HBR Blog on Disruptive Technologies
Here is my latest HBR blog, “The Idea that Led to 10 Years of Double Digit Growth” – Clay Christensen and Joe Bower’s “Disruptive Technologies” that we used at Medtronic to spawn our 18% per annum growth (http://bit.ly/Rv6Uqj).
Full Text Here:
In the mid-90s as CEO of Medtronic, I was concerned about whether we could sustain the remarkable success in innovation that we had enjoyed during the previous 10 years. As we grew, I knew it would be very difficult to continue to create the breakthrough innovations that had led to Medtronic’s high growth rate, which had exceeded 18% per annum for a decade. Then I read Clay Christensen and Joe Bower’s 1995 article “Disruptive Technologies: Catching the Wave” in HBR.
Christensen and Bower’s article offered the counterintuitive notion that great companies fail for the same reasons they initially experience success. They listen to their best customers — something we did religiously at Medtronic — making increasingly complex products to meet those customers’ most sophisticated needs. This process leaves companies vulnerable to competitors who develop new forms of technology that initially fail to serve the “best” customers well, but quickly improve.
This process of “disruptive innovation” enabled new competitors to create entirely new product categories. For example, early cell phones were woefully unreliable, and their voice quality paled in comparison with land lines. Then rapid improvement in cell phone technology combined with sharp reductions in cost opened up massive new markets that existing terrestrial business telecommunications companies had missed.
Impressed by the HBR article’s framework for resolving the tension between existing businesses and innovative ideas, I wrote an article for our employees titled “Reinventing Medtronic” that captured the essence of what was required to sustain our growth. We then initiated 12 radical innovations that challenged our conventional businesses. We organized these initiatives around small venture units, incubating them separately (and far away) from existing businesses. Venture innovators had greater freedom to deploy their independent R&D budgets. In financial terms these were small bets, with very low overhead. (See Peter Sims’ book, Little Bets, for a more complete description of how this works.)
One example was Medtronic’s reinvention of mainstream coronary artery bypass surgery. This involved minimally invasive cardiac surgery that eliminated the need to crack open a patient’s chest and put the heart on Medtronic’s bypass equipment. Clearly, this was threatening to people in Medtronic’s core business. Nevertheless, we steadfastly supported the venture. The new procedure proved to be effective and now accounts for 20% of heart surgeries while producing better outcomes.
Another innovation was a super low-cost pacemaker that reduced production costs 80% by challenging many of the traditional rules of pacemaker design. The product worked effectively, but never became a big seller. Still, it enabled Medtronic to expand into the Chinese market. Meanwhile, the mainstream pacemaker designers borrowed many of the creative ideas, resulting in a 40% cost reduction across the entire line. As I told our executives, “If we don’t make these innovations, our competitors will.”
All in all, the “Disruptive Technologies” article helped Medtronic broaden its ability to fulfill the mission of “alleviating pain, restoring health, and extending lives.” First, we increased our R&D budget from 9% to almost 12% of revenue. Second, we separated the ventures from existing business units so they could focus on disruptive innovations while the strategic business units focused on better engineering our existing product categories. Third, we made selected acquisitions of new technologies that fit in our product platforms or enabled Medtronic to expand into related product categories. Finally, our top executives gave the ventures the support required to go full throttle on innovation, spending time in the labs with them, understanding their work, and championing it throughout Medtronic.
Thanks to the HBR article, Medtronic avoided the lost years of stagnation that Hewlett-Packard and other once-great innovators experienced because they were unable to reinvent themselves. As a result, Medtronic’s revenue growth continued at 18% per annum for the next decade.