Meeting_the_Challenge_of_Disruptive_Change

Meeting_the_Challenge_of_Disruptive_Change - It’s no...

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Unformatted text preview: It’s no wonder that innovation is so difficultfor established firms. They employ highly capable peopie —- and then set them to work within processes and business models that doom them to failure. But there are ways out of this dilemma. hKTWOflK l‘f CURTIS PARKER 55 Harman!) nusmess nevraw MnmthprflZOm Meeting the Challenge of Disruptive Change by Clayton M Christensen HESE ARE SCARY TIMES FOR MANAGERS and Michael overdorf I in big companies. Even before the Internet and globalization, their track record for dealing with major, disruptive change was not good. Out of hundreds. of department stores, fer example, only one- Dayton Hudson ~becarne a leader in discount retailing. Not one of the minicornputer com- panies succeeded in the personal computer business. Medical and business schools are struggling— and failing— to change their cur— ricula fast enough to train the types of doc~ tors and managers their markets need. The list could go on. HARVARD nusmsss nsvrew Mamh-Apdlzooe ‘57 Meeting the Challenge of Dlsruptive Change It’s not that managers in big companies can’t see disruptiva 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 ca- pabilities as carehilly as they think about individ- ual people’s capabilities. One of the hallmarks of a great manager is the ability to identify the right .person for the rightful) and to train employees resumed at the. job's they’re given. But unfortunately, most managers assume that if each person working on a project is well matched to the job, then. the organization in which they Work will be, too. Often that is" not" the case. One could put two sets of identically capable peo- ple to work in different organizations, and what they accomplished would be significantly different. That’s because organizations themselves—indepen- dent” of the people and other resources in them— have Capabilities. To succeed consistently, good managers need to be skilled not' just in assessing people but also in assessing the abilities and disabil- ities of their organization as a whole. This article offers managers a homework to help them understand what. their organizations are capa- ble of accomplishing. It will show them how their company's disabilities become. more sharply de- fined even as its core capabilities grow. It will give them a way to recognize different kinds of change and make appropriate organizational responses to the opportunities that arise from each. And it will offer some bottom-line advice that runs counter to much that’s assumed in our can-do business cul- ture: if an organization faces maior change—a dis— ruptive innovation, perhaps—- the worst possible approach may be to make drastic adjustments to the existing organization. In trying to transform an enterprise, managers-Can destroy the very Capabili- ties that sustain it. Before rushing into the breach, managers must understand precisely what'types of change the ex- isting organization is capable'and incapable of han- dling. To help them do that, we’ll first take a sys- tematic look at how to recognize a company’s core Clayton M. Chime-u is a professor ofbusin‘css' admin. istmrion at Harvard Business School in Boston smiths author of The Innovator-is Dilemma: When New Tech- nologie's Cause Great Firms to Fail (Harvard Business SchoolPre'ss. r997). Michael Overdarf is a Dean‘s Re- search Fellow at Harvard Business School. To discuss this article, join HER-’s authors and-readers in the HER: Forum at mew. hbmrgfforum. 68 capabilities on an organizational level and then ex- amine how those capabilities migrate as companies grow and mature. Where Capabilities Reside Our research suggests that three factors affect what an organization can-and cannot do: its resources, its processes, audits values. When’thinkingjabout what sorts of innovations their organization will be able to embrace, managers need to assess how each of these factors might affect their organization's ca- pacity to change. Resources. When they ask the”:1uestion,_“What can this company do?” the place most managers look for the answer is inits resources -bo.th the tan- gible ones like people, equipment, technologies, and cash, and the less tangible ones like product designs, information, brands, and relationships with suppliers, distributors, and customers. Without doubt, access to abundant, high-Quality resources increases an organization's chances of coping with change. But resource analysis doesn’t come close to telling the whole story. Processes. Thesecond factor that affects what a company can and cannot do is its processes. By pro— cesses, We mean the patterns oftinter-action, coordi- nation, cominunication, and decision melting em- ployees use to transform rescurces into products and services of greater worth. Such examples-as the processes that govern product development, manu- facturing, and budgeting come immediately to mini-Some processes are formal, in the sense that they are explicitly defined and documwted. Others are informal: they are routines or ways of working that evolve over time. The former tend to be more visible, the latter less visible. One of the dilemmas of management is that pro- cesses, by their very nature, are set up so-that em- ployees-perfonn tasks in a consistent way, time after time. They are meant not to change or, if they must change, to change through tightly controlled proce- dures. When people use a. process to do the task it was designed for, it is likely to perform officimtly. But when the same process is used to tackle a very- di'fferenr task, it is likely to performslugishly. Com- panies-focused on developing- and winning FDA ap- provalfm new drug compounds, for example, often prove inept .at developing: and winning approval for medical devices because the second task entails very different ways of working. In four, a process that creates the capability to execute one task concur- rently defines disabilities in executing other tasks.‘ The most iinpcirtant capabilities ”and concurrent disabilities-aren’t necessarily embodied in the most HARVARD susmsss nrvrsw Massimo visible processes, like logistics, development, manu- facturing, or customer service. In fact, they are more likely to be in the less visible, background processes thatsupport decisions about where to invest re- sources— those that define how market research is habitually done, how such analysis is translated into financial projections, how plans and budgets are ne- gotiated internally, and so on. It is in those processes that many organizations" most serious disabilities in copingwith change reside. Values. The. third factor that affects what an orga- nization can and cannot do is its values. Sometimes the phrase ”corporate values” carries an ethical connotationt-one thinks of the principles that en- sure patient well-being for Johnson & Iobnson or that guide decisions about employee safety at Al- coa. But within our framework, "values” has a broader meaning. We” define an organisation’s val- use as the-standards by which employees set priori- ties that enable them to judge whether an order is attractive or unattractive, whether a customer is more-important or less important, whether an idea for a new product is attractivc or marginal, and so on. Prioritization decisions are made by employees at ever}t level. Among salespeople, they consist of on-the*8.pot, day-to-dav decisions about which products to push with customers and which to de- emphasiz’e. At the executive tiers, they often take the form of decisions to invest, or not, in new prod- ucts, services, and processes. The larger and more complex a company becomes, the more important it is for senior managers to train employees throughout the organization to make in- dependent decisions about pt'ibrities that are consis- tent With the Strategic direbtzio'n and the business model of the company..A lacy metric ofgood manages mcnt, in fact, is whether such clear, consistent val- ues havepermeated the organization But consistent, broadly understood values also de- fine what an. organization cannot do. A company’s values reflect its cost structure or its business model because those define the rules its employees must follow for the company to prosper. If, for example, a company's overhead costs require it to achieve-gross profit margins of 4.0%, then a value or decision rule will have evolved that encourages middle managers to kill ideas that promisegrossmargins below 40% . Such an organization would be incapable of com— mercializing projects targeting lowmargin mar- kets- such as those in e—commerce— even though another organization's values, driven by a very dif- ferent cost structure, might facilitate the success of the same project. Different companies, of course, embody different values. But we want to focus on two sets of values HARVARD BUSINESS REVIEW Mali—Aprilm Meeting the Challenge of Disruptive Change in particular that tend to evolve in most compa- nies in very predictable wastI‘he inexorable evolu- tion of these two values is what makes companies progressively,r less capable of addressing disruptive change successfully. As in the previous example, the first value dictates the way the companyr judges acceptable gross mar- Often, it seems, financial analysts have a better intuition about the value of resources than they do about the value of processes. gins. As companies add ficatures and functions to their products and-services, trying to capture more attractive customers in premium tiers of their mar- kets, they often add-overheadcost. Asazresult, gross margins that were" once attractive become unattrao tive. For instance, Toyota entered the North Ameri- can market with the Corona model,1which targeted the lower end of the market. As that segment be- came crowded with look-alike models-from Honda, Mazda, and Nissan, competition drove'down profit margins. To improve its margins, Toyota then de- veloped more sophisticated cars targetind at higher tiers. The proceas of developing carslike the Camry and the Lexus added costs to Toyotai's operation. It subsequently decided to exit the lower. end of the market; the margins had become unacceptable because the company’s cost structure, and conse- quently its values, had changed. [nadepamuefromthatpattem Tosctarecentlv introduced the Echo model, hoping to rejoin the entry-level tier with a $10,000 car. It is one thing for Toyota’s senior management to decide to [smash-this new model. it’s another for the many people in the Toyota system—including its dealers-so agree that sellingmore carsatlovvermargins'isabfetterwavto boost profits and equity values than selling more Camrys, Avalons, and Lexuses. Only tiine will tell whether Toyota can manage this dawn-market move. To be sucCesznl with the Echo, Toyota’s man agement will have to swim against a very strong mir- rent—the current of its own corporate values. The second value relates to how big a business opportunity has to be before it can be interesting. Because a company’s stock price represents the discounted present value of its. projected earnings stream, most managers feel compelled not just to maintain growth but to maintain a constant rate-of growth. For a $40 million empany to grow 25%, for instance, it needs to find $10 million in new business the next year. But a $4o billion company needs to find $ro billion inne‘w business the next year to grow at that same rat-e. It follows that an op- portunity that excites a small company isn’t big 69 Meeting the challenge of Dlsruprlve Change enough to be interesting to a large company. One of the bittersweet results of success, in fact, is that as companies become large, they lose the ability to en- ter smell, emerging markets. This disability is not caused by a change in the resources within the com- panies-- their. resources tin-tiesll)r are vast. Rather, it"s caused by an evolution in values. The problem is magnified when companies sud- denly become much bigger through mergers or ac- quisitions. Executives and Wall Street financiers who engineer megamer‘gers hemeen already-huge pharmaceutical companies, for example, need to take this effect into account. Although their merged research organizations might have more resources One of the bittersweet results of success is that as companies become large, they lose sight of small, emerging markets. 70 HARVARD BUSINESS REVIEW Mmh-Apdlzmfl Meeting the Challenge of Disruptive Change to throw at new product development, their com— mercial organizations will probably have lost their appetites for all but the biggest blockbuster drugs 'I‘his constitutes a very real disability in managing innovation. The same problem crops up in high— tech industries as well. In many ways, Hewlett-Packards recent decision to split itself into two companies is rooted in its recognition of this problem. The Migration of Capabilities In the start-up stages of an organization, much of what gets done is attributable to resources —peop1e, in particular. The addition or departure of a few key people can profoundly influence its success. Over tithe, however, the locus of the organization’s capabilities shifts toward its processes and values. As people address recurrent tasks, processes be- come defined. And as the business model takes shape and it becomes clear which types of business need to be accorded highest priority, values coa- lesce. In fact, one reason that many soaring young companies flame out after an IPO based on a single hot product is that their initial success is grounded in resources- often the founding engineers — and they fail to. develop processes that can create a se- quence of hot products. Avid TechnOIOgy, a producer of digitaLediting systems for television, is an apt case in point. Avid's well-received technology removed radium from the video-editing process. On the back of its star prod- uct, Avid’s stock rose from $16 a share at its 1993 IPO to $4.9 in midvrgps. However, the strains of be- ing a one-trick pony soon emerged as Avid faced a saturated market, rising inventories and receiv- ables, increascd competition, and shareholder law- suits. Customers loved the product, but Avid‘s lack of effective processes for consistently developing new products and for controlling quality, delivery, and service ultimately tripped the company and sent its stock back down. By contrast, at highly successful firms such as McKinsey 8'. 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 Millie join the firm every year, and almost as many leave. But the company is able to crank out high-quality work year after year 136- cause its core capabilities are rooted in its processes and values rather than in its resources. When a company's processes and values are being formed in its early and middle years, the founder typically has a profound inrpaet. The founder usu— ally has strong opinions about how employees . should do their work and what the organization’s nanvnno suersss nsvraw March-Aprilmoo priorities need to be. If the founder’s judgments are flawed, of course, the company will likely fail. But if they’re sound, employees will experience for themselves the validity of the founder’s problem- solving and decision-making methods. Thus pro- cesses become defined. Likewise, if the company be- comes financially successful by allocating resources according to criteria that reflect the founder’s priori- ties, the company‘a values coalesce around those criteria. As successful companies mature, employees gradually come to assume that the processes and priorities they’ve used so successfully so often are the right way to do their work. Once that happens and employees begin to follow processes and decide priorities by assumption rather than by conscious choice, those processes and values come to consti- tute the organization's cultureFAs companies grow from a few employees to hundreds and thousands of them, the challenge of getting all employees to agree on what needs to be dens and how can be daunting for even the best managers. Culture is a powerful management tool in those situations. It enables employees to act autonomously but causes them to act consistently. Hence, the factors that define an organization's capabilities and disabilities evolve over time -ithey start in resources, then move to Visible, articulated processes'and values , and migrate finally to culture. As long as the organization continues to face the samo sorts of problems that its processes and values were designed to address, managing the organiza- tion can be straightforward. But because those fac— tors also deflne what an organization cannot do, they constitute disabilities when the problems fac— ing the company change fundam'entally. When the organization’s. capabilities reside primarily in its people, changing capabilities to address the new problems is relatively simple. But when the capa- bilities have come to reside in processes and values, and especially when they have become embedded in culture, change can be extraordinarily difficult. [See the sidebar "Digital’s Dilemma”) Sustaining Versus Disruptive Innovation Successful companies, no matter what the source of their capabilities, are pretty good at responding to evolutionary changes in their markets~what in The Inn avatars Dilemma [Harvard Business School, 1997), Clayton Christensen referred to as sustain— ing innovation. Where they run into trouble is in handling or initiating revolutionary changes in their markets, or dealingwith disruptive innovation. 71 Meatlrtg the Challenge of Disruptive Change Sustaining technologies are innovations that make a product or service perform better in ways that customers in the mainstream market already Value. Compaq’s early adoption of Intel's 3a~hit 386 microprocessor instead of the 16-bit :86 chip was a sustaining innovation. So was Merrill Lynch’s' 111- Motion of its 0231': Manaseznent Account which allowed ”Customers to write checks against their eq- uity accounts. Those were breakthrough innova— tions that sustained the best customers of these companies by providing. something better than had previously” ”heen available. Disruptive innovations create an entirely new market through the introduction of a new kind of product or service one that’s actually worse ini- tially, as iudged by the perfomance mctrics that mainstream customers value. ”Shades Schwab's ini- tial entry as a” bare-bones discomt broker was a dis- ruptive innovation relative to the offerings of full— service brokers like Merrill Lynch Merrill Lynch's heat customers wanted more than _.Schwah-1ike ser— vices. Early personal computers were a disruptive innovation relative to mainframes and minicotn— puters. PCs were not powerful enough to run ”the computing applications that existed at the time they were introduced. These innovations were disrup- tive in that they didn’t address the nextggena-ation needs of” leading customers in existing markets. They had” other attributes, of course, that enabled new market applications to emerge— and the dis- mptive innovations improved so rapidly that they ultimately could address the needs of customers in the mainstream of the market as well. 811ng innovations are-nearly always devel- oped and introduced lav established ”industry lead- ers. But those same companies never introducc— —or cope well with- dismptive' innovations. Why ‘2' Our resomces-pIOoesses-valucs framework holds the seawee- Industry leaders are organised to develop and introduce sustaining technologies. Month-after month, year after year,- they launch new and im- proved products to gain an edge over the competi- tion. They do so by developing processes for eval- uating the te...
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