Clayton Christensen of the Harvard Business School, is the pioneer of the economic concept “The Innovator’s Dilemma.” At the Borrell Associates Local Online Advertising Conference in New York City on Friday, Christensen held forth with a keynote speech that taught lessons from history on disruption.
Christensen showed how large companies have the “dilemma” of developing a new product – one that competes with the company’s existing product and one that costs less. Heck – competitors are creating newer and less expensive products – so why shouldn’t you? Christensen showed how companies fail: They refuse to develop newer products that, while perhaps giving a short-term hit to the bottom line, will ultimately secure the long term growth of the company.
In other words: you can’t rely on your expensive product selling forever. The competition will make something better and cheaper. You have to do the same.
Your product doesn’t need to be bigger and badder. Don’t try to impress all the other engineers in the room with your multiple, often baffling, array of choices. There are high-end users for sure, but there’s a whole market that just wants to, say, watch TV. Enter the disruption:
“Disruptive companies brought to the market a product that wasn’t as good (as an industry leading product), but it was simple and affordable,” said Christensen.”(The newer product) could take root with a new group of customers who were quite happy with the simpler product.”
Discussing the death of conventional, major steel manufacturers, Christensen didn’t blame the company managers.
“You’ll notice… I never said ‘stupid managers'” said Christensen. “They followed the right principles. There are two (longstanding) principles of best management: listening to customers and going for the highest margins. But this focus made it impossible for smart managers to address the situation.”
That’s right – if you listen to your customers and go for the best profits, your future could be in doubt. “The customer is not always right,” said Christensen. “They’re not always buying what they think they’re buying.”
Consider the plight of the poor vacuum tube: Through the 1970s, most consumer electronics were made with vacuum tubes “about the size of a child’s fist,” pointed out Christensen. Vacuum tube-based televisions were so large, they had to sit on the floor. Transistor technology came along as the disruptive technology … every major manufacturer bought rights to transistor technology. “They spent $3 billion trying to make transistors as powerful as tubes,” said Christensen. Then came along new applications that took advantage of the transistors. Early applications included a hearing aid: “that’s a device you couldn’t make with a tube,” chuckled Christensen. And, of course, the transistor radio followed soon thereafter.
Of course transistors rule in all forms of technology now. The vacuum tube companies are out of business, except for a few high-end manufacturers for the audiophiles.
Why do businesses fail? Christensen convincingly points out that they have an inherent problem: “A business unit isn’t designed to evolve. But a company can evolve if it has many business units within it.” If you pluck a few people out of one department and tell them to do something, but insist they don’t “step on toes,” they will fail. Instead, the new unit has to be charged to destroy the old one.
Another reason for failure? Existing media companies are loath to hire web sales and marketing people, and they talk about how expensive it would be to do so. But they are being undercut by startups with less money that don’t obsess over legacy issues. “Why is it the startup companies have so little money just go ahead and do it, while the established companies with tons of capital don’t?” asked Christensen.
Good question. If it’s not “stupid managers,” and it’s not a desire to succeed, the only answer is that companies aren’t set up to innovate. But, as Christensen points out, they can be.