Week 3 – Disruptive Innovation
INFS7040
Digital Transformation
LEARNING OBJECTIVES
• Be able to identify changes in the
environment that can cause disruption to a
business model
• Be able to determine factors that differentiate
sustaining from disruptive innovation
• Determine appropriate strategies based on an
industry’s unpredictability and malleability
2
RECAP – DIGITAL TRANSFORMATION
… the integration of digital technology into all areas of a business resulting in
fundamental changes to how businesses operate and how they deliver value
to customers.
Is the pace of Innovation speeding up?
3
Source: McGrath (2013). The Pace of Technology Adoption is Speeding Up. HBR, November 25, 2013.
ORGANISATIONAL LIFECYCLE
4
Startup
Grow
th
M
aturity
Decline
Time
Pe
rf
or
m
an
ce
Source: Handy (1995). The Empty Raincoat: Making Sense of the Future. Random House Business, 1995.
TRANSFORMING BUSINESSES 1. How can an
organisation
generate, evaluate,
and implement a
profitable new
business model?
5
2. How can an organisation react to changes in its external environment at
point A rather than experiencing performance problems at point B?
A
B
Time
Pe
rf
or
m
an
ce New business model
New business model
Survival?
TRANSFORMING BUSINESSES
6
1865 1967 1982
1998 Nokia had sales revenue
of $20bn, $2.6bn profit.
April 2014, sale of
Nokia’s mobile
phone division to
Microsoft
20142007
Q4 2007 Nokia has a
global mobile phone
market share of 51%
2020
USA floats idea of
buying Ericsson or
Nokia to compete
against Huawei for
5G
1998
DISRUPTIVE INNOVATION
• In almost any industry the most dramatic
stories of growth and success were launched
from a platform of disruptive innovation
Examples:
– Traditional Encyclopedias – Wikipedia
– Video Rental – Streaming Services
– Photographic Film – Digital Photography
7
DISRUPTIVE INNOVATION
1. Pace of technological progress outstrips the ability of customers
to make effective use of the improved versions of a product
2. Companies earn attractive profit margins when going upmarket
3. Innovations by incumbent companies help them earn higher
margins from their best customers
4. Industry incumbents often are not first to market with a
sustaining innovation, but they almost always end up on top
5. Disruptive innovations appeal to customers who are unattractive
to the incumbents
6. Industry leaders are not motivated to pursue disruptive
innovation
8
DISRUPTIVE INNOVATION
What is Disruptive Innovation
• Lower performance (inferior product/service at cheaper
price) according to what mainstream customers want
• Other performance attributes (e.g., smaller, simpler, new
technology) that address current non-customers that
makes it prosper in a new value network
Over time
• As it improves along the traditional performance
parameters it eventually displaces the former technology
9
SUSTAINING VS DISRUPTIVE INNOVATION
• Sustaining Innovations
are those that current
customers demand
• Disruptive Innovations
are those that do not
satisfy current
customers
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Source: Clayton M. Christensen and Michael E. Raynor, The innovator’s solution: Creating and Sustaining Successful Growth, HBR, 2013
TWO TYPES OF DISRUPTIVE INNOVATION
• Low-end disruption
– Aimed at mainstream
customers for whom price
is more important than
quality
• New-market disruption
– Aimed at non-consumption
(i.e., consumers who
would not have used
product/service already on
the market)
11
TESTS FOR DISRUPTIVE INNOVATION
• Low-end Disruption
– Test #1: Are prevailing products more than good
enough?
– Test #2: Can you create a different business
model?
12
TESTS FOR DISRUPTIVE INNOVATION
• New market Disruption
– Test #1: Does the innovation target customers who in
the past haven’t been able to “do it themselves” for
lack of money or skills?
– Test #2: Is the innovation aimed at customers who will
welcome a simple product?
– Test #3: Will the innovation help customers do more
easily and effectively what they are already trying to
do?
13
LET’S TEST FOR DISRUPTIVE INNOVATION
• Wikipedia [founded 2001]
• Uber [founded 2009] and UberX [introduced 2012]
• Low-end Disruption
– Test #1: Are prevailing products more than good enough?
– Test #2: Can you create a different business model?
• New market Disruption
– Test #1: Does the innovation target customers who in the past haven’t been
able to “do it themselves” for lack of money or skills?
– Test #2: Is the innovation aimed at customers who will welcome a simple
product?
– Test #3: Will the innovation help customers do more easily and effectively
what they are already trying to do?
Question time
• Is Airbnb a disruptive
innovation?
15
IDENTIFYING INDUSTRY DISRUPTION
Scanning Trends & Environment
• Porter’s Five Forces
• PEST(LE)
• Unpredictability/Malleability Matrix
• Risk analysis and scenario matrix
16
PORTER’S FIVE FORCES
• Porter's Five Forces Model helps
managers and analysts
understand the competitive
landscape that a company faces
and to understand how a
company is positioned within it.
• Even though it was created more
than 50 years ago, the Five Forces
Model continues to be a useful
tool for understanding how a
company is positioned
competitively.
17
PORTER’S FIVE FORCES
• Threat of new entrants:
– This factor evaluates the ease or difficulty of new companies entering the market, which can affect the level of
competition and profitability.
• Bargaining power of suppliers:
– This factor evaluates the level of control that suppliers have over the cost and quality of inputs, which can affect the
profitability and competitiveness of companies in the industry.
• Bargaining power of buyers:
– This factor evaluates the level of control that buyers have over the price and quality of products or services, which can
affect the profitability and competitiveness of companies in the industry.
• Threat of substitute products or services:
– This factor evaluates the extent to which alternative products or services can meet the same needs as those offered by
the industry, which can affect the level of competition and profitability.
• Rivalry among existing competitors:
– This factor evaluates the intensity of competition among existing companies in the industry, which can affect the
profitability and market share of each company.
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PEST(LE)
• Political
– Legislation, Consumer Protection, Tax, Tariffs etc.
• Economic
– Growth, Interest Rate, Inflation, Exchange Rate etc.
• Social
– Culture, Demographics, Labour & Social mobility, Health & Welfare, Education, Lifestyle etc.
• Technological
– R&D activity, automation, Energy use and costs, Internet and ICT availability etc.
• Legal
– Employment/Consumer/Antitrust Law, Health & Safety, Regulations, Trade Barriers etc.
• Environment
– Weather, climate, etc.
19
PEST(LE) – e.g., AUTOMOTIVE INDUSTRY
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Political
Economic
Social
Technological
Legal
Environment
PEST(LE) – E.G. AUTOMOTIVE INDUSTRY
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• Incentives for low emission vehicles in EU/China
• Subsidies for car manufacturers are still high in several countries
(e.g., FRA, GER, CHN)
Political
• Recovery after the GFC abruptly ended with massive sales lump
in 2020
• Taxes on luxury vehicles increasing (e.g., Singapore)
Economic
• Owning a car less important to millennials
• SUVs continue to increase in popularity
Social
• EVs are getting better/cheaper (e.g., Tesla Model 3, VW ID.3)
• Connected cars, integrating of sensors and environment
• Self driving technology getting better
Technological
• Emission controls are tightening in EU and China (e.g.,
Volkswagen scandal)
Legal
• Banning of vehicles in cities (e.g., Paris, London, Beijing)Environment
Question time
• Make a PESTLE analysis
for ANU
22
In Class Exercise - PEST(LE) – ANU
23
Political
Economic
Social
Technological
Legal
Environment
• In this exercise you will work in groups to
complete a PESTLE analysis for ANU.
• You may need to use the Internet to gather
information about higher education in
Australia to help guide your analysis.
• Create a table and be ready to share with the
class.
UNPREDICTABILITY/MALLEABILITY MATRIX
24
1. (Un)Predictability
• Determines accuracy of forecasts
• Action: Experiment versus plan
• Action: Implement the required speed
and agility in processes
2. Malleability
• Determines how much the actions of
a firm can shape the industry
• Action: Act upon the Company’s
desire, need, and ability to shape the
industry
U
np
re
di
ct
ab
ili
ty
Malleability
Source: Reeves et al (2012). Your strategy needs a strategy. Harvard Business Review, September, 2012.
Hi
gh
Lo
w
HighLow
UNPREDICTABILITY/MALLEABILITY MATRIX
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Adaptive
• Be fast
• Experiment
• Short Cycle
Times
Shape
• Orchestrate
• Engage
• Grow the
ecosystem
Visionary
• Be first
• Persist
• Speed
Classic
• Be Big/Grow
• Plan
• Take a large
share of profit
pool
Malleability
Unpredictability
UNPREDICTABILITY/MALLEABILITY MATRIX
26
IMPLICATION FOR SUSTAINING
CONSTRUCTIVE DISRUPTION
• Transformative changes that are often
required in their business strategies require
disruptive thinking
– Transforming their customer-facing strategies;
– Monitoring environmental, social and governance
changes
– Revisiting strategies timely to keep business
ahead of the curve.
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DEALING WITH UNCERTAINTIES
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MitigationImpactLikelihoodRisk
DEALING WITH UNCERTAINTIES - EXAMPLE
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MitigationImpactLikelihoodRisk
• Invest in low/zero emission
technology
HighHighEmission regulations
tighten
• ↑ Revenue from auxiliary services
• Enter new markets
• Develop car sharing scheme
HighMediumCar ownership %
reduces
• Renting instead of selling carsMediumMediumTaxes on vehicles
increase
• Cost control
• De-Diversification of range
MediumMediumProlonged Economic
downturn
Question time
• Make a risks register
(short-version) for ANU
30
In Class Exercise - DEALING WITH UNCERTAINTIES
31
MitigationImpactLikelihoodRisk
• In this exercise you will identify potential
risks and develop appropriate mitigation
strategies for ANU.
• Try and identify at least 3 risks
• Create a table and be ready to share
with the class.
IMPLICATION FOR SUSTAINING
CONSTRUCTIVE DISRUPTION
• Continuous transformation effectively
accumulates risks.
– Top management should have a clear visibility of
the relevant internal and external risks that can
affect the family business, the strategy or the
business transformation model that is adopted.
32
SCENARIO PLANNING – EXAMPLE
33
Cars are only
bought B2B
Car ownership
increases
Zero emissions
cars mandated
Emissions are
not regulated
Long live Stuttgart
Focus on luxury,
Petrol-engine cars
Engineering Challenge
Develop zero emission
mass transport vehicles
Green cities
Zero emission, self driving,
mass market cars
Long live Detroit
Muscle Cars
Cost efficiencies
Globalisation
SCENARIO PLANNING – EXAMPLE-3D
• Theoretically speaking,
you can add as many as
dimensions to make
complex planning.
34
IMPLICATION FOR SUSTAINING
CONSTRUCTIVE DISRUPTION
• Transformative change is energised by foresight.
– It is driven by the family’s purpose and values and their
ability to continuously recognize new opportunities – or
anticipate potential “scenarios” “risks”, and “threats”.
– It’s proactive, not reactive, and it has a long-term planning
requirement.
35
IMPLICATION FOR SUSTAINING
CONSTRUCTIVE DISRUPTION
• With continuous transformation, there is the
potential for “Change fatigue” among management
and employees.
– Waning energy does exist.
– Stability is also a wonder indicator for (some) institutional investors
– In general, managers need to have good policies and procedures in
place to help ensure that changes are integrated successfully and
minimize disruption when turnover does occur.
36
QUESTIONS?
Summary of learning outcomes
• Disrupting or sustaining Innovation?
• Four useful models/tools to assess
environmental influences:
– Porter’s Five Forces
– PEST(LE)
– (Un)Predictability/Malleability matrix
– Risk analysis and scenario matrix
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