Appearing in In The Black magazine, July 2016
Thinking about innovation
By Derek Parker
Everyone has their own list of the heavy hitters of management theory but most lists would have Clayton Christensen, longtime professor at the Harvard Business School, near the top. His seminal work on disruptive innovation, spanning twenty years, has done a huge amount to explain the field. His book The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail (first published in 1997 but there has been a series of reprints, updates and sequels) outlined a gameplan for would-be disruptors and a defensive strategy for those vulnerable to disruption.
A new collection, The Clayton M. Christensen Reader (Harvard Business Review Press, A$32.99) has brought together his key articles, as well as a new essay showing the direction of his current thinking.
The term ‘disruptive innovation’ (coined by Christensen) is often thrown around fairly loosely but the real story is much more nuanced. Christensen makes clear that not every new technology is disruptive, and neither is every change in the business landscape. The concept describes a process by which a product or service takes root initially in simple applications at the bottom of a market and then moves relentlessly upwards, eventually displacing the previously successful players.
Established companies tend to innovate faster than their customers’ needs evolve, so many organisations end up producing products or services (“sustaining innovations”) that are actually too sophisticated, too expensive, and too complicated for many customers in their market. But companies pursue these products at the higher tiers of their markets because by selling to their most up-market customers they achieve the best margins and the greatest profitability per sale.
The other side of the issue, however, is that this strategy opens the door to “disruptive innovations” at the bottom of the market. An innovation that is disruptive provides a whole new population of consumers at the bottom of a market with access to a product or service that was historically only accessible to consumers with more resources or expertise.
Characteristics of disruptive businesses, at least in their initial stages, can be lower gross margins, smaller target markets, and simpler products and services. Because these lower tiers of the market offer lower gross margins, they are unattractive to other firms moving upward in the market. Christensen finds this pattern again and again, in products as varied as steel and milkshakes, and in services ranging from telecommunications to medical clinics.
Working from this principle, Christensen asked why established companies found it so difficult to respond to disruptors. His answer was that they did not understand their current business model well enough to know if it would suit a new opportunity or hinder it, and they did not know how to change models when they needed to. In one of his key essays, ‘Why Hard-Nosed Executives Should Care About Management Theory’, he underlined the importance of thinking about basic business principles rather than being overwhelmed by the daily tasks of management. He saw that a crucial task for senior executives was to understand their business model, look to the industry’s growth future, and be aware of the strengths and weaknesses of their company.
In one of his most controversial articles, ‘Innovation Killers: How Financial Tools Destroy Your Capacity to Do New Things’, he argued that an undue emphasis on metrics like discounted cash flow and earnings per share can make a company dangerously conservative and insular. He believed that methods that evaluate investments according to future value are a better way to go.
Christensen has always been aware of the need to get out of the academic tower, and he has provided consulting services to a wide range of companies, as well as often partnering with industry-based people as co-authors. He also set up, with industry support, a series of think-tanks such as Innosight to find solutions to business and social problems. He has made a point of keeping up with technological shifts, especially the impact of social media and open innovation systems.
The final essay in the Reader finds Christensen looking in a different direction. In ‘How Will You Measure Your Life’, he uses concepts from business to challenge readers to manage their careers and personal lives in a way that provides deep-seated satisfaction. He notes that his religious faith – he is a committed Mormon – has provided him a moral and intellectual base throughout his life. While not proselytising for his religion, he makes the point that personal growth and career success are intrinsically linked. Business is, he says, a way to serve others, and professional success is not an end in itself. When it comes times to look back, the metric should be not how much money one has made but how much one has made a positive difference.
This piece casts his body of work in a different light, giving it an emotional depth and resonance. The best managers, he says, are always good people as well, and that, in the end, is how it should be.