CHAPTER
2

Disruptive Innovation

Clay Christensen is an unlikely but compelling disruptive force in the field of innovation. Born in Salt Lake City, Christensen worked as a missionary for the Church of Jesus Christ of Latter-day Saints in the Republic of Korea from 1971 to 1973 and speaks fluent Korean. His career has straddled the worlds of academia and business. He worked as a consultant with the Boston Consulting Group (BCG) for four years and started three successful businesses, including CPS Technologies, a firm that he cofounded with several MIT professors in 1984.

Christensen became a faculty member at Harvard Business School in 1992 and was awarded a full professorship with tenure in 1998, becoming the first professor in the school’s modern history to achieve tenure at such an accelerated pace. He is now the Kim B. Clark Professor of Business Administration and is widely regarded as one of the world’s foremost experts on innovation and growth. In 2011, he was ranked number one in the Thinkers50.

In 2000, Christensen founded Innosight, a consulting firm that uses his theories of innovation to help companies create new growth businesses. In 2007, he founded Rose Park Advisors, a firm that identifies and invests in disruptive companies. Christensen is also the founder of Innosight Institute, a nonprofit think tank whose mission is to apply his theories to vexing societal problems such as healthcare and education.

The Ideas

Christensen is best known for his 1997 book The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail. In it, he looked at why well-managed companies often struggle to deal with new radical innovation in their markets. These companies often fail, he suggests, because the very management practices that have allowed them to become industry leaders also make it extremely difficult for them to develop the disruptive technologies that will ultimately steal away their markets.

The idea of “disruptive technologies” was introduced by Christensen and Joseph Bower in a 1995 article in the Harvard Business Review entitled “Disruptive Technologies: Catching the Wave.” Christensen and Bower noted that “one of the most consistent patterns in business is the failure of leading companies to stay at the top of their industries when technologies or markets change.”¹

Bower and Christensen pointed to a number of examples that were current at the time they were writing. For example, Goodyear and Firestone entered the radial tire market late, Sears gave way to Walmart, Xerox let Canon create the small copier market, and Bucyrus-Erie allowed Caterpillar and Deere to take over the mechanical excavator market. But the most striking example of this phenomenon is the computer industry.

IBM dominated the mainframe market but was slow to respond to the emergence of minicomputers, which were technologically much simpler than mainframes. Digital Equipment (remember it?) dominated the minicomputer market but in turn missed the personal computer (PC) market.

These observations led Christensen and Bower to pose the question: “Why is it that companies like these invest aggressively—and successfully—in the technologies necessary to retain their current customers but fail to make certain other technological investments that customers of the future will demand?”

In answering this question, Christensen and Bower argued that bureaucracy, arrogance, jaded executives, poor planning, and short-term investment horizons all play a part. But there is a more fundamental reason. Building on a model that Christensen had developed, he and Bower argued that there is a basic paradox at work—and it is that paradox that gives rise to the innovator’s dilemma in the title of Christensen’s 1997 book.

Too Close

At the heart of this paradox is the insight that “leading companies succumb to one of the most popular, and valuable, management dogmas. They stay close to their customers.”

While received wisdom suggests that it is good management practice to listen to what your customers want, staying close to your customers can have an unfortunate side effect. In particular, listening to customers can mean that companies do not invest in or see the potential of new technologies that will ultimately disrupt their markets.

The reason for this is simple. When a new technology is first introduced, although it may be cheaper, it typically will not be as good as the existing—or incumbent—technology. This is not surprising, as the new technology has yet to be refined and perfected. At this stage, if the companies that supply the existing technology ask their customers whether they want the new technology, the answer will almost always be no. It is less reliable and less attractive.

Furthermore, the company is earning good margins on its existing technological innovations and has little incentive to invest in a new technology that will eventually compete with its existing products and earn lower margins. As a consequence, incumbent companies have no incentive to develop the new technology that will in time disrupt their markets.

Over time, however, the new technology is refined so that it offers many of the same benefits at a lower price. At this point, the customers who used to prefer the incumbent technology want the new technology and desert their former supplier. This, in essence, is the innovator’s dilemma: Do you develop new technologies that your customers don’t think they want and that will earn you lower profits? Or do you continue to invest in improving the products that your best customers love?

This dilemma is played out in industry after industry. What Christensen’s model suggests is that the danger to an incumbent company usually comes when an inferior, cheaper product enters the bottom of the market. Over time, that cheaper technology evolves and moves up the value chain to displace the incumbent technology.

The computer industry is a good illustration of this process at work. Christensen’s model has influenced the strategy of some of the biggest and most successful companies and leaders in the industry. When he was CEO of Intel, Andy Grove flew Christensen out to California to explain disruptive innovation to his top managers, then used it to craft a strategy to resist insurgent chipmakers. Christensen’s influence is also cited as a major influence on Steve Jobs by his biographer, Walter Isaacson. Indeed, it can be argued that Apple’s huge commercial success during Jobs’s second stint at the helm is largely due to his success in resolving the innovator’s dilemma.

And the effects of disruptive innovation are not confined to technological paradigm shifts. Disruptive innovation can take the form of new business models or new manufacturing processes.

So, for example, in the U.S. automotive industry, Ford and General Motors did not perceive the threat to their home market from Toyota’s small cars. Instead of competing with the Japanese manufacturer, they preferred to concentrate on the more profitable midsize car and SUV segments. But over time, Toyota used its competitive advantage to move into these markets, and ultimately to attack the luxury car segment. Toyota now faces a similar incursion from Kia and other low-priced competitors.

So what can organizations do to safeguard themselves against disruptive innovation? Back in 1995, Christensen and Bower offered a method for spotting and cultivating disruptive technologies:

• Determine whether the technology is disruptive or sustaining.

• Define the strategic significance of the disruptive technology.

• Locate the initial market for the disruptive technology.

• Place responsibility for building a disruptive technology business in an independent organization.

• Keep the disruptive organization independent.

With his coauthors, Christensen has gone on to apply his model of disruptive innovation beyond business to include other sectors, such as education and healthcare. Disrupting Class (2008) and The Innovative University (2011) offer solutions for the education sector, and The Innovator’s Prescription (2009) examines how to fix the U.S. healthcare system. Christensen’s other books include The Innovator’s Solution (2003), Seeing What’s Next (2004), and The Innovator’s DNA (2011).

Innovation Direct

Meeting Clay Christensen, the most disruptive element is his physical presence. He is an extraordinarily tall man with a daunting presence. In his office at Harvard Business School, we began by asking him this question:

What does it feel like to be recognized as the world’s most influential management thinker?
I asked the same question of a friend of mine who is a professor at MIT. Broadly viewed, if they gave a Nobel Prize in Material Science, this guy would get the first one. So I asked him the same question, and he said, “It is so disappointing to be judged as the best in the world because all my life I was at the bottom of the mountain looking up at the people at the top and thinking, man, they’re smart. And now I’m sitting up at the top and thinking, well, if nobody’s better or smarter than me, then the world is in real trouble! And so I’m very honored that people would think this of me, but the world is hurting!”

You follow in the footsteps of Peter Drucker, Michael Porter, and C. K. Prahalad, the other people who have topped the Thinkers50. It means that you are highly respected, but it also carries some responsibility as well.
Yes, and I am really honored. The obligation is that if there’s anything I’ve learned about how to do research, I really have to teach the next generation to do much better research than I’ve ever accomplished. And if I can do that, then I feel like I will have accomplished something. If all I leave the world is a bunch of books, I won’t have changed much.

Let’s talk about those books. You’re best known for the idea of disruptive innovation. What exactly is disruptive innovation? Explain it.
Disruptive innovation has a very specific meaning. It is not a breakthrough innovation that makes good products a lot better. It has a very specific definition, and that is that it transforms a product that historically was so expensive and complicated that only a few people with a lot of money and a lot of skill had access to it. A disruptive innovation makes the product so much more affordable and acceptable that a much larger population has access to it.

So a disruptive innovation involves the democratization of a technology?
That’s exactly right. And so it creates new markets. But the technology leaders who made the complicated, expensive stuff find it very hard to move in the direction of affordable and simple because that is incompatible with their business model. And so it’s almost a paradox within itself. But what it says is, if you’re a little boy and you want to kill a giant, the way you do it is by going after this kind of product, where the leader is actually motivated to walk away from you rather than engage you.

Give us an example of this. Most people are familiar with the computer industry and how that’s developed. Perhaps you can use that to illustrate the point.
Yes. At the beginning, the first manifestation of this digital technology was a mainframe computer. It cost several million dollars to buy, and it took years to be trained to operate these things, so that meant that only the largest corporations and the largest universities could have one. So if we had a problem that required this technology, we had to take our problem to the center and have the experts solve it for us.

But then there’s a sequence of innovations from the mainframe to a mini to a desktop to a laptop and now to a smartphone that has democratized that technology to the point where everybody around the world has access to it and we are much better off. But it was very hard for the pioneers of the industry to catch these new waves. Most of those were created and dominated by new companies.

This process you describe gives rise to the innovator’s dilemma, which was the title of your 1997 book. Can you explain that dilemma?
Yes. So the dilemma is that every day and every year in every company, people are going to senior management, knocking on the door, and saying, I’ve got a new product for us. And some of those entail making better products that you could sell for higher prices to your best customers.

But a disruptive innovation generally causes you to go after new markets, to reach people who aren’t your customers, and the product that you want to sell them is something that is just so much more affordable and simpler that your current customers can’t buy it. And so the choice that you have to make is, should we make better products that we can sell for better profits to our best customers? Or maybe we ought to make worse products that none of our customers would buy that would ruin our margins? What should we do? And that really is the dilemma.

It’s the dilemma that General Motors and Ford faced when they tried to decide, should we go down and compete against Toyota, who came in at the bottom of their markets, or should we make even bigger SUVs for even bigger people? And now Toyota has the same problem. The Koreans, with Hyundai and Kia, have really won the low end of the market from Toyota, and it’s not because Toyota’s asleep at the switch. Why would it ever invest to defend the lowest-profit part of its market, which is the subcompacts, when it has the privilege of competing against Mercedes? And now Chery is coming from China, doing the same thing to the Koreans.

Your thinking has without question influenced generations of managers, including people like Steve Jobs and also Andy Grove at Intel.
Yes. I never imagined that I could ever meet these people, let alone be judged as having helped them. But I learned a lot from Andy Grove. What happened was that I was at Harvard Business School minding my own business, and Andy Grove called me out of the blue and said, “Look, I’m a busy man; I don’t have time to read drivel from academics, but somebody told me you had this theory, and I wondered if you could come out and present what you’ve learned to me and my staff and then tell us how it applies to Intel.”

And for me it was the chance of a lifetime, so I flew out there. Now, Andy Grove is quite a gruff man, and when I arrived, he said, “You know, stuff’s happened to us; we have only 10 minutes for you, so just tell us what this theory of disruptive innovation means for Intel.” And I said, “Andy, I can’t do that because I have no opinion about Intel, but the theory has an opinion, and so I have to describe the theory.”

So he sat back impatiently, and 10 minutes into it he stopped me and he said, “Look, I’ve got your stupid theory; tell us what it means for Intel.” And he really did get it. And I said, “Andy, I need five more minutes because I’ve got to describe how this process of disruption worked its way through a totally different industry, just so that you can visualize what can happen to Intel.”

So I described how the minimills came into the steel market at rebar and then went upmarket. When I was done with that, Grove said, “Oh, I get it. So what you’re telling me it means for Intel is . . . ,” and he described how Intel had two companies coming at it from below, and it needed to go down there and not let those companies go up against it from below. It was very successful.

And that was when Intel introduced its Celeron chip to counter cheaper competition from below?
Yes, that’s right. And I thought about this. If I had been suckered into telling Andy Grove what he should do, I’d have been killed, because he knew so much more about microprocessors than I would ever know.

But rather than telling him what to think, I taught him how to think so that he could reach his own conclusions. And that changed the way I teach, it changed the way I talk, and the insight is that, for whatever reason, the way the world is designed, data are only available about the past. And when we teach people that they should be data-driven and fact-based and analytical as they look into the future, in many ways we are condemning them to take action when the game is over.

The only way you can look into the future is by using a good model. There are no data, so you have to have a good theory. And we don’t think about it, but every time we take an action, it’s predicated upon a theory. And so, by teaching managers to look into the future through the lens of the theory, you can actually see the future very clearly. I think that’s what the theory of disruption has done.

And you’ve taken these ideas and applied them in nonbusiness areas—to healthcare and education. To what extent do you think that that’s the role of management theory and management ideas? What has it got to offer in terms of solving the really big problems that the world faces?
It depends on the level at which you look at it. If you say, what does management have to offer to healthcare and education, I would say, not that much, because the techniques that are useful here may not be useful there. So to try to take lessons from the best practices here is a crapshoot, but if, in your research, you get to a fundamental level, the theories are broadly applicable. And therefore what we learn in the study of management, if we’re figuring out what’s the fundamental causal mechanism, really is broadly applicable.

Take motivation, for example. Motivation is in the face of every innovator in our school system. How do we motivate the students to get engaged? But it turns out that motivation isn’t unique to education. It is in healthcare. How do we motivate people to take care of themselves? And in fact, in every business where you have a product and you’re trying to convince the customers to be motivated to buy that product, it’s the very same thing happening everywhere.

So if you understand the causal mechanism that leads people to pull something into their lives, then you don’t have to become an expert in all these fields. Instead, you have the expertise in the problem. And I think that for me that’s been really useful, because over the last 10 years we did two books, one in healthcare and one in how do we improve our schools, and we did them in parallel. And most people think, oh my gosh, you’re an idiot; these are such different fields. But from my point of view, no, they’re not such different fields; they all have the same problems.

And if you have theories that describe what happens at a fundamental level, you can do things like that and figure out that when you’ve solved this problem, where else you can use the same thing to solve the same problem?

Most recently, you’ve been applying some of this thinking or some of this thought process to your own life and asking how you will measure your life.
Yes. Again, this has just been a wonderful experience for me. I’ll give you an example. We wrote a piece in the Harvard Business Review about the misapplied measures of financial analysis, and we pointed the finger at finance people because they have taught us some things that sometimes actually take you in a very bad direction, and one of them is this dogma that you should ignore sunk and fixed costs and look only at the marginal cost and the marginal revenue, assuming that what is sunk is sunk.

But that marginal analysis is very scary sometimes because what you have to be good at in the future is different from what you were good at in the past. If you look at the marginal cost of leveraging what is already in place versus the full cost of creating something completely new from scratch, the marginal argument always trumps the full-cost argument. And established companies just incrementally keep marginalizing on things that are irrelevant to the future.

And the same is true of people in their careers? So, people who come to Harvard Business School have a propensity to always want to be achieving something, and you’ve said that that marginal effect can be detrimental to their long-term aims?
That’s right, because they look at the marginal benefit of just a little bit more investment in their career versus the cost of doing something else, such as throwing a ball with their kids. And because of the way they’re doing the accounting, working late and investing a little more in their career looks very profitable. But by the time their children are in their teenage years, they look at it again, and they say, “Oh my gosh, I should’ve been investing in those kids all along, and now the full cost of reversing that problem is almost impossible to do.” In the end, we pay the full cost, whether we know it or not.