Managing Innovation

Career Focus

Managing Innovation is for students aspiring to become general managers or to consult for general managers, in situations where innovation in new products, services and technologies will be important.

Educational Objectives

Many managers have viewed the challenge of innovation from a functional perspective -- as an engineering problem, a marketing problem, or a problem with reward systems or organizational bureaucracy. The viewpoint of this course is that innovation is a general management problem, whose solution requires skill and understanding in the problems of finance, organization, finding markets, and managing technology.

The course is divided into two parts. The first focuses on how to manage innovation to make good businesses better. It draws upon Wheelwright and Clark's work in managing the linkage of strategy with product and process development. The second part focuses on how to build new, entrepreneurial businesses within established companies, and is built around Professor Christensen's ongoing research. In both parts of the course, the cases are sequenced to help students first build a strategic perspective on the problem, and then explore how to implement solutions to the challenges of innovation.

Content and Organization

About 70% of the course sessions will use case studies. The remainder of the class discussions will be based upon academic research articles and guest speakers. The issues addressed include managing the role of customers in innovation; how to find and create new markets for new products and services; managing the allocation of financial and human resources across development projects; understanding what a firm's capacity to innovate is; and, in project management, the difference between plans for learning and plans for implementation.

The ideas in the course are refreshingly counter-intuitive. They include: (1) Good management is the root cause of many of the most severe problems in innovation; (2) A core cause of innovative stagnation is listening too closely to customers; (3) Success breeds failure, because small markets never solve the growth problems of successful companies; and (4) Vertical integration precipitates vertical disintegration. These are just a few of the sideways looks at the problems of innovation management that we'll take in the course. It promises to be fun, intellectually stimulating and managerially useful.

Cases and Readings

A Typology of Innovations: Sustaining and Disruptive
1 Wed Sept 11 Continuous Casting Investments at USX Corporation 9-391-121
2 Fri Sept 13 Christensen, Clayton M. "The Rigid Disk Drive Industry: A History of Commercial and Technological Turbulence." Business History Review. 67:4 (1993), 531-588. Christensen, Clayton M. and Rosenbloom, Richard S. "Explaining the Attacker's Advantage: Technological Paradigms, Organizational Dynamics, and the Value Network." Research Policy. 24 (1995), 233-257. "Core Capabilities and Core Rigidities: A Paradox in Managing New Product Development." (Hand out after class)

Managing Sustaining Innovations
3 Wed Sept 18 "Managers' Misconceptions About Technology." HBR #83617 Christensen, Clayton M. "Exploring the Limits of the Techology S-Curve (Parts 1&2)." Production and Operations Management. 1:4 (1992), 334-366. "The Dynamics of Innovation in Industry." Ch.1 in Utterback, Mastering the Dynamics of Innovation. Boston: Harvard Business School Press, 1994. (Hand out after class)
4 Th Sept 19 Technology and Product Planning at Materials Technology Corporation N9-696-082 "Creating Project Plans to Focus Product Development." HBR #92210
5 Fri Sept 20 Sony Corporation: Workstation Division 690-031 Article on dominant designs by Utterback (Hand out After Class)
6 Wed Sept 25 Ampex Corporation: Product Matrix Engineering 680-142
7 Th Sept 26 Guest Lecture: Ed Zschau - Capital Formation and Investment Policy Issues
8 Fri Sept 27 Medtronic's Brady Pacing Business In Process

Managing Impetus and Focus in Innovation
9 Wed Oct 2 Becton-Dickinson: Worldwide Blood Collection Team 9-394-072 Bower, Joseph L. Managing the Resource Allocation Process. Homewood, Illinois: Richard D. Irwin, 1970. (only Ch. 2)
10 Th Oct 3 Healthcare Industries: Hospital Equipment Division 9-695-011 Clark, Kim B. and Steven C. Wheelwright. "Organizing and Leading 'Heavyweight' Development Teams." California Management Review. 34:3 Spring of 1992, 9-28.
11 Wed Oct 9 Summary Lecture

Building New Businesses/Managing Disruptive Technology
12 Th Oct 10 Dupont Kevlar Armid Industrial Fiber 9-391-146 "Learning from the Market." Ch. 7 from Leonard Barton, Wellsprings of Knowledge. McGrath, Rita Gunther and Ian C. MacMillan. "Discovery-Driven Planning." HBR #95406
13 Fri Oct 11 Materials Technology Corporation 9-694-075 Hamel, Gary and C. K. Prahalad. "Corporate Imagination and Expeditionary and Marketing." HBR #91409
14 Th Oct 17 No Class- Prepare for electric vehicle discussion. Readings to be distributed.
15 Fri Oct 18 In-class case development: How would I manage an electric vehicle project?
16 Wed Oct 23 Hewlett Packard: The Flight of the Kitty-Hawk N9-696-079 "Strategy-Making as Iterated Processes of Resource Allocation." Noda & Bower (Hand out after class)
17 Th Oct 24 Guest Lecture: Ed Zschau - Science and Technology Policy Issues
18 Fri Oct 25 Guest Lecture: Ed Zschau - Federal Budget's Impact on Innovation
19 Wed Oct 30 Innovations in Diabetes Care at Eli Lilly & Co. N9-696-077

Integration and Innovation
20 Th Oct 31 Christensen, Clayton M. "Industry Maturity and the Vanishing Rationale for Industrial 94-059 Research and Development." (Working Paper) Christensen, Clayton M. "The Drivers of Vertical Disintegration." (Working Paper) 96-008 "From the Ladder of Science to the Product Development Cycle." HBR #95406
21 Wed Nov 6 Studio Realty In Process
22 Th Nov 7 GE Plastics: Selecting a Partner
23 Fri Nov 8 Molding the Impossible: The NYPRO/Vistakon Disposable Contact Lens Project 1-694-062
24 Wed Nov 13 Building Vallourec's Powdered Metals Business In Process

The Capability to Innovate
25 Wed Nov 20 Motorola, Inc.: Bandit Pager Project (Abridged) 692-069
26 Th Nov 21 Managing Innovation at NYPRO, Inc. N9-695-078 Senge, Peter M. "The Leader's New Work: Building Learning Organizations." Sloan Management Review. 32:1 (Fall of1990), 7-23.
27 Wed Dec 4 Chaparral Steel: Rapid Product and Process Development 692-018
28 Th Dec 5 Open Day
29 Fri Dec 6 Summary Lecture Day 30 Dec Exam Period

Course Materials

CASE LIST:

Continuous Casting Investments at USX Corporation 9-391-121
Technology and Product Planning at Materials Technology N9-696-082
Corporation Sony Corporation: Workstation Division 690-031
Ampex Corporation: Product Matrix Engineering 680-142
Medtronic's Brady Pacing Business In Process Becton-Dickinson: Worldwide Blood Collection Team 9-394-072
Healthcare Industries: Hospital Equipment Divisoin *
Dupont Kevlar Armid Industrial Fiber *
Materials Technology Corporation 9-694-075
Hewlett Packard: Flight of the Kitty-Hawk N9-694-079
Innovations in Diabetes Care at Eli Lilly & Co. *
Studio Realty 9-697-036
GE Plastics: Selecting a Partner
Design Manag. Inst.
Molding the Impossible: The NYPRO/Vistakon Disposable Contact Lens Project 1-694-062
Building Vallourec's Powdered Metals Business 9-697-001
Motorola, Inc.: Bandit Pager Project (Abridged) 692-069
Managing Innovation at NYPRO, Inc. *
Chaparral Steel: Rapid Product and Process Development 692-018

READINGS:

Christensen, Clayton M. "The Rigid Disk Drive Industry: A History of Commercial and Technological Turbulence." Business History Review. 67.4 (1993): 531-88.

Christensen, Clayton M. and Richard S. Rosnebloom. "Explaining the Attacker's Advantage: Technological Paradigms, Organizational Dynamics, and the Value Network." Research Policy. 24 (1995): 233-57.

"Managers' Misconceptions About Technology." HBR #83617

Christensen, Clayton M. "Exploring the Limits of he Technology S-Curve (Parts 1&2)." Production and Operations Management. 1.4 (1992): 334-66.

"Creating Project Plans to Focus Product Development." HBR #92210

Bower, Joseph L. Managing the Resource Allocation Process. Homewood, Illinois: Richard D. Irwin, 1970. (only Ch. 2)

Clark, Kim B. and Steven C. Wheelwright. "Organizing and Leading 'Heavyweight'Development Teams." California Management Review. 34.3 (1992): 9-28.

Barton, Leonard. "Learning from the Market." Wellsprings of Knowledge. (only Ch.2)

McGrath, Rita Gunther and Ian C. MacMillan. "Discovery-Driven Planning." Harvard Business Review. Reprint #95406.

Hamel, Gary and C. K. Prahalad. "Corporate Imagination and Expeditionary Marketing." Harvard Business Review. July-August, (1991): 81-92. Reprint #91409

Christensen, Clayton M. "Industry Maturity and the Vanishing Rationale for Industrial Research and Development." Working Paper. #94-059.

Christensen, Clayton M. "The Drivers of Vertical Disintegration." Working Paper. #96-008.

"From the Ladder of Science to the Product Development Cycle." Harvard Business Review. Reprint #95406.

Senge, Peter M. "The Leader's New Work: Building Learning Organzations." Sloan Management Review. 32.1 (1990): 7-23.

Good management is the root cause of many of the most severe problems in innovation; listening too closely to customers leads even the best to innovative stagnation; success breeds failure, because small markets never solve the growth problems of successful companies. Is this academic revolution? No, it is Managing Innovation , a second year elective MBA course which focuses on the general manager as the key player who must guide innovation with skill and understanding. In this class we discuss many important issues such as managing the role of the customers in innovation; how to find and create new markets for new products and services; how to manage resource allocation across development projects; and how to understand and cultivate a firms capacity and capability to innovate.

The course is divided into seven modules. It starts by introducing the basic principles of sustaining and disruptive technologies as a foundation for future discussions. We then study the management of sustaining technologies examining how to create and manage a project portfolio, and the use of periodic prototyping as a management tool. Two cases from the health care industry examine the factors that influence the resource allocation process, which can cause divergence between strategy and patterns in product development. The fourth module then focuses on managing the development of new markets and new technologies, culminating in a project on electric vehicles that requires students to summarize and apply their learnings to that point. The fifth module examines technology strategy and the management of research & development. The sixth segment builds a framework to guide decisions about which pieces of an innovation puzzle need to be done internally, and which can be outsourced from partners or suppliers. The course finishes with a brief look at developing the capability to innovate.

Module 1: Introduction

Session One- "Disruptive Technologies: Catching the Wave"

Bower, Joseph and Clayton Christensen, Harvard Business Review, January/February 1995.

With so many students in shopping mode, it is very difficult to achieve a serious case discussion the first day of class. Hence, we begin with this article, with its focus on why successful companies find particular types of innovation to be difficult, to summarize what the course is about. It introduces them to the concepts of disruptive and sustaining technologies, while contrasting this typology of innovation with others such as radical vs. incremental; competence enhancing vs. competence destroying; and architectural vs. modular. I use the findings of my research to illustrate the value and limitations of each of these frameworks.

The article introduces several other important concepts for managing technology. It shows how impetus affects the resource allocation process in companies and how resource allocation is integral to the management of innovation. It also describes how the pace of technological progress can easily exceed the rate of performance improvement that customers in a market demand or can absorb. The trajectory map I introduce from my disk drive studies is a very useful framework to help students understand a wide variety of innovative situations that are encountered in the cases of the course.

Session Two- Continuous Casting Investments at USX Corporation

Clayton Christensen, Case#9-697-020, July 17, 1996.

This case provid es a great example of disruptive technology, demonstrating how the logic and impetus that flows from a company's financial model and customers, can cause it to ignore important technologies. It describes a situation in the late 1980's at US Steel where engineers were evaluating installation of a continuous caster at their last remaining mill near Pittsburgh. Continuous thin-slab casting had just become commercially viable and the engineers at USX made every effort to justify installing a thin-slab caster at the Monongehela River Valley mill. USX was unable to invest in the equipment because the quality of the steel's surface finish did not meet the needs of its main-stream customers who made cars, appliances, and cans. USX was forced to invest in a conventional continuous caster, with much greater capital and operating costs, to preserve its competitiveness and profitability with its established customer base.

This case is a classic example of why it is difficult for successful companies to invest in disruptive technologies. Mini-mills are disruptive technologies to the integrated steel makers. They now account for 40% of North American steel production including virtually all of the markets for bars, rods, and structural beams. Although the capital cost-per-ton and the operating costs of mini-mill production are very favorable compared to integrated steel production, the integrated mills have focused all of their investments in the last 15 years on upgrading their established capacity to produce high quality sheet steel. Although integrated mills are financially and technologically capable of investing in mini mill production capacity, none of them have done so because it is not financially logical.

Session Three-"Explaining the Attacker's Advantage: Technological Paradigms, Organizational Dynamics, and the Valure Network"

Christensen, Clayton, Research Policy, November 1993.

In this session we examine the impact that a company's value network has upon its ability to innovate.

Module 2: Management of Sustaining Innovation

Session Four-Implementing Strategy at Materials Technology Corporation

Clayton Christensen, Case #9-696-082, January 29, 1996.

Supp. Reading: Wheelwright, Steve C. and Kim B. Clark, "Creating Project Plans to Focus Product Development," Harvard Business Review, March/April 1992.

We study this disguised case about Ceramics Process Systems, with Wheelwright and Clark's famous HBR article, "Creating Project Plans to Focus Product Development," to teach the students the importance of linking a company's strategy with its portfolio of development projects. Materials Technology Corporation, a high performance materials company, wanted to become a leading manufacturer of products and a leading licensor of process technology. Developing and commercializing its technology was an expensive proposition, and the company used a variety of innovative funding mechanisms to raise its capital.

When students plot the twenty or so projects the company had on its plate on the Wheelwright/Clark matrix, they find that MTC had invested in three process technology platforms and had a host of derivative and breakthrough projects under way as well. Students can calculate the engineering resources required to carry each of the projects to completion by the scheduled date, revealing that the company had easily committed itself to deliver more than 300% of what it had the capacity to deliver. The most stunning insight of the case, however, is that MTC's pattern of product development investments has little relationship to its espoused strategy. The case gives the students an opportunity to discuss why something like this would happen. They discover that the factors which influence the resource allocation process are fundamentally different than the process by which strategy is developed, and see that linking strategy and resource allocation in product development, through a tool such as the Wheelwright/Clark matrix, can be a very valuable exercise in the management of innovation.

I conclude this case with a brief lecture on mirror images. The essential message is that one ought to be able to look at the strategy of a company and draw a portfolio of development projects that would lead the company to implement its strategy. Conversely, one ought to be able to look at the portfolio of development projects and infer from that the company strategy. The two need to be mirror images of each other. The fact that this is rarely the case is central to the problems of managing innovation.

Session Five-Ampex Corporation: Product Matrix Engineering

Margaret B. W. Graham, Case #680-142, 1980.

How does a company design for manufacturing, and transfer products designs from engineering to manufacturing? This case describes the struggle Ampex had in shifting production of a new video recorder from its development labs in Redwood City, California, to its high-volume manufacturing facility in Colorado Springs, in the face of emerging competition from Japanese rivals. Ampex exhibits the same behavior as other established leaders examined in the first class, which were faced with disruptive technology.

Ampex had set up a special organization to act as interface between R&D and manufacturing. Much of the tension in the case surrounds the cry from manufacturing engineers for better documentation from the product development group. It gives me a great opportunity to ask students, few of whom have worked in a technology transfer environment, what documentation is, what kinds of information needs to be documented, why it is important, and why it seems so difficult to do. The answer is that at the outset, development engineers often have no idea what needs to be documented. There are a myriad of factors in manufacturing which affect whether, and how well, a product can be manufactured which are simply not apparent in a development organization. Through this case I try to help students develop a more sophisticated view of what designing for manufacturing really means, and see that it goes far beyond simply designing parts that can be easily assembled. They are able to use the insights from this case in a subsequent module of the course that deals with the outsourcing of components and services required in innovation.

Session Six-Sony Corporation: Workstation Division

Geoffrey K. Gill and Steve Wheelwright, Case #9-690-031, Rev. March 19, 1992.

This case describes the efforts of a team of engineers at Sony to develop the next generation engineering work station. At one level of the case, the engineers are working with very much the same problem that the Ampex engineers were facing: how to transfer a product from design to manufacturing. Sony approached the challenge differently however, relying upon a small cadre of highly cross-functionally trained engineers to handle the interface between functions.

The main purpose of this session is to teach students what a prototype means, and to introduce the concept of interactions. Typically there is a good electrical engineer in the class who can describe for the students how the functioning of many integrated circuits can be simulated quite early in the design phase by computer programs. I ask then why does Sony make physical prototypes of its new computer, rather than simply testing the design through a computer simulation. The answer lies in the lack of knowledge of how the components of the physical system interact with each other to make an accurate simulation. We then can look at other interactions in this project, such as the interaction of the circuit design with the components supplied by Oki, and the interaction of the product with Sony's manufacturing plant several hours away. By viewing prototyping in this manner students can see why Sony feels the necessity to prototype some of these interactions while not being nearly as concerned about others. It relates very much to Sony's knowledge about how pieces of the puzzle interact with each other in the system.

Session Seven-Motorola Inc., Bandit Pager Project Abridged

Geoffrey K. Gill and Steve C. Wheelwright, Case #9-692-069, Rev. March 19, 1992.

Supp. Reading: HK Bowen, KB Clark, CA Holloway, and SC Wheelwright, "Make Projects the School for Leaders," Harvard Business Review, September/October 1994.

This case ends the module by giving students the first view of an entire development project. I distribute with it the article on making projects the school for leaders, published in the HBR by our colleagues involved in the Visions project. The case helps to frame the discussion about how projects help educate those involved. During discussion I try to build a pyramid of blocks on the board, similar to the one below, to help students understand the value of step-wise, rather than revolutionary, improvement, and see how projects, as schools for leaders, can be used to create and institutionalize new capabilities and culture.

Module 3: Managing the Resource Allocation Process

Session Eight-Becton-Dickinson: Worldwide Blood Collection Team

Kathleen Scharf and Christopher A. Bartlett, Case #9-394-072, Rev. September 23, 1994.

This case describes a twelve year effort by Becton-Dickinson to develop a global product in its VACUTAINER line of blood collection devices. It is a fascinating study of how difficult it is to match changes in strategy with patterns in new product development. It gives students a great opportunity to apply concepts such as heavy-weight teams and the Wheelwright/Clark matrix to a real problem in global product development. BD's business was heavily centered in North America when, in the early 1980s, it made a strategic decision to shift the focus of its efforts to Europe. Within two years it had adopted a new organizational structure to accommodate this shift in strategy, but the products that emerged from BD's R&D organization continued to focus almost exclusively on the North American market. The organization seemed incapable of allocating resources to the product development needs of its small European organizations. The case describes BD's efforts to address this problem from three points of leverage: 1. training people across borders, 2. creating organization structures, and 3. allocating resources.

The root cause of their problems was essentially that BD allocated development resources on the basis of projected returns on investment. With the US business so much larger than the European business, projected returns for products targeted at North America always surpassed those projected for products targeted at Europe. As a result, although BD invested heavily in organization change and management training, they were unable to implement their strategy for over a decade. Ultimately BD did develop the products that Europeans wanted, but that was only when the American market shifted and demanded the same products that the Europeans had been asking for. BD then went through the same cycle again with Japan and it was not until the North American and European markets required the same products that the Japanese were allocated resources. The case ends with the manager feeling that BD had solved its problems of managing global product development, with a unified global product line as evidence, and the company looks to Latin America with great confidence.

Session Nine-Healthcare Equipment Corporation (renamed)

Steve Wheelwright and Clayton Christensen, Case #9-695-011, February 13, 1995.

This is a version of Steve Wheelwright's BSA Industries written about Hill Rom Industries. While Wheelwright's case focuses on the engineering management aspect of product development at Hill Rom, this case focuses on the way Hill Rom develops ideas for new products and matches product development projects with its strategy. The case describes Hill Rom's unique process for understanding its customers, and managing the development, manufacturing, and marketing of new products. Hill Rom had launched a succession of hospital room beds, which accelerated the rate of market growth and propelled it to control 80% of the hospital bed market. At the time of the case it appeared that the trends in hospital utilization portended minimal future market growth.

With their success in introducing new products whose technical and economic structure were similar to hospital beds, Hill Rom decided to develop a simple overbed table. The overbed table offered Hill Rom the opportunity to do again what it had done in hospital beds; to take an undifferentiated, low value-added product, and generation after generation add additional features to create a high margin, high value-added piece of health care equipment which hospitals needed to upgrade frequently. At one level this table fit very well with the market Hill Rom knew, as well as with its strategy, but despite its technical simplicity and apparent fit, Hill Rom stumbled all over itself taking ten years to develop this simple product.

Students studying this case are struck by Hill Rom's incapability of making over-bed tables when it was so good at hospital beds. The answer is not in the technical and strategic aspects of the project, but is in the company's financial structure. The bed did not attract energy and impetus, because it did not fit the financial needs. As a big company it needed products targeted at large markets with high margins. The over-bed table project offered neither one, and it consequently languished. This gives the students an opportunity to discuss what in fact are the core competencies of Hill Rom which could be leveraged in pursuit of future growth, and how they ought to organize their innovative efforts to achieve that growth, allocating resources in a manner that would be consistent with the company strategy.

Module 4: Managing the Development of New Markets for New Technologies

Session Ten-Du Pont Kevlar® Aramid Industrial Fiber

Richard Rosenbloom and David Hounshell, Case #9-391-146, Rev. March 12, 1992.

Supp. Reading: McGrath, Rita Gunther and Ian C. MacMillan, "Discovery Driven Planning," Harvard Business Review, July/August 1995.

This session introduces the new module with a case about how Du Pont developed its miracle Kevlar fiber and then floundered in its attempts to find the market for it. Based on very sound customer feedback it initially had targeted the tire cord market and invested hundreds of millions of dollars in production capacity for the market. But the market never materialized, for reasons that Du Pont had been unable to foresee. Gradually, however, other applications for Kevlar emerge d, and it ultimately became a profitable product for the company. In the class discussion I shift away from Kevlar to discuss in general the concept of discovery driven planning, introduced in the supplementary reading, as it relates to test marketing and prototyping. It helps students see the great value of this technique in defining what the key uncertainties really are in the project. We then discuss how a project can be structured so these uncertainties are probed as early as possible in the project.

The supplementary reading gives students a good technique for evaluating proposals to invest and enter new technologies and new markets. It asks them to create a reverse income statement, starting with the profits that the organization will require in order for the project to be perceived a success. Working backwards students uncover underlying assumptions that need to be validated in order for the proposal to be successful. When this technique is applied to the proposal to make Kevlar tire cord, it becomes very clear that the company was making some unrealistic assumptions about the economics of production and the economics of alternative technologies.

Session Eleven-Materials Technology Corporation

Clayton Christensen, Case #9-694-075, March 3, 1994.

Supp. Reading: Leonard-Barton, Dorothy, Learning from the Market, Chapter 7.

This session ties the learnings from the previous three sessions about what types of market research can be useful and what types can be misleading in different situations, to the typologies of market research that Leonard-Barton describes in chapter 7 of her book. This second case on Materials Technology Corporation (MTC) describes the company's efforts to find markets for its advancing materials technology. The company initially approached the market with conventional market research techniques, identifying what it thought was an attractive existing market where its technology gave it an advantage. As it pursued the market however, a bewildering range of potentially more attractive markets began to emerge as customers asked the company to use its innovative process technology to create new components or products that would solve performance bottlenecks in their products or processes. The new opportunities, and the methods the company used to uncover and test their potential, make for a rich discussion.

Session Twelve-Hewlett-Packard: The Flight of the Kittyhawk

Greg Rogers and Clayton Christensen, Case #9-697-060, January 2, 1997.

The HP Kittyhawk case allows students not only to test how useful Professor Leonard-Barton's typologies of market research would be for a company like HP, but also to explore in detail why it is so difficult for established firms to succeed at disruptive technologies. The Kittyhawk team developed a 1.3" disk drive: a disruptive technology in every sense. From a project management point of view HP did everything right. They had set up an autonomous project team, and gave the project heavy senior management support. The team focused on the emerging personal digital assistant (PDA) market, which in the early 1990's was believed to have explosive growth potential. As a consequence the team created a product that had incredible shock resistance and low power consumption, and weighed less than an ounce. In terms of field failure it was the most reliable product ever introduced in the disk drive industry. HP created a remarkable new technology, but its targeted market never blossomed. Just at the end of the case as the clock was running out on the Kittyhawk team, Nintendo approached HP with its Nintendo 64 system with a slot for a 1.3" diskdrive, and projections that it would sell several million units per day during the upcoming Christmas season. The problem was that they needed the drive for $49.95, and HP had designed the Kittyhawk for a different market at a cost of $250 per unit. The 1.3 drive was a potentially disruptive technology which could have been designed to a $49.95 price point, but HP had positioned it as a sustaining technology, as nearly as possible.

Whether a new technology is sustaining or disruptive is often a strategic variable rather than something inherent in the technology itself. HP took the market's structure and the needs of the customers it had identified as givens, and attempted to push the technology far enough that it addressed those needs. A very different approach would have been to take the disruptive technology's current capabilities as a given, and then find a market which valued the attributes of the technology which existed at that time. My research indicates that the overwhelming tendency of successful companies is to try to force fit a new technology to address the needs of known customers. Often, however, the home run comes when the company discovers or creates a market which values the very different attributes that are enabled by a disruptive technology.

Session Thirteen-Eli Lilly and Company: Innovation in Diabetes Care

Clayton Christensen, Case #9-696-077, 1995.

Supp. Reading: Christensen, Clayton, "Patterns in the Evolution of Product Competition," European Management Journal, April 1977.

The purpose of this session is to help students identify a certain regularity in the patterns of product competition as markets mature, and recognize that the basis of competition often evolves from functionality, to reliability, to convenience., and finally to price The initial shift from functionality to reliability is a result of product innovation overshooting market need. Using our trajectory maps from the course, we can see that product performance often progresses at a faster pace than what the market is able to absorb, creating the possibility for markets to become over-satisfied. In this condition, reliability becomes the new basis for competition. When the market's needs for reliability are satiated the basis of competition often shifts again, this time towards convenience. In this stage products that are disruptively simple and convenient become most successful.

The Eli Lilly case describes the company's efforts to develop a series of innovative products and services in diabetes care. It invested over a billion dollars to create a line of genetically engineered human insulins that were 100% pure and structurally equivalent to human insulin. The market's reaction to this technological miracle was tepid, however, because it was satisfied with the insulins that were already available on the market. The case gives students the opportunity to explore why a very competent company could overshoot its market so badly. The facts lead us to point our finger at Lilly's main customers (high end diabetes specialists), who provided misleading indications of the needs of consumers in the main stream market.

In contrast to Lilly's technology oriented struggles to innovate in this market, its main competitor, Novo Nordisk, introduced a line of insulin pens which made injection simpler and more convenient for patients with diabetes. The basis of competition in diabetes care had shifted towards convenience, and Novo caught the wave, nearly doubling its share of the insulin market. The reading on how the basis of competition shifts enables students to evaluate different innovative options facing Lilly, and suggests how Lilly can take advantage of the market's thirst for convenience.

Session Fourteen & Fifteen-Electric Vehicle Days

The third module concludes with a two-day study of electric vehicles. I cancel the first class and ask students to write a four to five page paper summarizing what they have learned about managing the development of new markets and new technologies to this point. I also distribute readings about the electric vehicle and ask them to assume they have been assigned to manage the electric vehicle project of a major automobile manufacturer. They are to apply what they have learned in the course to this task and tell us how they would manage the project differently than how the automobile manufacturers are currently doing it.

We gather on the second day to discuss their recommendations. This is really a fun class because the students can see that the path the leading automobile manufacturers (not just in America, but in Europe and Japan as well) are pursuing is perfectly predictable according to our frameworks developed in the course. Not only is it predictable, but also perfectly wrong and guaranteed to fail. If the principles of the course were used to guide the electric vehicle initiative in these companies, they would pursue a very different course. For example the leading automobile makers all take the needs of the current customer as a given and are struggling to fit the electric vehicle technology into existing market applications. Principles of the class teach that they instead should look to other markets that value the electric vehicle as it currently exists. With this in mind, students come up with very different applications. For example, how about targeting parents of teenagers who currently buy cars for their children to commute to high school and to tool around town? Parents would actually prefer a car that couldn't cruise very far, or accelerate very fast. Students then explore how they would manage the development of a product targeted at this market, harnessing the principles taught in the course.

Module 5: Technology Strategy

Session Sixteen-What is Technology Strategy?

Reading: Christensen, Clayton, "Exploring the Limits of the Technology S-Curve: Parts I & II," Production and Operations Management , 1992.

There are several dimensions of technology strategy: whether one should lead or lag, whether one should outsource or develop internally, and so on. We spend the first part of this session discussing these concepts and reviewing what the course has taught us about when different strategies might and might not be appropriate. The discussion of the technology S-curve in this session's readings introduces a different dimension of technology strategy: when and whether a company should focus on major technological leaps in component technologies (switching to new technology S-curves), or towards incremental improvements in existing technology, through system design technology.

These papers describe how two leading disk drive companies, IBM and Hewlett-Packard, pursued these respective strategies. IBM's historical strategy was to leap from one technology s-curve to another, focusing on developing the highest performance components possible. On the other hand HP works to extend the life of its technology S-curves as far as possible, focusing on maximizing performance from available component technologies by understanding how the components interact in the disk drive system.

Next year we will read Marco's work from the mainframe computer industry, which provides a similar look at technology strategy. I also have research underway on how manufacturers of laundry detergent follow strategies. Unilever has essentially pursued an IBM approach in developing very expensive and technologically sophisticated components. Proctor & Gamble, in contrast, has employed a Hewlett-Packard approach, working with more widely available components but extracting maximum performance from them.

Session Seventeen-The Rationale for Research and Development

Reading:

1. Gomory, Ralph, "From the Ladder of Science to the Product Development Cycle," Harvard Business Review, November/December 1989.

2. Christensen, Clayton, "Industrial Maturity and the Vanishing Rationale for Industrial Research and Development," Working Paper, March 1994.

3. Moore, Gordon, "Some Personal Perspectives on Research in the Semi-Conductor Industry."

In this class we develop a framework describing how most companies initially get into the business of research, and why it seems progressively more difficult for some companies to capture the value of their investments in R&D.

Module 6: Innovation Across the Value Chain

In this module we explore how most product and process innovations are nested within a chain of value-added activities. Students build a framework for understanding when they can expect suppliers or partners to readily and competently help with the other necessary pieces of the innovative puzzle, and when the innovating company will need to put the entire puzzle together itself.

The theoretical underpinnings for this section are presented in a working paper I wrote a couple years ago: "The Drivers of Vertical Disintegration." It asserts that to procure a component, product, or service from a partner or supplier you need to be able to specify exactly what you need. You must also be able to measure what they provide you. In cases involving new technology, products, or activities that are not well understood, it is difficult to specify what you need. In these instances it often makes more sense to do develop that capability internally rather than relying upon another company.

Session Eighteen-Molding the Impossible: The Nypro/Vistakon Disposable Contact Lens Project

Clayton Christensen, Case #9-694-062, Rev. November 23, 1994.

This case describes the efforts of two very capable companies, the Vistakon division of Johnson & Johnson and Nypro, Inc., a precision injection molder, to develop a process for manufacturing disposable contact lenses. Nypro was to supply Vistakon with single-use clear styrene plastic molds, which Vistakon would then use to make the disposable lenses. Vistakon initially specified that it needed clear plastic cups molded to ± 20 microns accuracy. Nypro delivered molds which it believed met these specifications, but Vistakon could not make reliable products with them. The two went back and forth about where the fault lay, but the root cause of the problem was that Vistakon simply did not know how to specify the molds it needed, and neither firm could measure what Nypro produced.

Both companies were committed to creating a close, integrated development team, but found it very difficult. Students learn that it is feasible to outsource services or components when they are modular: when the interface with the rest of the system is so well understood that the service or component can be specified and measured accurately, procured from a vendor, and "plugged and played" in their system with no unanticipated interactions. Components or services that cannot be specified, because their interactions with other parts of the product and system are complex and not well understood, are integral . With these principles in mind I build a matrix on the board with modularity vs. integrality on one axis, and no competence vs. deep competence on the other. This typically results in a very rich discussion, and students who historically have bought into the simplistic paradigm that companies should only focus on their core competencies and outsource everything else, can see that the problem is far more subtle than they have been led to believe.

Session Nineteen-Studio Realty

Bret Baird and Clayton Christensen, Case #9-697-036, December 5, 1996.

As a general principle, a disruptive technology does not enhance a company's ability to make more money within its established financial infrastructure. It usually appeals to a whole new set of customers. Just as an innovation can challenge a company's traditional way of doing business, it can also disrupt other players along the value chain. This happened when Jim Connor developed an "electronic open-house" that made it easier for the buyer to search for the right home and for sellers to communicate the value of their home, all in the comfort of the Realtor's office. The system seemed like a great innovation for an industry that was still using the age-old method of site hopping by car to sell homes. But when Connor tried to sell the system to Realtors he found them to be completely disinterested because it challenged their traditional way of selling homes. Ultimately Connor was forced to start his own real estate agency. Even though the electronic open house was a great product that both buyers and sellers of properties liked, it was disruptive to a major player of the value chain.

Session Twenty-Vallourec

Clayton Christensen, Case #2-697-001, October 23, 1996.

This case describes a French manufacturer of seamless stainless steel tubing which innocently undertook a technological innovation to change its tube manufacturing process to utilize powdered stainless steel. This one change in the manufacturing process in effect rippled back to require innovations at the raw materials level, which then rippled forward forcing the firm to diversify into manufacturing a wide variety of powdered metal products to drive its materials costs down. This case helps students see that for companies far upstream in a value chain, innovating often entails pushing a string. It is difficult to put a material or a component into the marketplace unless there is another player on the other end pulling the string. Students learn from this case, coupled with the Studio Realty and Nypro cases, that if an innovation doesn't help players at every step of the value chain make more money more easily, they are likely to have to integrate into doing those function themselves. If they lack the resources to take on those functions, the innovation will not be successful and they should not begin the effort.

Module 7: Developing the Capability to Innovate

In this final module we try to understand what it takes for a manager to create an organization that systematically generates important innovations-in other words how a manager can create an organization that is capable of continuous innovation.

Session Twenty-One-Managing Innovation at NYPRO, Inc. (A)

Rebecca Voorheis and Clayton Christensen, Case #9-696-061, Rev. January 3, 1997.

This second Nypro case introduces basic insight that does not intuitively occur to most students: in a large company senior executives actually have no idea what the individuals and teams, who are conducting most of the innovation within their organization, are learning. If senior managers don't know what the innovations are, how can they ever determine which innovations ought to be cultivated and disseminated throughout the company? Most learning is accomplished by individuals and teams. The learning can only be institutionalized throughout a company after senior managers recognize its value and work to imbed that learning in new processes or procedures throughout the company. This case describes a unique process by which the senior managers at Nypro uncover the most important ideas for their company and how they work to institutionalize those innovations across the company's worldwide network of plants.

The case presents a new process innovation developed within the company called a Novaplast, which is capable of molding low volumes per unit of a wide variety of products because of its fast set up time. It is a disruptive technology. Nypro's system, however, force-fits the Novaplast machine into its mainstream business. Of all the cases in the course, this offers the deepest insights into the problems that general managers face in managing innovation.

Session Twenty-Two-Chaparral Steel: Rapid Product and Process Development

Gil Preuss and Dorothy Leonard-Barton, Case #9-692-018, Rev. February 18, 1994.

The Chaparral Steel case is a wonderful way to close the course. It describes all the factors that Chaparral's managers put into place to help the company become consistently and spontaneously innovative. Through discussion, students see that there are three classes of factors in the company that effected its innovative success: 1. Resources of the company, including people, equipment, and technology; 2. Processes that it uses to convert inputs into outputs-production processes, processes to upgrade equipment, processes to improve individuals' skills, processes to understand customers' needs better, etc.; and 3. Values, which are the criteria by which decisions are made in the company. As we classify the factors highlighted in case into these three categories, we consider the question of where the capabilities of Chaparral really reside. Students can see that the resources available to the company play a critical role in its performance, but that the core capabilities that make it successful are the processes it has developed: both to produce products and create more capable resources.

Once this insight has been achieved, we then discuss what it means for a general manager to create and cultivate an organization's capabilities to innovate. At one level, innovation consists of discrete projects resulting in new products and processes. At another level, however, innovation consists of systematically changing the way an organization does its work, so that its capabilities consistently improve.