Harvard Business School Professor Clayton Christensen ended the conference’s presentations with a review of his theory on disrutpive innovation, which he popularized in his best-seller The Innovator’s Dilemma some thoughts on outsourcing and predictions on Linux.
The soft-spoken prof, whom colleague Warren McFarlan introduced as “one of the most extraordinary members of the Harvard Faculty,” told the audience that the puzzle that prompted his research for The Innovator’s Dilemma was the fact that the most successful companies often end up at the bottom of their industries and Christiansen wanted to find out why.
“In battles for sustaining innovation, incumbents almost always win,” said Christensen. But, he added, every once in a while there is a different kind of innovation. It comes in at the low end of the market.
It’s called a disruptive technology because it redefines the trajectory of performance improvement. The technology is usually simple and affordable and can take root in an undemanding part of the market. “Almost always, entrants beat incumbents when a disruptive technology comes in and that’s what kills leaders in an industry over and over again.”
Christensen then proceeded to give examples of companies that rode long waves of success only to wipe out big time, starting with perhaps the most famous example in the computer industry, Digital Equipment Corp. (DEC.). “Every mini-computer company collapsed in unison,” said Christensen. “You’d expect them to collude on pricing but not on collapse,” he said to much laughter. (Pithy comments punctuated the professor’s presentation. He was as funny as one of the previous speakers, Gerry McCartney, the CIO at Purdue’s Krannert School of Management.)
When Digital was introducing its mini-computers to the market in the 1970s and ’80s, the company did anything it could to make better products that it could sell for higher margins because mini-computers were so complicated and expensive to make and sell.
Management had an idea for a mini-computer that it could sell for $500,000 and a 60 percent profit margin. At the time, PCs were emerging, but their performance was crummy at best and none of DEC’s customers expressed any interest in them. (The gross margin in a $2,000 PC was 40 percent.) So management at DEC had to make a decision that at the time looked like a no-brainer but that ultimately led to the comapny’s demise: either use corporate resources to make lousy PCs that none of its customers wanted or to make really good, really expensive computers that all of its customers were asking for.
“When you’re faced with that dilemma, that’s Business School,” joked Christensen. “Every once in a while when disruption comes in, the principles of good management paralyze a company.” And that’s what he meant when he earlier said to much laughter: “The paradigms we teach at Harvard Business School sow the seeds of every company’s demise.”
“When a leader finds itself making better and better products, the only way it can catch the next wave without gettingn killed is if it sets up a totally new organization with a charter to kill the old organization,” said Christensen. That is the way IBM survived, he noted.
Christensen explained how disruptive innnovators win business once the functionality of their once lousy products becomes good enough for mass adoption: they have to be first to nmarket with new products. In order to be first to market, the architecture of their products tends to flip from being proprietary and interdependent to open and modular. The modular architecture facilitates speed to market because it allows companies to mix and match and plug and play components to meet every customers need. When this happens, companies no longer need to be vertically integrated–meaning they no longer have to control and manufacture the entire architecture.
They can in fact outsource pieces of it, which is what Compaq did. But Compaq ended up outsourcing pretty much every aspect of its business, with the exception of its branding, to Flextronics. Christensen said outsourcing actually staved Compaq’s failure.
Christensen used the example of Compaq to get attendees to think carefully about the right approach to outsourcing and what kinds of things to outsource. “Much of what we think needs to be outsourced actually doesn’t have to be outsourced,” he said. If CIOs structured their IT systems in a way that helped their customers get their jobs done, their might not be as much need to outsource IT, he said.
With his model of disruptive innovation laid out, Christensen proceeded to put Linux in the context of his theory. Linux is a disruptive technology with a modular architecture. Windows by contrast has an interdependent architecture. He predicted that we wouldn’t see Linux taking root on desktops in enterprise networks but that it would become the dominant operating system on handheld computers.
“That’s the way Microsoft gets unwound,” he said.
–Meridith Levinson, CIO magazine Senior Writer