Analysis of Digital Equipment Company’s Case (600)
- How many times is the company Walmart mentioned in the video?
Walmart has not been mentioned anywhere in the video.
- Is Professor Christensen optimistic or pessimistic about the future of Tesla?
The professor is pessimistic about the future of Tesla. He argues that Tesla started as a sustaining innovation, which created high-end products and neglected potential consumers. He adds that Tesla is likely to face stiff rivalry from luxury brands such as BMW, which would drive it out of the competition.
- Does Professor Christensen speak positively or negatively about Ikea?
Christensen’s remarks portray Ikea positively. He lauds the company for its exceptional products that meet the needs of diverse consumers and attract premium prices. The professor describes Ikea as a company with an inclusive business model that produces products for customers with varying purchasing power.
- Does sustaining innovation and the creation of sustaining products create market growth?
This innovation strategy does not create growth because replacing existing merchandises with improved versions reduces the affordability of the products to potential buyers. With time, low-end customers find the company’s products to be costly.
- What “job” does a McDonald’s milkshake do for early morning customers?
The early morning customers that purchase McDonald’s milkshakes are long-distance drivers who need something to keep them busy as they drive. The “job,” according to Christensen, is to keep one hand off the steering wheel to reduce monotony while driving.
Analysis of Digital Equipment Company’s Case (600)
Christensen, a Harvard Business School Professor, links both the failures and successes of Digital Equipment Company (DEC) to the management team. He argues that organizational managers are culpable for any decisions or actions that affect the operations of their companies. The professor lauds DEC’s leadership for the remarkable performance witnessed in the 1970s and 1980s. During this period, Digital Equipment Company outperformed its competitors, thanks to the brilliant management. However, the organization failed to sustain its esteemed image, partly because the management team in the late 1980s did not respond effectively to the fast-emerging disruptive technology. Christensen asserts, “Smart people could get stupid so fast,” referring to the DEC management team’s ineptitude to study the changes in the business environment and respond adequately. From the professor’s sentiments, the management team is responsible for the failure of the Digital Equipment Company.
The situation at Digital Equipment Company presents what Christensen describes as an innovators’ dilemma. In innovation, Christensen argues that doing right is wrong while doing wrong is right. On the one hand, DEC management had a choice to adopt novel ideas and technologies that would enable them to improve their products and sell at higher profits. On the other hand, the management had the option to continue with their current business model, which was quite profitable then, and produce less competitive products, which would ruin their profit margins in the long run. DEC opted for the second alternative for the fear that personal computers, which were emerging as a new technology in the industry, presented a low-profit margin compared with the minicomputers they produced.
Unlike DEC that faced extinction in the fast-changing operational environment, IBM succeeded in a disruptive business landscape. The advent of personal computers and client servers disrupted the market for mainframe producers, including IBM. The management team separated IBM’s business units into independent companies to compete more effectively. This decision led to the establishment of a new IBM unit in Florida, purposely to strategize on keeping the profit margin at 25% by listening to the customers. Professor Christensen applauds IBM for maintaining dominance, while its peers waned. The company leveraged the potential product innovation strategy, which focuses on discovering and solving the most pressing needs of the customers in ways that delight them. Therefore, creating new businesses was a visionary approach for long-term survival in a disruptive environment.
IBM’s tactic exemplifies useful strategies for multilevel businesses to respond to disruptive innovations. First, companies should embrace the long-term thinking mentality. As Christensen argues, sustainable competitiveness requires managers to adapt to the changing operational environment. Viewed this way, surviving disruptive innovation necessitates a shifting of managerial role from bureaucracy to dynamic linking. In other words, the role managers should evolve from controlling to enabling. This perspective advocates radical management, typical of continuous innovation and agility.
Toyota/Lexus Entry into the American Market (600)
Although Toyota now enjoys a significant market share in America with topnotch brands, the automaker entered this region at the bottom. According to Christensen, Toyota entered America at a time when General Motors (GM) and Ford were the dominant brands. These companies neglected the small-car niche. Cognizant of this opportunity, Toyota initially targeted low-end customers. It produced sub-compact corona models, which were affordable and accessible to low-income earners. The company had a significant cost advantage over its competitors. Within Christensen’s classification of innovation, Toyota’s approach reflects disruption innovations. The author describes this invention as the use of new technology to produce better products that outperform those of competitors. This strategy enabled Toyota to have a competitive advantage over its rivals in the country.
Toyota’s strategy fits between the second and third levels of Christensen’s three concentric circles. The company is now pursuing striving to outshine the incumbent. The management has gradually moved from disruption to efficiency, where they now focus on ways of increasing their output with limited resources and reducing jobs. Initially, GM and Ford did not consider Toyota as a threat; since it produced small cars that only attracted the low-income market segment. Thus, Toyota implemented disruptive innovation to penetrate the luxury segment. The company leveraged product development capability with a focus on broadening its competencies in new technologies. The exceptional performance of Toyota cars in the market triggered competition, as other industry players now started considering the low- and middle-class. For example, Ford introduced Pinto to compete with Toyota’s small cars. However, venturing into the small car segment did not help American companies to redeem their status. Ford’s Pinto model performed below Toyota’s small cars. Consequently, the market got more competitive for American automakers.
The disruptive innovation strategy of Toyota transformed the American automotive industry. Christensen underscores that the entry of Toyota into the American market has increased diversification. Before Toyota made inroad in the United States, only the luxury segment was performing. GM Motors controlled the largest share of the American market. The period before Toyota’s debut in the country saw automotive venture a capital intensive enterprise. However, Toyota’s technological advancements have transformed the industry by emerging as the lowest-cost, highest-quality, and reliable brand. From the value proposition perspective discussed in the class lecture, Toyota focused on optimizing product reliability so that consumers willingly pay premium prices for its luxury segment (Bose and McClelland Session 3, slide 11). The company has increased competition in the industry, with the Japanese automaker now producing cars for all categories of consumers. This aspect explains the increasing presence of Lexus models in the country today. Toyota enjoys a cost advantage that enables it to produce and sell reliable cars more cheaply than its competitors.
Financial Measures and Disruptive Technologies (600)
Disruptive technology drives competition and growth in the corporate world. Christensen defines disruptive innovation as a process by which a company enters a market segment using simple applications, and persistently strives upmarket to displace the incumbent players. Companies using this strategy begin by producing less expensive and accessible products that attract low-and middle-income clientele. Companies such as Toyota, Honda, and Sony have implemented disruptive technology successfully in Japan. According to the business professor, the three companies have respectively made cars, motorbikes, and radios accessible and affordable to a large population. This innovation strategy is a significant driver of competition, quality, and financial performance.
Against the backdrop of disruptive technology as a driver of competition, financial measures and analyses are tied to this innovation. Christensen underlines two doctrines that matter in finance analysis; namely, abundance in scarcity and abundance in cheap. The author advises companies to strike the right balance between the readily available resources that have significant cost implications and those that are cheap and available in plenty. He cautions against irrational sourcing of business capital. In the author’s view, investors considering financing sources need to take care of what is scarce but costly, such as Platinum. He argues that technological innovations have increased access to capital sources, which might be expensive for businesses in the end. Therefore, a financial analysis must carefully weigh the options that disruptive innovations provide.
Ratios have become popular in financial analysis. Historically, whole numbers dominated the economic analysis. However, the need to compare the relative strength of companies necessitated spurred the development of an assessment tool that takes into account a holistic view of financial performance. Consequently, ratios emerged as the most suitable tools for evaluating operational efficiency, profitability, liquidity, and stability Mohammed and et al. 22). The author argues that ratios provide more relevant information than raw financial data. Therefore, ratio analysis can help investors to gain a competitive advantage.
The use of ratios is justifiable in many ways. First, they provide a standardized comparison index. Companies vary sizes, market shares, and cash flows. As such, a comparison of raw financial data can only give limited insight. The author alludes that measuring financial performance based on numbers might lead to misjudgment because whole numbers may not reveal the level of operational efficiency. Therefore, ratios they help analysts in levelling the ground for equating performance.
Secondly, ratios provide benchmarks against which financial analysts measure the performance of all industry players. Ratios such as the rate of return on investment, debt-to-equity ratio, and return on assets can provide small companies suitable benchmarks for strategy development. Christensen maintains that an analysis of the rate of return helps investors to make decisions on whether to invest in long- or short-term innovations. Therefore, ratios serve as performance indices that show profitability and efficiency, thus informs on the most viable investment option for a company.
The choice between disruptive and efficiency innovation depends on the economic situation of a company. According to Christensen, these two forms of innovation are distant apart in the economic continuum. Whereas disruptive innovation allows industry entrants to advance their initially simple applications to overtake incumbent companies in the value chain, efficiency is all about improving the throughput of the production line to achieve better cost advantage. In this regard, disruptive innovators drive economic growth by creating job opportunities and producing products that meet the diverse needs of the market. Japan’s economy, for instance, flourished between the 1960s and 1980s because most of its companies invested in disruptive technologies, which reduced unemployment, and made products affordable and accessible. However, the country’s economic growth dampened from the late 1980s, when analysts resorted to gross margins as the metric for success. This shift from ratios to gross margins led to increased adoption of efficiency innovation that led to reduced creation of cash flow. Considering the outcome in Japan, financial analysts are likely to promote disruptive innovation to spur economic growth, as it creates job opportunities and averts a potential financial recession.
Conclusion
Christensen’s video, “Where does Growth come from?” offers valuable insights into growth models. The professor provides a detailed understanding of four innovation strategies: potential product innovation, sustaining product innovation, disruptive product, and efficiency innovation. He has explained ways in which an organization can apply these growth models with real-world examples. Christensen is analytic throughout his presentation; he drives his conclusions about success and failure through an in-depth critique of the operational decisions and actions. For instance, he gives a historical overview of Digital Equipment Company, Toyota, and IDM, and how their innovation models evolved to sustain or kill their businesses. He goes further to back his views by providing the perspectives of financial analysts, especially on the significance of using ratios as the metric for success. The professor remarks that the future of America’s economy rests on the innovation strategy that companies embrace. He contends that the efficiency technology will not drive the country’s economic growth positively; since, it increases unemployment and reduces capital investment. Therefore, financial analysts should discourage the use of gross margins, which promote efficiency at the expense of disruptive innovation that stirs economic growth.