Industry Overview Disruptive Innovation New Diagnosis and Treatment for the

Industry Overview Disruptive Innovation – New Diagnosis and Treatment for the Systemic Maladies of Healthcare a report by D r s J o h n W K e n a g y and C l a y t o n M C h r i s t e n s e n Physician and Visiting Scholar, and Professor, Harvard Business School US healthcare has systemic ills. One problem is unique: the 40 million uninsured people that lack access to employer-based insurance and do not buy private coverage. However, there are other maladies as follows. • The US needs to improve systems for patient safety and quality improvement. • The US faces severe healthcare worker shortages, particularly in nursing, while many physicians, nurses and technicians find their work environment has deteriorated significantly. • Valued US institutions struggle financially and many incur million-dollar losses. Dr Clayton M Christensen Dr John W Kenagy is a physician and visiting scholar at Harvard Business School (HBS). He is also Clinical Associate Professor of Surgery at the University of Washington, Adjunct Associate Professor of Pharmacy and Therapeutics at the University of Pittsburgh and a Fellow of the American College of Surgeons. Dr Kenagy received a Masters degree in Management from Harvard University’s Kennedy School. He earned a Doctor of Medicine (MD) with distinction from the University of Nebraska and completed postgraduate training in General and Vascular Surgery at the University of Washington. Dr Clayton M Christensen is a professor of business administration at HBS, with a joint appointment in the Technology & Operations Management and General Management faculty groups. Dr Christensen holds a BA with highest honours in Economics from Brigham Young University and an MPhil in Applied Econometrics and the Economics of Less-developed Countries from Oxford University. Dr Christensen received an MBA with high distinction from HBS and was awarded a Doctor of Business Administration (DBA) also from HBS. There are different funding systems but common maladies and shared, ineffective treatments. If healthcare systems were patients and symptoms were found to be persisting despite intensive therapy, the diagnosis might be questioned and new treatments considered. The Issue Dr John W Kenagy Large numbers of dedicated, intelligent people have spent a great deal of time, effort, energy and money on treating healthcare’s systemic ailments and yet ‘the patient’ worsens almost universally. If it is not a lack of intelligence, commitment, effort and money, then the cause of the problem needs to be investigated. If present treatments fail, it is important to ascertain where a new diagnosis might be looked for. A ‘Disruptive View’ of the Problem • US attempts to control costs have failed, and costs are rising at a double-digit rate while the economy slows, placing an increasing burden on public and private sectors. The maladies are often the same for any major industrialised country and are just as intractable – quality issues, workplace shortages, struggling professionals, financial limitations, rapidly accelerating costs and limited resources. It is an epidemic – the developed world’s healthcare systems are ailing and, in some cases, infirm. The Present Solutions Present policy and strategy in most developed countries seem limited to three well-tried nostrums: 1. decrease available healthcare (‘managed care’ in the US, queues or service limitations in governmentally funded systems); 2. wring more cost or value out of present methods through quality efforts, downsizing, cost cutting, productivity improvements and technological solutions; and 3. increase reimbursements through governmental and private subsidy. From 1960 to the present, many technology companies worldwide rose to greatness but then subsequently failed. When the ‘paradigm shifted’ – when an industry-changing innovation was created – it was never accomplished by the leading company. Vacuum tube manufacturers were unsuccessful with transistors, Xerox could not stop Canon and Ricoh with desktop copiers, Microsoft and Intel were affected by IBM creating huge new growth businesses after they left and the list continues. Maybe there was an ‘innovative malady’ affecting these companies that rose to greatness on innovation but were unable to transform. Dr Clayton Christensen set out to discover the etiology of this disorder and ascertain why the established and the strongest were disadvantaged by fundamental change. He anticipated proving the reigning business school paradigm of the day – winners are smarter and try harder. However, that was not what he discovered. Instead, he found the very skills and success of the leaders prevented them from developing fundamentally new products and services. He termed it ‘disruptive innovation’. A recent article in Harvard Business Review suggests disruptive innovation may ‘cure’ healthcare in the US. BUSINESS BRIEFING: GLOBAL HEALTHCARE 2002 14 Industry Overview Defining Disruptive Innovation While the dominant players focus on improving their present products or services, they miss less complex, more convenient and affordable innovations initially designed for simpler, less demanding needs. These new methods then improve to meet mainstream requirements and supplant the leaders with higherquality, more reliable and accessible lower-cost products and services. The functionality (performance of diagnosis and treatment) of medical and surgical facilities has improved continually and treatments are performed now that were undreamt of 20 years ago. These kinds of improvements are known as sustaining innovations. The pace of sustaining innovation nearly always outstrips the ability of mainstream customers to utilise it. For example, healthy patients undergoing simple therapies and procedures do not need the intensive monitoring, support systems and speciality personnel required for complex, high-risk diagnosis and therapy. Therefore, sustaining innovations ‘overshoot’ the needs of less demanding customers. This creates the opportunity for disruptive innovation – simple, more reliable, convenient, less costly products or services that start by meeting less demanding needs appropriately. In competitive environments, these disruptive innovations improve and supplant the leaders progressively with reliability, customisation, accessibility and lower cost in simpler business models. This growth from simple to complex is the fundamental mechanism through which many higher-quality, more convenient and lower-cost products and services have become available to consumers worldwide. Many of the economy’s greatest companies began with simple products or services and limited but appropriate functionality, then grew as disruptive innovators. Another key issue in healthcare is that a disruptive innovation is almost always ignored or opposed actively by the leadership. This is the ‘innovator’s dilemma’ – doing and improving what they do best causes them to overshoot the needs of many they serve and miss great but simpler opportunities that could grow to meet mainstream needs. The Opportunity of Disruptive Innovation redefine success and failure; it becomes a strategy tool – a new common language for innovation and a different perspective from which to view ideas and the environment in which ideas live, to tailor both better for success. Healthcare Examples of Disruptive Innovation Surgery, antisepsis and anaesthesia all began as simple technologies then improved steadily to meet more complex needs. Although there is great regional variation, innovations such as free-standing ambulatory surgical and diagnostic centres, angioplasty and nonphysician clinicians have changed the foundation of healthcare worldwide. Often opposed or ignored initially, these innovations met simple requirements in niche or under-served populations and improved steadily to meet mainstream needs. The ‘Disruptive’ Issues Today It is not the pace of present innovation that is important, but rather the opportunities presented by innovations that are not occurring. Disruptive innovation has been the source for great improvement in many industries and healthcare in the past. It is important now to take another view and to question what is happening currently. Established organisations and institutions rarely lead disruptive change. Mature organisations improve based on established processes and values (sustaining innovation) but disruptive innovation processes and values are fundamentally different. Therefore, our capabilities become our innovative disabilities. We improve the functionality of what we know how to do, while simple but organisationally disruptive solutions cannot maintain a place on our institutional and political radar screens. The result is that we work harder at present methods and ‘redesign systems’ that look the same a year later. Established institutions, top-down decision-making and political process reinforce status quo methods rather than take us in a new direction while we tend to ignore or try to avoid those problems that do not fit (primary care, behavioural health, queues, the poor and under-funded services, etc.). It is always somebody else’s fault when it does not work. Hospitals blame the government and physicians, physicians blame the government and the hospitals, etc. In the US, it has become quite common to blame the patient for ‘wanting too much’. Our present systems and methods are designed perfectly to deliver exactly what we have. The developers of new healthcare technology, products and services must meet the needs of their BUSINESS BRIEFING: GLOBAL HEALTHCARE 2002 16 History suggests a great strategic opportunity. When an industry makes a dramatic change, it is commonly through disruptive innovation. It is not just a great growth opportunity, it is the customer who benefits as disruptive innovation has always brought betterquality products and services at increasingly lower cost. Disruptive innovation is not just a way to New Diagnosis and Treatment for the Systemic Maladies of Healthcare best customers – established institutions. Investment and effort flows towards extending what we already do rather than creating small experiments that challenge present methods or traditional business, political and organisational models. For example, Internet connectivity may be a new enabling technology for healthcare, but established institutions treat it as a technical problem to be adapted to their present needs. Disruptive innovation suggests that if e-health initiatives transform healthcare, they will come from ‘outside and under’, not through present established organisations and institutions. As current methods overshoot the needs of more patients, the basis for improvement changes from increasing functionality to new parameters for success – reliability, access, customisation, convenience and affordability. Poorly equipped to compete on this basis, the leaders turn to market power, cost cutting, political influence, subsidy and regulation for support. Attempts to use regulation to stave off disruptive attacks are quite common. When present business models falter, particularly when they involve entrenched and highly valued institutions, the pressure for increasing subsidies and protective regulation becomes almost overwhelming. A dilemma that affects everyone involves political process, regulation and subsidy, which tend to solidify the status quo. In addition, because healthcare is so complex, well-meaning regulatory bodies can kill novel ideas by sapping the innovative energy out of an organisation as it tries to negotiate regulatory barriers or defuse bureaucratic land-mines. From a governmental point of view, these are not simple issues but disruptive innovations only take root and grow in markets where organisational and regulatory barriers are minimised. A Challenge for Leadership present methods in established institutions are part of the problem, not the solution. New systems will develop by returning to the patient, identifying and supporting strategies that fulfil unmet patient needs in the following ways: • target undemanding applications where patients will be delighted to have simpler, more accessible services; • allow patients to access treatment formerly available only in inconvenient, centralised settings; • use simpler, lower-cost business models; • seek to improve these services by solving small problems experimentally in order to move to more complex treatments. Avoid programmatic implementations and utilise the ingenuity of the people who do the work to make improvements based on meeting patient needs; and • start simple and small – success is built on replicating effective principles, not methods that must be customised. Replicating successful principles allows a growth rate of double. Most importantly, leadership must protect these strategies from barriers to expansion and improvement. Ideas that run counter to the established processes and values of mainstream organisations and institutions do not survive unprotected. Leadership is essential to create the organisational and regulatory safe havens that allow novel ideas to grow. Summary Once an industry is in crisis, individual leaders often become paralysed. They are incapable of embracing disruptive approaches because the financial underpinnings of the institutions they lead have been eroded so severely. Typically, not only do they ignore potential disruptions, they work to discredit and oppose them actively. Making changes in healthcare requires leadership – not to regulate and subsidise the existing system, but to co-ordinate the removal of barriers that prevent simple innovations from developing to serve more complex needs. These concepts are being tested in the context of the US system. The following principles could apply to any healthcare environment. Leadership must first recognise that ‘capabilities are disabilities’. When the basis of improvement changes to reliability, customisation, convenience, access and low cost, BUSINESS BRIEFING: GLOBAL HEALTHCARE 2002 Disruptive innovation is a strategy tool that helps diagnose our healthcare maladies in different ways and treat them with new modalities. Learning from the success of others, leadership has new tools to change and improve ailing systems. The leadership objective is to create the environments and provide the resources to stimulate transformation, discovering the new principles around which partnerships, organisations and institutions with new capabilities will lead us in the 21st century. The transformed systems with new capabilities are based on simplicity, reliability, customisation, access, convenience and low cost. All can then realise the opportunities that come with disruption because it is the strategy through which higher-quality, more convenient, lower-cost healthcare systems can be built. s Additional Information The complete version of this article, including graphic, tables and references, can be found in the Reference Library on the CD-ROM accompanying this business briefing. 17