disruptive technology: digital film

Children’s Game Toys

Applications for
Silver Halide Film
Technology

Established players force new technology
into old markets

Disruption in
digital
photography

Kodak’s
Response

($1B in R&D)

© 2004, Clark Gilbert, Harvard Business School



Page

5

Definition of a Fanatic
:

Someone who doubles his speed
when he has lost his direction

--
George
Santayana



© 2004, Clark Gilbert, Harvard Business School



Page

6

The Benefit of Staged Learning

Discovery of
New Market and
Business Model

Replication of
Old

Market and
Business Model

© 2004, Clark Gilbert, Harvard Business School



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7

Different Types of Innovations

Low
-
End
Disruption

New Market
Disruption

Sustaining
Innovation

CUSTOMERS


Overserved customers
in low
-
end of existing
market


New customers or new
contexts of use


Most profitable
customers in existing
markets

BUSINESS
MODEL


New financial or
operational model that
earns attractive returns
at low prices


New business model,
often lower price points,
new sales model &
distribution channels


Similar to existing
model, improves or
maintains margins

TECHNOLOGY


“Good enough” on
traditional metrics but
lower prices


Improved performance
on new attributes (e.g.,
simplicity, convenience)


Improvements along
dimensions valued by
current customers

New Market
Disruption


New customers or new
contexts of use


New business model,
often lower price points,
new sales model &
distribution channels


Improved performance
on new attributes (e.g.,
simplicity, convenience)

© 2004, Clark Gilbert, Harvard Business School



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8

Steel Minimills: A Low
-
End Disruption

© 2004, Clark Gilbert, Harvard Business School



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9

7%

4%

12%

8%

18%

22%

% of Tons

Steel Quality

1980

1975

1985

1990

25

30%

55%

% of Margin

Steel Minimills: A Low
-
End Disruption

© 2004, Clark Gilbert, Harvard Business School



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10

Different Types of Innovations

Low
-
End
Disruption

New Market
Disruption

Sustaining
Innovation

CUSTOMERS


Overserved customers
in low
-
end of existing
market


New customers or new
contexts of use


Most profitable
customers in existing
markets

BUSINESS
MODEL


New financial or
operational model that
earns attractive returns
at low prices


New business model,
often lower price points,
new sales model &
distribution channels


Similar to existing
model, improves or
maintains margins

TECHNOLOGY


“Good enough” on
traditional metrics but
lower prices


Improved performance
on new attributes (e.g.,
simplicity, convenience)


Improvements along
dimensions valued by
current customers

© 2004, Clark Gilbert, Harvard Business School



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11

Minicomputers: A New Market Disruption

The DEC Programmable Data Processor 8: 1965

© 2004, Clark Gilbert, Harvard Business School



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12

Established Markets Continue to Grow even
as the Disruptive Markets Take Root

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

11000

12000

13000

14000

15000

1965

1975

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

Source: ITI, Industry Statistics Programs; U.S. Microcomputer

Statistics Committee Forecast, Data Analysis Group

Mainframe Computer

Market

Minicomputer

Market

First
Revenue
Lead

Sustained
Revenue Lead

Minicomputers Disrupt Mainframes

Dollars
($billions)

Phase I

Phase II

Phase III

© 2004, Clark Gilbert, Harvard Business School



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13

Disruption in Print Media

“All the News that Fit to Pixel”

© 2004, Clark Gilbert, Harvard Business School



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14

Disruptive
Proposal


Targets Different
Customers in New Ways


Introduces Different
Performance Criteria


Under Valued by Leading Customers


Lowers Performance along Traditional
Trajectory


Lowers Gross Margins

Marketing Manager

Production

Budgeting Committee

Disconnect with Resource Allocation

© 2004, Clark Gilbert, Harvard Business School



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15

Missing Revenue: Online Advertising Market

0
20
40
60
80
100
120
Online Newspaper
Typical Online Entrant
E-mail
Demographic
Usage Targeting
Sectionals
ROS
45%

15%

20%

10%

Old Business Models Make It

Very Difficult to Realize

45%
Missing!

© 2004, Clark Gilbert, Harvard Business School



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16

Online Revenue Per Unique User

$7.93
$17.12
$1.00
$3.00
$5.00
$7.00
$9.00
$11.00
$13.00
$15.00
$17.00
$19.00
Newspapers
Pure-Plays
© 2004, Clark Gilbert, Harvard Business School



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17

The Irony of Disruptive Innovation

Growth Starts in New, Not Established
Markets

Product Performance

Time

New
Net

Growth

© 2004, Clark Gilbert, Harvard Business School



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18

Established

Business

Disruptive

Business

Net New

Growth

Starts Outside
Established
Business

Displacement

"Overall, the newspaper industry's involvement with the Internet has been
one where it had a lot to lose and it's been trying not to lose it, as opposed
to starting from scratch and having a lot to win."



--
Steve Yelvington, President of Online Newspaper Division

Finding New Market Growth

© 2004, Clark Gilbert, Harvard Business School



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19

Why is this so difficult
for otherwise
successful firms?



© 2004, Clark Gilbert, Harvard Business School



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20

RPV: Strengths Become Weaknesses


Hiring & Training


Product
development


Manufacturing


Planning &
Budgeting


Market Research


Resource
allocation




People


Technology


Products


Equipment


Information


Cash


Brand


Distribution

Processes

Resources

Values


Ethics


Cost structure/

income statement


Size of opportunity

The criteria by which
prioritization decisions
are made

Core Competence vs. Core Rigidity

© 2004, Clark Gilbert, Harvard Business School



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21

Capabilities in One Context

Become Disabilities in Another

Big

enough to be

interesting?

Processes:

How?

What

Margins Are

Attractive?

Cost structure

Product


Quality

Resource

Allocation

Customer

Feedback

Planning


Cycles

Market

Research

Values:

Why?

“Organizational

DNA”

© 2004, Clark Gilbert, Harvard Business School



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22

Disruption through Portable Ultrasound



I had a call with a nephrologist where I
literally told the sales rep to take the product
out of the bag and show it to the physician.
He didn’t do it. And I’m the President of the
company…


...We have all of these sales leads, but some
of my reps are afraid of cannibalizing sales
of higher
-
end hand carried systems.”


President, Hand
-
Carried Ultrasound
Company



I need to look at the kidney
myself and see what’s
going on. Every time I want
to look I have to send the
radiologist a patient…


That’s not good. It doesn’t
help me get my job done. I
want to do it myself.”


Nephrologist

© 2004, Clark Gilbert, Harvard Business School



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23

Develop Separate Business Development
Processes

Performance

Time

© 2004, Clark Gilbert, Harvard Business School



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24

Separate Disruptive Ventures

Integrated
Sites

Millions
of Page
Views /
Month

Separated
Sites

Separated sites had nearly 4 million more page views

0

2

4

6

8

10

12

Penetration

6.5

10.4

© 2004, Clark Gilbert, Harvard Business School



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25

Implications



Disruptive technologies attack an established business, but provide
enormous opportunities for new net growth



Focusing on your core market can lead to organizational rigidity


Trying Harder Can Be Part of the Problem!



Identifying these opportunities requires different lenses:



Reconsidering technologies viewed as “inferior” in your core market



Targeting “overshot” where the primary alternative is non
-
consumption



Developing these opportunities requires different tools:



A different development, review, and funding process than the core business



A venture process that is patient for growth, not for proof of concept



A willingness to look outside of core business

venture autonomy, talent,
partnerships, and acquisitions



Disruption can provide competitive advantage is the search for growth

© 2004, Clark Gilbert, Harvard Business School



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26

Managing Uncertainty

in New Venture Creation


Clark Gilbert

Harvard Business School


© 2004, Clark Gilbert, Harvard Business School



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27

HBS Definition of Entrepreneurship

Pursuit of Opportunity

Without Regard to Resources
Currently Controlled

Managing Uncertainty

1.
Identify Critical Risks

2.
Design Experiments

3.
Stage Investment

© 2004, Clark Gilbert, Harvard Business School



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28


Technical


Operating


Market


Distribution /Pricing


Team


Environmental

Which is the most
important risk to
understand and remove?

Deal Killers, Path
Dependencies, Costs,
Investor Needs, Greatest
Uncertainty

1) Identify Key Sources of Risk

Total Venture
Risk

© 2004, Clark Gilbert, Harvard Business School



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29

Driver 3

Driver 2

Business Models: Fishbone Diagrams

profits

costs

revenues

Driver 1

Driver 2

Driver 3

Driver 1

Driver 2

Driver 3

Driver 1

Driver 2

Driver 3

Using the tool


1. Draw the key drivers of revenue and costs


2. Identify key drivers and assumptions


3. Test sensitivity to changes in key drivers


4. Analyze how reasonable key assumptions are


5. Use the tool to surface key assumptions,
logical inconsistencies, critical sources of
uncertainty and important questions to ask

© 2004, Clark Gilbert, Harvard Business School



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30

2) Types of Experiments


Partial experiments



buy information on “deal killer” source of uncertainty


good when you know you don’t know something, risk of failure is high


case examples


customer research before introduce product (Parenting, Tally Up)


hire as consultant before hiring full time (Tally Up)


background check on job candidate


Holistic experiments



test entire model on small scale


good to reveal ignorance
-
I.e., things you didn’t know you didn’t


good to tests interaction between variables


case examples


introduce product in trial before full launch (Onset vs. Knight Ridder)


develop prototype with development partner (Tally Up’s beta version, E
Ink)


projection and reflection (ONSET ask VCs evaluate whole plan)

© 2004, Clark Gilbert, Harvard Business School



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31

2) Risks of Experiments


Experiments can be expensive


(Knight Ridder, E Ink, Segway)


They can take too long


What if you finally get it right, only to find out that the
market has moved or someone else has beat you to
the punch?


They can perpetuate


“Given the pace of our expansion, I don’t think we
made mistakes fast enough and we didn’t learn from
them often enough. The problem wasn’t just turning
them on, sometimes it’s turning them off.”

»
-
Bob Ingle, Executive Editor, San Jose Mercury News

© 2004, Clark Gilbert, Harvard Business School



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2) The Value of Experiments

Value greatest when:


Significant cost of failure


Significant probability of failure


Cost of the experiment is a small percentage of the total
investment


The experiment yields fairly accurate results



You can increase the value when:


Minimize both costs and timing


You impose variance on key questions, but control for other
variables (Onset)


Have key milestones and ways of measuring progress


Change behavior as a result

enter vs. exit, product adaptation,
adaptation subsequent roll
-
out

© 2004, Clark Gilbert, Harvard Business School



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33

3) Staging Investment

Lock
-
in on
Early
Assumptions



Market and
Business Model

Discovery of New

© 2004, Clark Gilbert, Harvard Business School



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34

3) Staging Investment


Only spend significant sums of money after
big risks have been reduced.


Examples


R&R doesn’t place manufacturing order
until after K
-
Mart order is received


Knight Ridder waits on registration until
execution and sales risk are reduced



© 2004, Clark Gilbert, Harvard Business School



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35

SUCCESS

INVEST NOW

FAILURE

SUCCESS

Payoff

-

Investment
-

Cost of Test

GOOD RESULTS

INVEST

-

Investment

-

Cost of Test

FAILURE

RUN AN EXPERIMENT

ABANDON

-

Cost of Test

BAD

RESULTS

ABANDON

Payoff
-

Investment

-

Investment

1

1

(1
-
P
G
)

1

P
G

P
S

(1
-
P
S
)

P
S|G

(1
-
P
S|G
)

3) Staged Investments and Value of
Information

© 2004, Clark Gilbert, Harvard Business School



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36

Capital

Funding to Milestones

aka “Old
-
Fashioned Venture Capital”

Risk (
ß)

Valuation

Idea is

Feasible

Technology

Works

A Customer

Buys

Seed

Funding

R&D

Capital

Go
-
to
-
Market

Capital

Expansion

Capital

P(success) = 30%

Req’d IRR = 100%

P(success) = 40%

Req’d IRR = 70%

P(success) = 50%

Req’d IRR = 50%

P(success) = 80%

Req’d IRR = 30%

Source: Lou Mazzucchelli, Ridgewood Capital

© 2004, Clark Gilbert, Harvard Business School



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37

The “Fully Funded” Folly

A Customer

Buys

Fully

Fund

IPO

(……….pray……………….)

Capital

Risk (
ß)

Valuation

Idea is

Feasible

Technology

Works

Source: Lou Mazzucchelli, Ridgewood Capital

© 2004, Clark Gilbert, Harvard Business School



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38

Implications



Risk is inversely related to value



Entrepreneurial managers don’t
take

risk, the
manage

risk



New ventures will:



Develop in an highly iterative and staged process



Employ a series of risk reducing experiments



Business models will change multiple times




Reviewing of new ventures requires that board members can:



Considered plans that will change considerably



Demand results, but on different metrics

opportunity recognition and

milestone achievement



Identify risks, stage investment, and value risk reducing experiments



Embrace outside perspectives



Creating the right context for reviewing new ventures is key

simply
having powerful ideas and opportunities is not enough