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Disruptive innovation challenges an established market structure
The market for contact lenses is dominated by a few key players. Back in the late 1980s and early 1990s, Johnson & Johnson was the market leader, with Ciba Vision (a Novartis group company) coming in a distant second. Ciba Vision's business was profitable, but J&J was gradually pulling further ahead. Then came a market disruptive launch from J&J in 1987 - the disposable contact lens, which offered a whole new paradigm to consumers who had only conventional contact lenses at that time.
Glen Bradley, who headed Ciba Vision, understood immediately the disruptive potential of disposable contact lenses. If more and more consumers started opting for disposable lenses, it would seriously challenge the existing settled market structure in the contact lens market. Ciba Vision was profitable, but Bradley recognized that long term profitability was going to be seriously challenged by a new product launched by the market leader.
The present has to fund the future
Bradley recognized the need to plunge into the disposable lens segment, not just as a me-too, but as an innovator. He also understood very well that funds for research and product development in this new segment would come in from the cash flows of the current, profitable conventional lens business. He fully understood that while the current business appeared stable, if he did nothing, its volumes and profits would gradually shrink to a point of no return - there was after all a whole new paradigm of convenience being offered by disposable lenses - which he could not afford to ignore.
Six new autonomous project teams
In 1991, Bradley launched six new development projects, with their own R&D, finance and marketing teams. Four were tasked with coming up with breakthrough innovations in the disposable lens segment and two were tasked with coming up with breakthrough technologies to drastically lower manufacturing costs in the existing conventional lens business. He articulated a new vision statement for the company, "Healthy Eyes For Life", which clearly spelt out the new direction for the company.
These teams recruited fresh talent that was relevant to the challenging task at hand. Bradley effectively created six new autonomous business units, but which reported into a single trusted "old hand" Adrian Hunter - who was tasked with driving synergies among these new units and the existing business. Bradley understood very well that new ideas need new blood and radical new thinking and different skill sets - which is often difficult to find within an established set up. Making them autonomous - with their own finance and marketing teams - ensured that rivalries between "old" and "new" do not derail promising projects.The new units were given freedom to challenge status quo and the freedom to operate independently. They created their own rewards structures which were competitive in the cutting edge area of their operations. At the same time, having all of them report into a single trusted old hand, ensured that they didn't stray too far away from the mother ship. Money for funding these new initiatives came from scrapping a number of development initiatives in the existing business - a move that sparked a furore in the existing organisation. Bradley was however clear that the present had to fund the future, if the company was to remain competitive in the years ahead.
Wise initiative pays off hugely
Over the next 5 years, these new business units delivered exactly what Bradley wanted. One unit came up with a breakthrough daily disposable lens while another pioneered contact lenses that you could keep on even when you slept at night (extended wear lenses). One unit introduced a new manufacturing process for conventional lenses that dramatically reduced manufacturing costs, and another unit pioneered a new drug for treating age related eye problems.
Daily disposable contact lenses in turn sparked a whole new genre of innovation, with coloured contact lenses adding a new dimension in the fashion world.
Ciba Vision remained profitable in the core business thanks to its new manufacturing process, and captured significant market share in the rapidly growing disposable lens segment, with products that offered varied kinds of convenience to the convenience seeking consumer.
Ten years after Bradley's bold evolutionary move, Ciba Vision's annual turnover had tripled to cross US$ 1 billion and its new drug which was transferred to parent Novartis was well on its way to becoming a billion dollar product. A business whose turnover a decade ago was stuck at US$ 300 million and looked like heading down, was now hugely more successful and in fact had overtaken market leader J&J in some product segments.
In recent years, Ciba Vision's parent - Novartis, bought out Alcon - a leader in the eye care business, and merged Alcon with Ciba Vision to create a world leader in eye care with a full spectrum of eye care products.
Soft contact lenses (disposable lenses) far outsell conventional lenses today, with the fastest growing segment being the daily disposable lenses and all their colourful fashion extensions.
Lessons for financial advisors
Technology is disrupting the financial intermediation business, just as soft disposable lenses disrupted the world of conventional contact lenses. Bradley's wise strategy offers many rich insights to distributors on how to manage evolution in their business models:
Recognize that your business model is not going to go bust in the near future as a result of tech innovations , but equally recognize that a new paradigm of convenience now offered through tech platforms, will forever change your business Use cash flows from your existing profitable distribution business to fund development of more convenient tech enabled solutions which will not only keep your existing clients with you, but also attract more convenience seeking clients Understand that this new vertical will need to be run very differently from your conventional distribution business - give it the space, flexibility and freedom to operate as it should in its arena. Focus on cost control measures that will help the present business model remain profitable in an era of shrinking margins Have the wisdom and foresight to realize that the present needs to fund the future, if the future is to be bigger and brighter than the present. Guide the evolution of your business model to embrace the future even as you actively participate in the present.
Content is prepared by Wealth Forum and should not be construed as an opinion of HDFC Mutual Fund.
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Wise Advice
Your current business is profitable, yet you know that its future is uncertain due to disruptive changes in the competitive landscape. You know deep down that you need to embrace a new business model, with new skill sets, but you are torn between maximising today's opportunity and preparing for a different tomorrow. What is the wisest way for you to participate actively today, while simultaneously preparing for tomorrow? This case study of Ciba Vision will hopefully give you some wise insights.