© 2007 Innosight LLC - PowerPoint Presentation

© 2007 Innosight LLC 1 Disruptive Innovations: A driver of leadership failure and the source of new growth opportunities Performance Time Performance that customers can utilize or absorb Pace of Technological Progress Sustaining innovations Disruptive innovations Incumbents nearly always win Entrants nearly always win

7/26/2011Copyright Clayton M. Christensen 2 7%4% Quality of minimill-produced steel 12% 8% 18% 22% % of tons Steel Quality 1980 1975 1985 1990 Rebar Angle iron; bars & rods Structural Steel Sheet steel 25–30% 55% Little boys beat giants by disruption Quality of integrated mills’ steel

7/26/2011Copyright Clayton M. Christensen 3 ~ 8% inflation The intent and effect of sustaining innovation is to drive prices up. Disrupting innovation drives prices down.

7/26/2011Copyright Clayton M. Christensen 4 ~ 8% inflation Replication, rather than disruption, characterized higher education in the past. The future might be different.

Performance Time Pocket radios Portable TVs Non-consumers or Non-consuming occasions Different measure Of Performance Time Hearing Aids Tabletop Radios, Floor-standing TVs Path taken for transistors by vacuum tube manufacturers The customers are enticed into the new system, not vice versa . The metric of performance changes 7/26/2011 Copyright Clayton M. Christensen 5

Changes in product architecture have profoundly changed the architecture of the computer industry Equipment MaterialsComponents Product design & assembly Operating system & applications software Sales & distribution Field service 1960 - 1980 IBM Control Data Digital Equipment ---------- 1990 – Present ------- Intel, Komag, etc. Dell, HP, Quanta, Acer Best Buy Geek Squad Microsoft Monsanto, Sumitomo Metals, Komatsu, Shipley, etc. Teradyne, Nikon, Canon, Applied Materials, Millipore, etc. Apple Computer 7/26/2011 6 Copyright Clayton M. Christensen

Changes in product architecture have profoundly changed the architecture of the computer industry Equipment MaterialsComponents Product design & assembly Operating system & applications software Sales & distribution Field service 1960 - 1980 IBM Control Data Digital Equipment ---------- 1990 – Present ------- Intel, Komag, etc. Dell, HP, Quanta, Acer Best Buy Geek Squad Microsoft Monsanto, Sumitomo Metals, Komatsu, Shipley, etc. Teradyne, Nikon, Canon, Applied Materials, Millipore, etc. Apple Computer 7/26/2011 7 Copyright Clayton M. Christensen Interdependent architecture Modular architecture

7/26/2011 Copyright Clayton M. Christensen 8 Conflicting mandates in the way we must teach, vs. the way students must learn Standardization !! Every student is different Multiple styles of learning & types of intelligence Paces of LearningHome & family backgrounds Customization !! Interdependencies in the teaching infrastructure Temporal Lateral Physical Hierarchical

PROCESSES :Ways of working together to address recurrent tasks in a consistent way: training, development, manufacturing, budgeting, planning, etc. 7/26/2011Copyright Clayton M. Christensen9 What is a business model, and how is it built? PROFIT FORMULA : Assets & fixed cost structure, and the margins & velocity required to cover them THE VALUE PROPOSITION: A product that helps customers do more effectively, conveniently & affordably a job they’ve been trying to do RESOURCES: People, technology, products, facilities, equipment, brands, and cash that are required to deliver this value proposition to the targeted customers

7/26/2011Copyright Clayton M. Christensen 10 When framed as a sustaining innovation: Hybrid is required When framed against non-consumption, Pure-play can take root A Theory of Hybrid Technologies Then it can improve

Fee for service Fee for outcomeFee for membership or transaction Manufacturing Food services Medical procedures Instruction Textbooks; ed. Software today Value-adding process businesses Telecomm Insurance EBay D-Life Education software tomorrow Facilitated Network businesses Consulting firms High-end law firms R&D organizations Complex medical diagnosis Special Education Solution Shop businesses Three Types of Business Models

© 2007 Innosight LLC 12 Non-consumers or Non-consuming occasions Different measure Of Performance Time Performance Time Path taken by Educational software developers The instructional materials business historically has been a value-adding process business

Student-centric software will be a facilitated network business7/26/2011 Copyright Clayton M. Christensen13 Non-consumers or Non-consuming occasions Different measure Of Performance Time Performance Modules Custom classes Tutoring Facilitated Network: parents, teachers, students, entrepreneurs

7/26/2011Copyright Clayton M. Christensen 14 Toyota % of tons Steel Quality 1980 1975 1985 1990 Subcompact Mid-sized SUVs Trucks General Motors

Faculty qualifications, student learning 7/26/2011 Copyright Clayton M. Christensen15 Student achievement in on-line courses when administered by faculty in core 4.6 Student achievement in traditional classes taught by faculty in core 5.6 Student achievement in on-line courses when administered by focused on-line faculty 5.7

7/26/2011Copyright Clayton M. Christensen 16The substitution of one thing substitutes for another always follows an S-curve pattern % new % new % old .001 .0001 .01 0.1 1.0 10.0 09 11 07 05 03 13 15

7/26/2011Copyright Clayton M. Christensen 17Online learning gaining adoption Enrollments up from 45,000 in 2000 to 1,000,000 in 2007

© 2007 Clayton Christensen 18 Market Understanding that Mirrors how Customers Experience Life “The customer rarely buys what the company thinks it is selling him” - Peter Drucker 7/26/2011Copyright Clayton M. Christensen

7/26/2011Copyright Clayton M. Christensen 19A Theory of Hybrids Performance Time Disruptive Innovations Time Sustaining innovations Peapod: Are there customers that would love a car that won’t go far, and won’t go fast? Competing on cost, design, reliability, and performance on the California Freeway Tesla $100,000 Prius Hybrid

7/26/2011Copyright Clayton M. Christensen 20The right product architecture depends upon the basis of competition Compete by improving speed, responsiveness and customization Performance Time Compete by improving functionality & reliability IBM Mainframes, Microsoft Windows Proprietary, interdependent architectures Dell PCs, Linux Modular open architectures