This article was taken from the April 2013 issue of Wired magazine. Be the first to read Wired's articles in print before they're posted online, and get your hands on loads of additional content by <span class="s1">subscribing online.
Sixteen years ago a book by Clayton Christensen changed business thinking forever. The Innovator's Dilemma looked at industries, ranging from disk drives to steel to mechanical excavators, and exposed a surprising phenomenon: when big companies fail, it's often not because they do something wrong, but because they do everything right. Successful businesses, Christensen explained, are trained to focus on what he calls sustaining innovations -- innovations at the profitable, high end of the market, making things incrementally bigger, more powerful and more efficient.
The problem is that this leaves companies vulnerable to the disruptive innovations that emerge in the murky, low-margin bottom of the market. And this is where the true revolutions occur, creating new markets and wreaking havoc within industries. Think: the PC; the MP3; the transistor radio. This insight -- that managers might actually scuttle the ship by following the navigational chart laid down in business school -- shifted the way people thought about innovation.
Christensen's book soon became required reading in Silicon Valley, where it has been championed by the likes of Steve Jobs, George Gilder and Andy Grove. Christensen has since applied his theories to industries ranging from health care to higher education, always attempting to teach people how to think about business rather than what to think. "I don't have an opinion," the Harvard Business School professor and devout Mormon often says. "But the theory has an opinion."
In the meantime, Christensen has faced some major disruptions of his own. In July 2010 he suffered a debilitating stroke that left him unable to speak. But within weeks he was using Rosetta Stone to reteach himself the English language, and within months he had begun writing again. His recent book, How Will You Measure Your Life?, came out last year and a new work,
The Capitalist's Dilemma, is due to be published in 2014.
Wired: You've founded a company. You've worked at the White House. And now you teach at the most prestigious business school in the world. But you originally wanted to be a journalist?
Clay Christensen: The head of the journalism department at Brigham Young University (BYU) [in Provo, Utah] told me to study a real field instead. I wound up in economics, thinking that would eventually take me to The Wall Street Journal.
But you became an executive.
I helped to start a ceramics company called CPS Technologies. We took it public in 1987 at $12 (£8) a share. Three months later there was this horrible cliff, Black Monday. Fidelity had bought 15 percent of our stock, and its algorithm caused it to dump it all on to the market that day. We dropped from $12 to $2 (£1.30). There's this great children's book called Alexander, Who Used to Be Rich Last Sunday, and that was us. I started to think, jeez, is this really what I want to do for the rest of my life? I think the CPS board was asking itself the same question. They fired me -- and I'm so glad they did.
And you wound up studying at Harvard.
It was already the third week in September. Classes had started.
But one of the board members for CPS, Kim Clark -- a future dean of Harvard Business School -- called the head of the doctoral programme and said, "I've got this guy. He's smart. Can you admit him?" That was on a Friday. So instead of going in to work on Monday, I showed up at Harvard as a PhD student.
And then your dissertation ended up on the best-seller list?
It became Innovator's Dilemma, yes. I brought one big question with me to Harvard. Why do smart companies fail? It was clear that CPS, which made advanced ceramics - silicon nitride - was going to make it. But there were big companies such as General Electric that had spent more than $100 million (£66 million) trying to make ceramics into a business. They all stumbled and withdrew. I couldn't attribute it to stupidity; they're all smart people who knew so much more about business than I did. That's where the basic puzzle came from. How did these big, smart businesses fail and CPS did not? I had my dissertation all laid out. I was going to study mechanical motor drives -- the switches that turn an engine on and off. The industry had gone through upheaval, as the mechanical switches had been replaced by electronic ones. Then one of the faculty said to me, "Check out disk drives. I think that the same phenomenon happened there too."
Disk drives are "the fruit flies of the business world".
Right. I didn't know anything except that disk drives were a thing inside a computer. But it turned out disk drives have really short life-spans. Every few years a new innovation turns the industry upside-down. I kept seeing mentions of something called the Disk/Trend Report. It was published by some guy in Mountain View, California. It turned out that he had data on every disk-drive company ever, whether it sold a product or not. He had the background on the people who started them, on the technologies themselves, sales by product line, everything. My kids helped me put it all into a spreadsheet. You could see how, in each generation, an established company would start focusing on bigger, more powerful disks for the top end of the market and then just get wiped out when the lower end of the market found a way to make smaller, cheaper disks, even though those had lower profit margins.
It made my thesis. Smart companies fail because they do everything right. They cater to high-profit-margin customers and ignore the low end of the market, where disruptive innovations emerge from.
Is this the time that Intel CEO Andy Grove heard about your work?
This was before the book came out. I'd published two papers on my theory, and a woman who worked in the bowels of Intel's engineering department went to Andy and said, "You have to read this article. It says Intel is going to get killed." I hadn't even mentioned Intel, but the implications were there. So Grove called me up, and he's a very gruff man: "I don't have time to read academic drivel from people like you, but I have a meeting in two weeks. I'd like you to come out and tell me why Intel's going to get killed." It was a chance of a lifetime. I showed up there. He said, "Look, I'll give you ten minutes. Explain what you think of Intel." I said, "I don't know anything about Intel. I don't have an opinion. But I have a theory, and I think my theory has an opinion on Intel." I described the idea of disruptive innovations, and he said, "Before we discuss Intel, I need to know how this worked its way through another industry, to visualise it." So I described how mini mills killed off the big steel companies. They started by making rebar cheaper than the big mills did, and the big mills were happy to be rid of such a low-margin, low-quality product. The mini mills then slowly worked their way upward until there was nothing left to disrupt.
What did Grove say?
He cut me off before I could finish. "All right. I got it," he said, and then he described the whole thing. Instead of the mini mills, there were two microprocessor companies, Cyrix and AMD, making cheap, low-performance chips. Grove says, "What you're telling me, Clay, is that we have to go down and kill them, set up our own business unit and launch our own low-end competitor." I didn't say anything. I wasn't going to be suckered into telling Andy Grove what he should do with Intel. I knew nothing about semiconductors. Instead of telling him what to think, I told him how to think.
What did Intel wind up doing?
Then they made the Celeron processor. They subsequently blew Cyrix and AMD out of the water and the Celeron became the highest-volume product in the company. The book came out in 1997, and the next year Andy Grove gave the keynote at the annual conference for the Academy of Management. He holds up my book and basically says, "I don't mean to be rude, but there's nothing any of you have published that's of use to me except this."
If you had to list some industries right now that are in either a state of disruptive crisis or will be soon be, what would they be?
Journalism, certainly, and publishing, broadly. Anything supported by advertising. That all of this is being disrupted is beyond question. Higher education is just on the edge of the crevasse. Generally, universities are doing very well financially, so they don't feel from the data that their world is going to collapse. But I think even five years from now these enterprises are going to be in real trouble.
Why is higher education vulnerable?
The availability of online learning. It will take root in its simplest applications, then just get better. Harvard Business School doesn't teach accounting any more, because there's a guy out of BYU whose online accounting course is so good. He is extraordinary and our accounting faculty, on average, is average.
Your latest book, How Will You Measure Your Life?, is a bit of a departure from your work on disruption. How did that come about? From my first year in the faculty, there was always so much more I wanted to impart to the students. I decided that rather than waste the last day of class summarising the semester, I'd spend my time talking about what I'd learned in life that was useful. We spend the whole semester learning theories, and you know that a theory is good if it's applicable at every level.
There are useful theories you can apply to your personal life as well. One year I was asked to deliver that lecture to the entire graduating class, and the book emerged from it.
So how should one measure one's life? By asking yourself a series of questions. How can I be successful and happy in my career? How can I be sure my family and close friends are a source of enduring happiness and joy to me rather than a source of unhappiness and heartache? How can I be sure I stay out of jail? A shocking number of my business colleagues went off that rail. What do we have to do differently today if we want different outcomes in our lives? There is a theory about deliberate and emergent strategy. The deliberate strategy allows you to choose the kind of person you want to become. But at the same time you need emergent strategy, which allows you to embrace serendipity. <span class="s2">Another important theory is about what motivates people.
Many think of management as cutting deals and laying people off and hiring people and buying and selling companies. That's not management, that's deal making. Management is the opportunity to help people become better people. Practised that way, it's a magnificent profession.
You're working on a new book now, right? The Capitalist's Dilemma. How is that related to The Innovator's Dilemma? Things seem to be going just great, especially company balance sheets. They haven't been so strong in decades. It looks like the economy is emerging from the recession in an exciting way, but we're not creating more jobs or income for the average person. The bad actors are business-school professors like me who have been teaching people what I call the Doctrine of New Finance. We've encouraged managers to measure profitability based on a return on net assets, or on capital employed. That encourages companies to liberate their capital, so they invest in efficiency innovations, which means they can make more money with fewer resources. But what the economy ultimately needs are empowering innovations -- the Model T, the transistor radio. Empowering innovations require long-term investments, which tie up capital for years and years.
Do you study business, or do you study the world through business? Oh, the latter. What's unique about Mormonism is it encourages inquiry. I really do think my research and religion are all on the same page. I never could have come up with the notion of disruptive innovations, which went against a lot of conventional wisdom, if I hadn't been raised to always be asking questions.
US Wired contributing editor Jeff Howe is a professor at Northeastern University and author of Crowdsourcing
This article was originally published by WIRED UK
