February 20, 2013

EVERYTHING IS FINE...AND THEN IT'S NOT:

Clayton Christensen Wants to Transform Capitalism (JEFF HOWE, 02.12.13, Wired)

Howe: And then your dissertation ended up on the best-seller list? Not bad.

Christensen: 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 like GE that had spent more than $100 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 not CPS? 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 were replaced by electronic ones. Then one of the faculty said to me, "Check out disk drives. I think the same phenomenon happened there too."

Howe: Disk drives: The fruit flies of the business world, I think you called them.

Christensen: 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 lifespans. 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 organized, 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.

Howe: Is this around the time that Intel CEO Andy Grove heard about your work?

Christensen: 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 10 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 visualize 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.

Howe: What did Grove say?

Christensen: 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.

Howe: What did Intel wind up doing?

Christensen: They made the Celeron Processor. They 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 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."

Howe: If you had to list some industries right now that are either in a state of disruptive crisis or will be soon, what would they be?

Christensen: Journalism, certainly, and publishing broadly. Anything supported by advertising. That all of this is being disrupted is now beyond question. And then I think 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.


Posted by at February 20, 2013 10:29 AM
  
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