The value of theories in management

Prof. Clayton M. Christensen Theories and Management • A theory is a statement of what causes what, & why  Every action a manager takes is based upon a theory  Every plan a manager makes is predicated upon a belief in cause and effect: that certain actions and events will lead to the envisioned outcomes.  Every analyst or investor’s conclusion about the meaning of data is based upon a theory • Managers, consultants, analysts and investors therefore are actually voracious consumers of theory  Explicit, well-researched theories of cause and effect can have tremendous value to each of these people. Correlative theory

The best practices The of the best key to companies run success by the best leaders Correlation between characteristics and outcomes More Less Successful Successful

Characteristics Characteristics How to prepare for BSSE classes

Step 1:

The assigned reading should be the primary focus of each day’s preparation

The case is a venue or vehicle on which to practice using the theory How to prepare for BSSE classes

Step 1: Step 2:

The assigned reading about a theory of and growth is the primary Look through the focus of each day’s preparation lenses of theories used in prior classes, to get a comprehensive picture The case is a venue or vehicle on which to practice using the theory Incumbents dominate sustaining battles 60% on $500,000 Competing against consumption

45% on Performance $250,000

Time

Competing Time against non- Entrants 40% 20% consumption on $2,000 typically win at disruption

8/3/2018 Copyright Clayton M. Christensen 6 A model for managing mergers and acquisitions

RESOURCES THE VALUE PROPOSITION People, technology, products, A product that helps customers facilities, equipment, brands, do more effectively, and cash that are required to conveniently and affordably a deliver this value proposition job they’ve been trying to do to the targeted customers

PROCESSES THE PROFIT FORMULA Ways of working together to Assets and fixed cost address recurrent tasks in a structure, and the margins and consistent way: training, velocity required to cover development, manufacturing, them budgeting, planning, etc.

8/3/2018 Copyright Clayton M. Christensen 7 is only beginning in healthcare The decentralization that follows centralization Scanners PET CT, MRI, Imaging: Homes Clinics Retail Offices Clinics

Surgical suites Specialist physicians Personal physicians Nurse practitioners testers multi High - - speed speed channel channel Pharmacists Family care A few theories about management.

1. Disruption 2. What a company can and cannot do (M&A) 3. Can we predict what a customer will buy? 4. How are brands bought and destroyed? 5. How nations become prosperous 6. Interdependence and modularity 7. The capitalist’s dilemma Most potentially successful focus on a job that people need to do.

“The customer rarely buys what the company thinks it is selling him.” - Peter Drucker I need to get this to there as fast as possible, with perfect certainty.

Horseman & chariot

Telegraph or railroad

Airplane

DHL 11

8/3/2018 Copyright Clayton M. Christensen How everyone knows what product does the job best.

What we can do that competitors cannot.

How customers will choose us

The job the customer needs to do. A purpose brand is one that “pops” into our minds when we realize that we have a specific job to do. IKEA Disney Mayo Clinic TurboTax QuickBooks Zara Hilti LandRover A purpose brand acts as a two-faced compass. It tells customers what to expect from the product, and it tells marketers and engineers what features and functions they should and should not incorporate in their product. The Prosperity Paradox

How Innovation can Lift Nations Out of Poverty Compete on the autobahn Tesla $100,000 based upon design, reliability & performance: a sustaining innovation

Competing against non- consumption. Electric cars Performance need to be better than nothing: A disruptive Time innovation.

Time

8/3/2018 Copyright Clayton M. Christensen 15 Competing against non- consumption of refrigeration

Many more can own & use refrigeration.

More people start new businesses that are enabled by refrigeration. Peltier-Effect refrigeration Hire more to make them.

And to sell them.

And be distributors. Market-Creating Innovation and Growth:

By Koreans for Koreans

1980 1990

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Air conditioners for Mormon missionaries, Pusan, 1960s

SamSung Air Conditioner, 1970s

8/3/2018 Copyright Clayton M. Christensen 18 Idomie Noodles in Nigeria Development of Sustaining Innovations Resource-Based Focus of management Time Sustain margins Economies Create little net growth

Disruptive Innovations Create corporate and A manager’s economic growth. view of growth Create jobs Efficiency Need capital Innovations

Eliminate jobs Increase free cash flow - Airtel, MTN The right product architecture depends upon the basis of competition

IBM; GE

Compete by improving functionality & reliability Performance

Compete by improving speed, responsiveness and customization

Dell PCs, Linux

Time 8/3/2018 Copyright Clayton M. Christensen 22 Sustaining Innovations A manager’s view make good products better. of Innovation and Improve margins Gain market share growth Create little net growth

Time Disruptive Innovations make products affordable and accessible. Create growth Create jobs Efficiency Innovations Need capital make more with less. Eliminate jobs Increase free cash flow - Key doctrines in Sustaining the financial view Innovations of corporate prosperity:

1. Abundance and scarcity Efficiency 2. Profitability (RONA, IRR) Innovation Disruptive is better than s Innovations profit ($) Key doctrines Sustaining in the financial view Innovations

of corporate Time performance:

Disruptive Innovations

Efficiency Innovations The ratios used to measure returns on sustaining innovations are always higher than when the ratios are calculated for disruptive innovations.

Time

Disruptive innovations Ratios used to measure returns always struggle to on efficiency innovations attract capital and The impact that always appear to be more managerial attention. profitability metrics attractive than returns on sustaining innovations. have in the resource allocation process $ Are universities being disrupted? • Undergraduate education – Southern New Hampshire – Western Governors – Kaplan – Purdue University • Law schools – Para-legals – Out-sourcing data & analysis • Business schools – Solving the overshooting problem by in-sourcing training – Modular – Job to be done – Perdue University • Medical schools “Morris, the American semiconductor companies all try to become fabless companies. This drives their RONA up. But when they outsource fabrication to TSMC, they shift the assets off of their balance sheet onto your your balance sheet. How is something that is bad for them, good for you?”

“Clay, their analysts have never talked to a banker. But I have. I’ve interviewed bankers all around the world. I have not yet found a bank that accepts ratios as deposits. They only accept cash.”

. Morris Chang, Founder and Chairman of TSMC, from an interview with The ratios used to measure returns on sustaining innovations are always higher than when the ratios are calculated for disruptive innovations.

Time

Disruptive innovations always struggle to attract Ratios used to measure returns capital and managerial The impact that on efficiency innovations attention. always appear to be more profitability metrics attractive than returns on have in the resource sustaining innovations. allocation process $ Different types of innovations play roles in the growth of companies and economies

Growth economies Sustaining economies

India Korea Kenya China Viet Nam Chile

USA Potential economies Efficiency economies:

Pakistan Japan Ghana Western Europe Venezuela The Flee or Fight Response to Profit DOD

25–30%

SteelQuality 18%

12%

7%

1975 1980 1985 1990 1995

8/3/2018 Copyright Clayton M. Christensen New technologies need to be embedded into a Compete on the autobahn Tesla $100,000 based upon cost, design, reliability, anperformance: a sustaining innovation Performance Competing against non- consumption. Electric cars Time Prius Hybrid need to be better than nothing: A .

Time

8/3/2018 Copyright Clayton M. Christensen 32 Development of Sustaining Innovations Resource-Based Focus of management Time Sustain margins Economies Create little net growth

Disruptive Innovations Create corporate and A manager’s economic growth. view of growth Create jobs Efficiency Need capital Innovations

Eliminate jobs Increase free cash flow - What theories might give us guidance?

• Disruption • Job to be done • Interdependence – Modularity • What an organization can and cannot do • The Toyota set of rules Stephen Gould: Panda’s Thumb • General, community hospitals – 1920s: doctors cheap, transportation expensive • Do everything for everybody – 2013: doctors expensive, transportation cheap • Marginal cost is lower than whole cost • Doctors choose this profession so that they can control their destiny and choose how they will work. • Reducing cost inherently impairs quality of care

8/3/2018 Copyright Clayton M. Christensen 35 We’ll do anything for Turning machines Hobbing department anybody.

Annealing Tapping furnace equipment •Overhead = Boring 85% of total machines •Overhead

off saws increases 30% Stamping

Cut - for each machines De-burring doubling of

Polishing Dept. complexity Assembly •Variable quality Storage Shipping Department Office area

8/3/2018 Copyright Clayton M. Christensen 36 Processes of Strategy Formulation and Implementation

Intended Strategy: Analytical project followed by implementation

The Resource Priorities Stream of new embedded Allocation Process: products, services, Actual strategy in Decisions about what company’s processes and that is implemented gets resources: what acquisitions profit model to do & what not to do

Emergent Initiatives Responses to unforeseen opportunities and problems Solution Typical hospitals Process Businesses Shops are not Manufacturing • Consulting firms • complicated. Education • R&D organizations • They are •Construction • Diagnostic & intuitive impossible. activities of hospitals • Medical procedures

Fee for service Fee for outcome

National Jewish Medical Center Facilitated Pulmonary & Respiratory Diseases Networks • Telecommunications Shouldice: Hernia surgery; • Insurance New England Baptist: • EBay orthopedic surgery Dave Snow, asthma • D-Life; Crohns.org CEO, Medco Fee for membership Proper team structure is crucial in every project

Product Process Team Type Autonomous Business model in which Business model in VP VP VP VP product is used which process is used Disruptive innovations Product architecture: What Process architecture: Heavyweight are the components, and What are the steps in VP VP VP VP which ones interface with the process, and what others? is their sequence?

Lightweight Change the specifications How must the steps in VP VP VP VP for how components must the process interface fit together in time and space?

Functional Improve performance of Improve individual VP VP VP VP Sustaining innovations Sustaining -

Level of change each component steps in the process

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