How can you tell if your plan to take on a big swinging company is smart or foolhardy? Harvard Business School professor Clayton M. Christensen might have the answers.
Harvard Business School professor and author Clayton M. Christensen has attracted a lot of fans who are heavy hitters. Fans like Andy Grove, chairman of Intel Corp. In a review of Christensen's 1997 business best-seller, The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail, on Amazon.com, Grove wrote: "This book addresses a tough problem that most successful companies will face eventually. It's lucid, analytical, and scary." Then there's George Gilder, of Gilder Technology Report, who called it "the most profound and useful business book ever written about innovation ...." And when we interviewed Michael Bloomberg recently, the man who is now mayor of New York City credited Christensen with helping to shape his ideas about innovation in running his successful media company, Bloomberg LP.
Christensen's thesis: that the best run of the large corporations -- those that are well managed, pay attention to their customers, and invest in new technology -- are vulnerable to being outwitted by disruptive innovators.
Christensen, a professor of management at Harvard Business School, has, in his writings and his work as a consultant, been focused largely on helping big companies to understand disruptive innovation and to avoid becoming victims of it. Recently, he's looked at the process from the point of view of the disrupters themselves. He has come up with a series of tests to help entrepreneurs judge whether their ideas are likely to succeed in the marketplace. To find out more, senior editor Nancy J. Lyons interviewed Christensen at his Harvard office.
Let's get right down to brass tacks here. When I first heard you speak, you threw out this phrase: "If I wanted to start a new growth business, I'd ..." What is it that you'd tell entrepreneurs to do?
No idea for a new growth business ever comes fully shaped. When it emerges, it's half-baked, and it then goes through a process of becoming fully shaped. I've developed tests that I'm hoping can help entrepreneurs manage that shaping process, so that the business plan that comes out the other end has a very high probability of success.
So you have been able to identify the strategies that allow new growth companies to succeed?
The whole story is about motivation. The leaders in every industry have vast resources at their disposal. If I try to grab a piece of real estate that the established leaders want, where the customers are attractive and the business is attractive, the evidence is overwhelming that the leaders will win. So what I want to do is to craft a strategy that takes advantage of what I would call asymmetry of motivation. That is, a situation where I'm motivated to go after the business of the market leaders, but the piece of their business that I can most naturally go after is the one that they're the least motivated to defend.
The established companies are always looking ahead to products that better satisfy their prime customers, where their profit margins are highest. Does that mean they're not that concerned about the lower-margin end of their business? And that's where the opportunity lies for start-ups with new ideas?
Remember that when a new idea emerges in an established company, it needs to get funded. And the only ideas that get funded are those that help the established company make more money. That process favors the ideas that create improved products for existing customers, and tends to reject more innovative, or disruptive, ideas. That is what creates disruptive entrepreneurial opportunities.
Tell me more about what a disruptive idea or innovation is.
A disruptive innovation is a technologically simple innovation in the form of a product, service, or business model that takes root in a tier of the market that is unattractive to the established leaders in an industry. Very often this occurs at the low end of a market -- that is how Toyota attacked General Motors, for example. Or it takes root by providing a simple and inexpensive product that enables a new population of customers to begin participating in a new application in the market -- as was the case with personal computers.
I don't feel that this concept of disruptive technology is the solution for everybody. But I think it's very important for innovators to understand what we've learned about established companies' motivation to target obvious profitable markets -- and about their inability to find emerging ones. The evidence is just overwhelming.
How would you go about coming up with an idea for a disruptive technology?
The first thing is to find out whether there is potential to create a new growth market, a new application, within the general industry dominated by an established company. The first litmus test is, Is there a larger population of less skilled, or less wealthy, customers who could be pulled into that market?
You mentioned personal computers. Can you give us some other examples of companies that have brought new customers into a market?
If you look back into history, many of the most exciting disruptive growth businesses have done this. The available products on the market were so complex you had to be an expert in order to use them, and they were expensive. Take stocks. Prior to 1910, to buy stocks you had to be a J. P. Morgan-type person. Charles Merrill's strategy was to bring Wall Street to Main Street, and he created a business model of salespeople who were not commissioned but were salaried, so they could afford to sell stocks to ordinary Americans. That was a ridiculous business proposition at the time -- that the unwashed masses would be interested in owning stock -- but Merrill made it so simple and cheap that he brought a larger population into the investing market. Then E*Trade and Charles Schwab have done it again, enabling even college students to manage their own portfolios, and day traders -- not just George Soros -- to speculate. That's how Ricoh and Canon disrupted Xerox. They made copiers that just were so cheap you could stick one on a table in a corner, and people could do the copying for themselves. If there isn't a larger population of less skilled and less wealthy people whom you can identify to pull into the market, it's a strike against the disruptability of that market.
But not all successful disruptive strategies bring new people into the market, do they? For instance, you've cited the online educational market, which some custom publishers are going after by putting supplemental materials on the Web. Their idea is to give college students the opportunity to learn in-depth about a particular subject. Having observed the study behavior of most college students, you suggested somewhat jokingly that the custom publishers would do better to put up a site called Cram.com. How does that fit in with your theories about disruptive innovation?
