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Navigating Disruptive Innovation: The Innovator's Dilemma
- 1. Navigating Disruptive Innovation: The Innovator's Dilemma Presented by: Eng. Zahreddine Kaabi
- 2. About the Author-Clayton Christensen ● Professor at Harvard Business School. ● Introduced Disruptive Innovation Theory. ● Most Influential Business Thinker In The World, 2011 & 2013. The London Times. ● One of Most Influential Business Theorists of the Last 50 Years. Forbes
- 3. What causes successful companies to lose their growth and ultimately fail?
- 5. Steel production methods Integrated Steel Mills The last integrated steel mill built in the US Electric Arc Furnace (Mini-Mills) Small Electric Arc Furnace
- 6. Now, imagine you're the CEO of an integrated steel company. Wouldn't you adopt this new technology, which could reduce steel production costs by 20% ?
- 7. The flee or fight response to profit
- 8. The flee or fight response to profit
- 9. The flee or fight response to profit
- 10. The flee or fight response to profit
- 11. The flee or fight response to profit
- 12. The flee or fight response to profit
- 13. The flee or fight response to profit
- 14. Disruptive Innovation The Innovator’s Dilemma
- 15. Dynamic capability is “the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments” “David J. Teece”
- 16. Thank you for your attention!
Notas del editor
- Good Afternoon, i have the pleasure to present today the theory of The innovator’s Dilemma which is introduced by Pr Clayton Christensen in 1997 in his book titled with the same name the Innovator’s dilemma, this theory came after a long observation of the realm of business. And through this presentation by a case about steel production business you will conclude by yourselves that disruptive innovation is in the core topic of DC .
- Clayton Christensen, a prominent figure in the realm of business and innovation, was a renowned professor at Harvard Business School. He earned widespread recognition for his groundbreaking research on disruptive innovation, which fundamentally reshaped how businesses understand and respond to market dynamics. Christensen's work delved into the mechanisms behind disruptive technologies and their ability to upend established industries, challenging conventional wisdom and inspiring a new wave of strategic thinking in corporate boardrooms worldwide. The Economist named the innovator's dilemma one of the six most important books ever written about business I can’t start my presentation without introducing Pr Christensen, brievly he is a prominent figure in the realm of business and innovation, the author of the innovator’s dilemma which is named one of the six most important books ever written about business and innovation.
- what causes successful companies to lose their growth and ultimately fail ? and this is the model that emerged and what I'm going to do is describe this model in the context of a case about the steel industry
- David and Goliath is a classic biblical tale of courage and triumph against all odds. Goliath, a towering Philistine warrior, challenges the Israelites to send out their champion for a one-on-one battle. The Israelites are terrified, but a young shepherd boy named David steps forward to accept the challenge. Despite being small and inexperienced, David faces Goliath armed only with a sling and stones. With unwavering faith and determination, David slings a stone at Goliath's forehead, striking him down and defeating the mighty giant. The Israelites are astonished by David's victory, and it inspires them to rally against their enemies. The story of David and Goliath serves as a timeless symbol of courage, faith, and the triumph of the underdog. Clayton wrote about the lumbering Goliaths of the business world, successful, set in their ways, and seemingly invincible. But despite their size and armor, they became easy prey for the Davids and their shepherd's slings. How quickly fortunes changed when confronted with the disruptive force of new approaches and new technology. Professor Christensen pointed out that the time to adapt is before the stone is even in the air; at that point, it is too late. In the modern economy, disruption is the new normal, and anticipation and innovation are how you survive
- So for those of you who have not yet made a lot of steel in your lives (unfamiliar with steel production) there are two ways to make it most of the world's steel historically has been made in massive integrated steel companies by using basic chemical elements to create steel, They create steel "from scratch," by melting iron ore and coke using blast furnaces. It would take about 10 billion dollars to build an integrated steel company today the other way to do it, Is in what we call a mini mill, mini mills melt scrap in electric furnaces and we could put easily 1, maybe 2 electric furnaces in this room. Because you can make steel of any given quality in one of these mini mills, they don't have to scale up the downstream processing steps and that's why they call these things mini mills. The most important dimension of a mini mill is that in fact you can make steel of any quality for 20% lower cost in a mini mill, then you can make it in an integrated mill.
- "So just think about this for a minute. Imagine that you were the CEO of an integrated steel company somewhere in the world. You're making commodities. Here is a technology: mini mills that would reduce the full cost of making steel by twenty percent. Don't you think you'd adopt this new technology? It's broadly available, and yet not a single integrated steel company anywhere in the world has yet successfully built and operated one of these mini mills. And this is my sense for why something that makes consummate sense is actually impossible for smart people to do.
- So, the steel market, like every market, is comprised of tiers. At the bottom of the mark, it is concrete reinforcing bar, or rebar. Almost all of us could make rebar if we wanted to. At the high end of the market is sheet steel that's used to make appliances and cars. It's actually very hard to make that stuff. And at the beginning of this story, the integrated steel companies made the full range of these products. Mini mills became technologically viable in the late 1960s, and because they were melting scrap in these electric furnaces, the quality that they could produce was uniformly bad. In fact, the only market that would buy what the mini mills made was the concrete reinforcing bar market because there are almost no specs for rebar anyway. And then, once you bury that inside of cement, you couldn't verify if it had met spec or not. So, rebar was a perfect market for crummy products. As the mini mills attacked the rebar market, the reaction of the integrated mills over there was they were just relieved to get out of the rebar business. It truly was in American English, a dog-eat-dog commodity. Their gross margins were only 7%.
- It just made no sense to defend a crummy 7% margin business when, in the tier above them, the integrated steel companies could generate 12% gross margins. So, an interesting thing happened as the integral mills were expanding their capacity to make rebar and then the integrated steel companies got out, is they got out of rebar and added up the remaining numbers. Their profitability improved by getting out mini mills because they had a 20% cost advantage. They rolled tons of money by getting in, so they're quite happy, one with another. But that disappeared in 1979. That was the year when the mini mills finally succeeded in driving the last high-cost integrated player out of rebar. You look at what happened to the price of rebar in 1979. The price of rebar collapsed by 20%. It just turns out that there's a subtle fact about strategy that nobody had thought about before, and that is a low-cost strategy only works as long as you have a high-cost competitor in your market. And as soon as they had fled upmarket, then it was just low-cost mini mill fighting against low-cost mini mill in a commodity business. Very quickly, competition drove prices of rebar down to the point where nobody could make money. So, what are these poor mini mills going to do? Well, they tried to become efficient making rebar.
- But that's just a recipe for survival. And then, one of them looked upmarket and announced, "Oh my gosh, if we could just make bigger and better steel, we'd make money again!" Because the margins there are nearly double. And so, they stretched their ability from rebar into making thicker bar and rod and angle iron as they attacked that tier, the remark of the market.
- The reaction of the integrated mills was they were just relieved to get out of that business because it was such a dog-eat-dog commodity. And why would they ever want to defend a crummy 12 percent margin business when they could make 18 percent in structural steel? So, the very same thing happened as the integrated steel companies lopped off the lowest profit part of the product line and added the remaining numbers. Their profitability improved by getting out, and the mini mills, by getting in, had a 20% cost advantage again. And everything was half to hunky-dory on both sides until 1984. That was the year when the mini mills finally succeeded and drove the hat on the last high-cost integrated player out of angle iron, bar, and rod. If you look at what happened to the price of those products in 1984, their prices collapsed by 20%. And the reward to the mini Mills for their victory is they couldn't make any money !!
- So what do these poor suckers going to do? One of them looked up and said, "My gosh, if we could just make even bigger and better steel, we'd make money again!" And as they attacked the smallest end of the structural steel building business, the reaction of the integrated mills was, "Men, were they happy to get out of that business!" Because it was such a dog-eat-dog commodity. And why would it have, I told this story before?
- Why would anybody ever want to defend a crummy 18% business when their margins in sand sheet steel were so dramatically better? So the very same thing happened as integrated mills lopped off the lowest profit part of their product line and added the remaining numbers up. Their profitability improved by getting out, and the mini mills, as they had a 20% cost advantage, their profitability improved by getting in to the piece that the integrated mills got out of. And things were just fine with this arrangement until 1996. That was the year when the mini mills finally succeeded in driving the last high-cost integrated player out of sheet and structural steel. What happened to those products in that year? Prices collapsed by 20%.
- And so, what's poor new core and the mini mills going to do? They've got to get into sheet. As they hit the commodity ends, the reaction of integrated mills is, "Boy, they were happy to get out of that commodity stuff because their margins are so much better in specialty steels." And so here we are today, the mini mills account for about 65 percent of North America's steel production. All but one of the integrated steel companies has gone bankrupt. Now, you notice I was able to tell the whole story without using the words "stupid manager" once, because there's no stupidity involved on either side of the equation. Every time the integrated steel companies got out of what was less profitable, their profitability improved, and every time these guys that went at one stage upmarket, their profitability improved. And the causal mechanism behind this phenomena that we call the innovator's dilemma is the pursuit of profit. So, if you are a little boy and you want to kill a big giant, what does it tell you to do? Well, if you think you can beat the giant by making better products that you could sell for better profits to the giant's best customers, they'll get you. But if you define a business or an approach where you come in at the bottom of them, then in pursuit of profit, the giant is motivated to flee rather than fight you. And if we had several days, we could go through industry by industry of how this has happened before.
- The Innovator's Dilemma" is a concept popularized by Clayton Christensen in his book of the same name. It describes the situation where successful, established companies can fail or struggle when faced with disruptive innovations. These innovations are often cheaper, simpler, and initially serve smaller, niche markets compared to the products or services offered by the established companies. The dilemma arises because these established companies have invested heavily in their current products or services, and their business models are optimized for serving existing customers and markets. However, when disruptive innovations emerge, they typically disrupt the status quo, creating new markets or reshaping existing ones. Initially, these disruptive innovations may seem inferior or unattractive to the established companies because they don't meet the performance standards or profit margins demanded by their mainstream customers. As a result, the established companies may overlook or dismiss these innovations, allowing smaller, more agile competitors to gain a foothold in the market. Over time, these disruptive innovations improve and eventually surpass the capabilities of the established products or services, leading to the decline or failure of the once-dominant companies. The dilemma for established companies lies in balancing their investments in sustaining innovations that maintain their current market position with investments in potentially disruptive innovations that may cannibalize their existing business. Many companies find it challenging to navigate this balance effectively, leading to missed opportunities or even downfall in some cases.