Innovation can be lethal, says Clayton Christensen, author of “Seeing What’s Next” and professor of business administration at the Harvard Business School.
Christensen, who has studied the life cycle of corporations, said there is a common story in mega-companies that are taken down by far smaller competitors.
It’s not necessarily about which company has the most technologically advanced products, he said. Rather, success can be based on innovations that shake the marketplace with their ease of use and affordability.
“It seems not to matter technologically whether the innovation is complicated,” said Christensen, who spoke last week at a home builders’ conference in San Francisco.
“What is it that kills successful companies? Oddly, it isn’t somebody that comes in and makes better stuff, but someone disrupts the market.”
The disruptive innovations are often the ones that are “simple and affordable and convenient to use,” he said. Without such a disruption, the major companies are likely to stay on top. But when there is a disruptive innovation, it’s best to bet on the innovator, he said.
The scary part is that many companies caught off guard and hammered by disruptive innovations appear to have done everything by the book.
“The conclusion is: the principals of good management that we teach at Harvard Business School (appear to) sow the seeds of every business failure,” he said.
In order for innovators to offer disruptive pricing, there has to be a high-cost competitor in the market, Christensen said.
He offered up the example of steel mini mills that introduced new competition for the larger, more established integrated steel plants.
At first, the mini mills were not perceived to be a threat to the larger plants because they produced low-quality steel products for a low cost.
Gradually, the integrated plants conceded more and more of the market for low-quality steel products, like rebar, to the mini mills because the larger plants relied more on profits from higher-grade products, he said.
The larger steel companies with integrated mills continued to report healthy profits as they gradually exited the market for low-grade steel products, while the mini mills gradually evolved to handle more diverse product lines.
While hindsight can clearly show the best course of action for new innovators and established leaders, Christensen said that “there’s no stupidity involved in either side of the equation” for both the disruptive innovators and the ultimate victims of those innovations.
The steel companies operating the integrated mills, he said, “Were listening to their very best customers at the top of the market and focusing their margins where the profits were most attractive.”
There are parallels to the biblical story of David and Goliath, he said, although the battle between the steel mills was waged over a long period of time rather than through a quick confrontation, and Goliath didn’t see it coming until too late.
“If you tried to leap ahead and grow the business by making better products, the likelihood that you could succeed is pretty small,” he said. There is a greater chance of success, he said, if the giant is motivated to flee rather than to face the competition.
Similarly, the U.S. auto industry did not view the U.S. market for Japanese-built subcompact autos as a threat decades ago, as the U.S. automakers realized most of their profits from much larger vehicles.
The next disruptive player could be China’s Chery Automobile, which has announced an overseas sales goal of 80,000 cars this year, compared with 50,000 overseas sales in 2006, Christensen said.
Department stores have also been victims of disruptive innovations by low-cost competitors. Christensen noted that major department stores in the 1960s used to sell everything from paint to toys and books, though the entry of discount retailer K-Mart led several department stores to focus on products with higher profit margins, namely clothing and cosmetics.
Following this trend, he joked that Target stores may have to become “Targét” (which he pronounced tar-SHAY) as discounters gain market share.
IBM is one of the only computer companies still around today that existed in the 1960s, he said, because it set up separate autonomous businesses to target different market segments. But IBM decided to abandon its focus on some technologies, which boosted competitors Microsoft and Intel.
Some companies seek acquisitions to acquire new technologies and stay competitive, though acquisitions are not always the answer, he said. When Daimler and Chrysler joined forces, Christensen said that it may have been a better strategy to keep the two companies as autonomous as possible rather than to completely integrate them.
It becomes difficult for very large companies to maintain strong growth, he said, because “small markets don’t solve your problem for growth,” and this can create opportunities for smaller, more flexible competitors.
As an example, he said, large construction companies may move “out of the small, simple projects into big projects, creating a vacuum at the lower end for small companies to come in underneath them.”
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