This course utilizes an inquiry based approach to understanding sources of competitive advantages in companies and other organizations.
Module 5 Part 2
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Entrepreneurial Strategic Management
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Week 5
How can companies deal with disruptions in the marketplace? Part 1
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Doug E Thomas, Ph.D.Professor
International Management, Anderson School of Management
So I mentioned that we've got this model or framework that we hope
will give us a better ability to make some type of prediction about the future
in the context of business, and what businesses should do, and
what we'd expect to occur given different circumstances.
This model is also from a famous Harvard Business School professor.
His name is Dr. Clayton Christensen, and he's written a number of books
all about strategy, and technology, and innovation.
His first book was published in the 1990s, and it was called the Innovators Dilemma.
Famous best selling book that has helped a lot of
business people improve their practice of business, and
their thinking, and their analysis, and their strategic planning.
He's followed that up with some other books, and we're going to look at this
framework, and I invite you to consider reading some article or
some book related to this model to further your own understanding.
It might help you make sense of what we're going to discuss in a relatively
short period of time.
But one thing that I would mention to you,
if you do choose to look at one of the books or articles written by Dr.
Christensen, is that you may find yourself wondering,
why is this model mentioned in a class on strategy?
You may notice that the models seem to be a lot focused on innovation.
And let me try to provide some context on why a book that's really focused on
innovation, how it's linked to strategy for managers and entrepreneurs.
If you recall through our other frameworks, or models,
we were trying to help businesses develop this sustainable competitive advantage.
Which is some distinction in the marketplace that allows that company or
organization to succeed.
And we talked about navigating the industry in a very specific way
through managing the circumstances or the characteristics of the industry.
We've talked about developing niche strategies within industries.
We've talked about developing internal capabilities or core competencies.
And all of those are efforts to achieve sustainable competitive advantage.
Some consultants and business people have observed and
argued that it's very, very difficult to develop a sustainable competitive
advantage because as soon as you develop it, others will try to imitate it.
And so companies that develop a sustainable competitive advantage
immediately need to seek out the next competitive advantage,
the next source of competitive advantage.
And so, one argument that's made is that what companies
really need to do is to develop a core ability to innovate.
To innovate their processes, to innovate their products,
innovate with people, and etc.
So, innovation sometimes is argued to be the ultimate
source of competitive advantage, or the ultimate source of success in business.
This framework, I'm going to state, is an attempt to do that.
And to predict how these changes or innovations will impact the strategies,
the strategic management, of entrepreneurial and existing firms, or
existing companies.
And so that's the context that I would provide to you.
So, this model is sometimes, or framework,
is sometimes referred to as disruption, disruptive innovation.
And if you look at books that talk about disruption,
you'll probably see a reference to Dr. Christensen's models,
which look at understanding how disruption in marketplaces, or
in sectors, or in companies, impact their ability to survive and succeed.
And the model is going to make a very specific prediction, or
set of predictions, about the future with respect to businesses and innovations.
If you look at this model, it might seem a little bit overwhelming or
confusing, especially if you haven't had a chance to read one of Dr.
Christensen's books or articles.
But, let me try to describe the model, and
then in the next part I'll go through a case.
And then we'll continue to extend in subsequent parts of this module,
this framework or model.
So what you're looking at is kind of the basis of Clayton Christensen's
approach to understanding disruptive innovation,
disruptive technologies, and how they affect the survivability and
the success of companies, and other organizations.
One thing that should be very clear is that this model is referring
generally to marketplaces where competition is allowed.
In some societies,
competition is restricted in certain ways, including the United States.
Another thing to remember when you look at it is,
it's refers to disruptive technologies, but
this is not a model just for companies that exploit technology.
This could be a restaurant, or this could
be something service related that is not related to developing
computer based technology, or software based technology.
So let me try to go through it.
This model shows, here at the bottom, time.
And so here, we see the predictive aspect of it.
And on the left side, the left axis, it says the word performance, and
that's referring to the performance of a product, not of a company, per say.
Now, this model is very product centeric, or product focused.
Dr. Christensen's approach assumes that if a company's products are successful,
then the company is successful.
And so that seems to be a pretty safe argument could be made.
And what it shows with these different lines, the green and
the blue and the red, is the performance of a product.
And performance meaning, how it meets the demands, or
needs, or utility, of customers.
And the red line shows the average level of
utility that the average customer receives from a product or service.
And so as you can see, the red dashed line increases slightly over time.
In other words, customers demand a little bit more as time passes from the product.
They expect a little bit more utility.
They expect it to do a little bit more in terms of solving problems in their lives.
And the red band here, what it shows,
is the range of performance that customers expect.
So there are some customers who are very demanding with respect to performance.
They expect a lot from products, and then there are, the majority
of customers here in the middle, who have average expectations of products.
And then, down here, you have the least demanding, or
the customers with the lowest expectations of a product or service.
And, with the green and the blue lines, we're seeing companies and
their improvements of products or services, over time.
And most companies engage in improving their products over time.
They add additional benefits or utility to the product or
service, and most of those innovations, or
improvements, we call sustaining innovations, or sustaining improvements.
And usually it's incumbents, or companies that already exist,
that are undertaking the sustaining innovations.
And what they're trying to do as they make better and
better products, they make Improvements to it,
they're increasing the satisfaction of customers who are the most demanding.
And so at some point, companies that are introducing sustaining innovations,
and those companies are usually incumbents, are introducing
improvements that are at the top of this red range, this red curve.
And so they're really only satisfying,
with those improvements, the most demanding customers.
So, what we see with the green line is the disruption.
And we're going to focus on this for the rest of the module, and
what we're going to try to understand is the circumstances when
a disruption might occur in a market, and who will win.
That's the prediction in the marketplace when true
disruptions are introduced to the market.
And so what you can see,
to finish off this part, is that when some disruption occurs, and we haven't yet
defined disruption, and we probably won't do a great job of defining it either,
which is the real challenge with this model,
is defining truly what disruption is.
But let's assume that in a marketplace a new company, a new entrant comes in and
introduces a product or service that seems to be quite different in its approach.
Perhaps in cost, perhaps in technology, perhaps in marketing and distribution.
What most new technologies or new products that are brought to the market do,
is satisfy only a small portion of the market, and
it's usually the least demanding customers.
Usually, when some new product or service comes to the market,
it's not good enough, and that's a very important phrase.
It's not good enough to meet the demands of the average customer,
which is the largest portion of this red band.
As you can see the green line at the beginning, when it starts out,
is very far below the red dashed line, which indicates that
the product just is not good enough, it doesn't meet the average customer's needs.
And so what do most companies do when a new product or
service like that comes out?
They will tend to ignore that product or service and
its technology because it's not doing very well, the job that the product or
service is hired to do, in the life of the customer.
And so what Dr. Christensen is going to say, and
we're going to expand upon over the next few minutes,
is that if there is a technology, or an innovation in a product or
service that truly is disruptive, that new entrants will usually be, or
new startups, new entrepreneurs, will usually be the ones to win,
because the existing companies or the incumbents will have very
strong incentives to ignore that low end of the market.
And it continued to try to please their most important, and
most demanding, and most profitable customers.
And the prediction is, if it truly is disruptive,
that new entrants will win, and incumbents will eventually lose.
And so what we're going to do in the next part is talk about a case that I hope you
find very relevant and familiar, something that appears to be potentially disruptive.
The goal here was to simply get these
labels understood, you may need to go back and re-watch this to understand, or
you may need to do some research on your own to understand this model.
But this is very important if you're going to understand the following parts.
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