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It’s been a big couple of weeks for Prof Clayton Christensen, one of the world’s most influential thinkers on innovation. Not only has his theory of Disruptive Innovation been attacked in the New Yorker, in his most recent article for the Harvard Business Review he acknowledged that his “Innovator’s Solution” may have been wrong too.
Every few years, a book comes along which profoundly changes the way businesses think about the work they do. In recent years, the startup world has had the Lean Startup. But among the people tasked with understanding how innovation efforts impact their companies, not to mention innovation consultants like myself, one of the most impactful books came out in 1997: The Innovator’s Dilemma by Prof Clayton Christensen from Harvard Business School.
This book outlined Christensen’s theory about why large, established companies eventually get overtaken by smaller ones, and it introduced the concept of disruptive innovation. Put simply, it theorises that small companies can disrupt the market of large companies by releasing a new version of an offering which appeals more to a subset of the customers. In many cases (especially those listed in the book, such as Computer Storage, Department Stores and Construction Equipment), the small company releases a new technology which is inferior in quality or performance to that of the large company, but makes up for it in another way, like a lower price or convenience. Over time and iteration, this new technology will begin improving to handle more demanding uses.
The important aspect of the theory which most discussions ignore though is that while it is happening, management think they’re making the right decision to let the new companies take over the low-end of the market. The reason: The low end of the market is often the least profitable, and by removing it from your customer base, the large companies are actually becoming more profitable (although not necessarily making more profit). Since company leaders have often been taught that increasing profitability is the holy grail of management, it makes perfect sense to allow someone else to take over the low market.
It’s a theory which took the world by storm, seemingly explaining the evolution of companies and providing evidence to pro-innovation advocates that all companies must change or die, lest they eventually be forced out of the market by a young upstart. It also went fairly unchallenged over the past decades, which seemed to anger Jill Lepore from The New Yorker, who wrote a scathing article declaring that the theory outlined in The Innovator’s Dilemma had no solid foundation and was built on shaky evidence.
Jill Lepore: “It’s a theory of history founded on a profound anxiety about financial collapse, an apocalyptic fear of global devastation, and shaky evidence.
Her main bugbears appear to be twofold:
- The case studies used by Christensen in the book don’t actually show disruption by new entrants. In some cases, companies which are listed as new market entrants are offshoots of existing companies. And in most cases, the large companies listed as having been disrupted still exist today, in some cases still being the market’s largest players.
- For a model to work, it needs to have predictive power, which Disruptive Innovation theory does not. She notes how Christensen predicted the iPhone would fail, and how an investment fund selected on disruptive technologies fell much further than the NASDAQ within a year of being released.
More than anything, while very well written and researched, the article comes across as a personal attack on Prof Christensen and the feeling that innovation equates to progress. It falls short of calling him a liar, but the publication of the article apparently hurt him deeply.
In a phone interview with Businessweek, Prof Christensen hits back at some of the interpretations which Lepore put on the case studies in the book, outlining that while some of them are still major players, their business and customer base had changed, while other players had indeed been forced out of the market altogether.
However, the main point Christensen mentioned is that the book which Lepore was analysing, written in 1997, had all of the points Lepore mentioned addressed and updated in subsequent books and articles over the past 17 years. The theory continues to evolve and change as new causal methods and evidence are investigated.
In fact, in preparing for his latest Harvard Business Review (June 2014) article, Christensen and his co-authors made a surprising revelation: that they had been wrong in their book The Innovator’s Solution suggesting a solution to the innovator’s dilemma. In this 2003 book, Christensen & Co suggested the way large companies could fight back against being disrupted was to have independent business units which could develop innovations without being killed by current management mindsets.
The problem? As Steve Denning reviews in his recent Forbes article: “Separate organizations don’t work—or at least not for long,” as analyst David Garvin noted in HBR. Even if the innovative independent business unit is successful, the firm often folds the subsidiary into the mainstream of the organization and the culture in due course crushes it to death, as happened with the PC division of IBM.
The “innovator’s solution” isn’t a “solution” to the innovator’s dilemma. It doesn’t neutralize the forces hostile to innovation; it merely postpones the task of finding a solution to a later date. Companies continued to be disrupted in significant numbers. – David Garvin
Instead, Christensen’s most recent update to the theory is that innovation can only flourish in a large organisation if management and leadership are basing their decision-making on the right metrics. In today’s climate, most management decisions are ultimately tooled towards keeping shareholders happy, who usually have a short term interest (less than 1 year). The metrics which keep these people happy are profit, a high return on assets (ROA) and a high internal rate of return (IRR). The issue is that one of the easiest ways to improve those metrics is to remove costs and assets from the organisation. While this is great for short-term profitability, it strongly inhibits investment into potentially risky / uncertain innovations (which would increase assets), and thereby limits a company’s future growth.
Christensen’s newest advice is startlingly simple: Educate managers into considering the impact on the customer of their decisions, not the shareholders. The non-financial impact of their programmes, both cost-cutting and innovation development, should play a key part in resource allocation.
Disruptive Innovation is a force, not a tool
So what can we learn from all this? My view is to treat disruptive innovation for what it is: a theory on how innovation impacts companies and markets, not a methodology for success. The vast majority of companies who try to innovate by actively disrupting a market are actually doing innovation wrong and will likely fail. Customer choose which innovations they see value in, so focus on the customer rather than the competitors for your greatest chance for success.
Have you experienced or attempted disruption in your market? Let me know in the comments below.
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