COMM5010
Disruptive Innovation and Design
Thinking
Week 4
Greta Sharples g.sharples@unsw.edu.au
Assignment 1 General Feedback
What you did well
• Focused use of drivers and megatrends
• Interesting and innovative understanding of what is changing
• Some good research
Assignment 1 General Feedback
What could you improve
• Clearly following ALL instructions
• As a capstone course format, referencing and ability to
express ideas are important
• Clear links between sections
• Megatrend, organisation, strategy, management issues
Disruptive Innovations =
A good (e.g. product or service) that provides a new
configuration of features that will eventually take business from
an existing product.
Terms – Let’s be Clear
If an organisation creates a disruptive innovation, that often
means they are drawing on some external megatrends to link
to their “next big thing”.
If an organisation is disrupted, it usually means that a
competitor has taken advantage of a megatrend in a manner
that makes a “next big thing”
Need to under Explorative or Exploitative
Exploration:
Seek out new opportunities.
Exploitation:
Focus on honing what
you already do well.
What is the level of investment and how much
R&D is the business interested in?
How will you measure success?
Sales
Profits?
Market share?
Past performance may not predict future success in disruptive
environments
A Mystery
Why do some firms disrupt?
While
Others get disrupted?
A tales of 3 businesses
Blockbuster WAS... An International Company
Offered home movie & video game rental, accessible mainly
through physical stores.
At its peak in 2004, Blockbuster consisted of nearly 60,000
employees and over 8,000 stores.
Revenue = $6 BILLION in 2004
Blockbuster filed for bankruptcy in 2010
Why didn’t they?
Blockbuster could have bought
Netflix for $50 million
(which was ~1% of their
value at the time).
4 Explanations for the Mystery
Awareness
Risk aversion
Short-term focus
Inertia
Awareness
Many firms are not aware of the business opportunities
created by changing technology until it is too late. Many firms
are so focused on efficiency that they don’t realise that
another way is possible.
Remember: Focus on efficiency has advantages. Horses have
blinders for a reason… so they don’t get distracted
4 explanations for the mystery
Awareness
Risk aversion
Short-term focus
Inertia
Imagine this scenario
A friend offers to flip a coin and give you $110 if it lands on
heads. If it lands on tails, you give her $100.
Would you take that bet?
The average person is so risk averse that they will not take this
bet unless they can win ~$160.
Potential disruptive innovations are
riskier and more uncertain than
incremental improvements
(i.e. sustaining innovations)
3 Drivers of risk aversion:
1. Psychological biases:
All else equal, most people want to avoid risk. Psychologists
call this “risk aversion”.
Embodied by sayings like “Better to be safe than sorry”; “If you
are going a long way, go slowly.”; “Measure twice, cut once.”
3 Drivers of risk aversion:
2. Business incentives to be risk averse:
A commonly observed dynamic is that businesses often punish bad
action much more than they punish bad INaction.
i.e. If you take an unusual position and it fails, you may get
punished. If you make the same mistake as everyone else, no one
will be punished.
This principle is embodied by sayings like “There’s safety in
numbers”.
Example: Risk Aversion
From a sales brochure IBM used to sell their computers to IT
purchasing agents in the 1980’s:
“It’s better to be conventionally wrong than
unconventionally right.”
- John Maynard Keynes
If you are interested in learning more about this dynamic after
class, check out this interview with economist Michelle
Baddeley on "herding behaviour" here:
http://socialsciencebites.libsyn.com/michelle-baddeley-on-the-herd
3 Drivers of risk aversion
3. Risk averse budgeting process:
A common budgeting practice is to fund initiatives with the
highest projected Return on Investment (ROI).
Because potential disruptive innovations are so uncertain, it is
often impossible to create a valid ROI estimate.
So, such projects often go unfunded.
3 Drivers of risk aversion
3. Risk averse budgeting process:
And amount invested in R&D is often a fixed percentage of
Revenue or Profits.
4 explanations for the mystery
Awareness
Risk aversion
Short-term focus
Inertia
Investing in potential disruptive
innovations often means spending
resources (money & time) now on
something that may pay off in the
future
4 Key drivers of short-term focus:
1. “Hyperbolic discounting” = the psychological tendency to
favour a "smaller-sooner" reward over a "larger-later"
reward.
2. Debt providers - are sometimes impatient for profits. Even if
a manager wants to think long-term, she doesn’t always
have the freedom to do it due to demands for profits today
4 Key drivers of short-term focus:
Business processes that create a short-term focus:
3. Career dynamics: Managers want to be able to demonstrate
their success in order to get promoted (and avoid getting fired).
So, they prefer championing “quick wins” over initiatives that
won’t pay off for many years.
4. Budgeting systems - departmental budget are often based
on last year’s performance. These backwards looking budgets
don’t allow managers to invest in something that won’t pay off
until years later. In the simulation, 3% of last year’s sales on R&D
budget
4 explanations for the mystery
Awareness
Risk aversion
Short-term focus
Inertia
Inertia: A tendency to remain unchanged
Change requires revising lots of interdependent elements of the
organisation (i.e. changing / aligning Strategy, Staff, Skills,
Systems, Shared Values, Style, & Structure)… which is difficult
& takes time!
Many people don’t like change. e.g. Some resist change
because they may lose power/position
Example: Think of the employees at Blockbuster. If Blockbuster
switched to the Netflix model, most of their employees (e.g.
store managers) would lose their jobs. There was a strong
motive for most existing employees to not like the change
In sum:
Many reasons
companies don't
pursue disruptive
innovations.
A final mystery
How can firms master disruptive innovation? Some key steps:
Increase awareness of disruptive opportunities (e.g. external
research, engaging in trend analysis, bringing in outside
consultants).
Embrace smart risks by allocating greater Research &
Development funding to potentially disruptive innovations.
Longer-term focus by having both a short term and a long-term
strategic plans (e.g. 2-year plan and 10-year plan).
Overcome inertia using organisational change techniques
How are your Groups?
Next Week