The Harvard Business School professor on responding to shifting economic environments.
This is an extremely important issue that is at the heart of being able to implement ongoing growth. Those who have taken our class on Driving Organic Growth through Innovation will recognize these issues that were embodied in our IBM case on how they organized to totally refocus their company:
Question: How can companies learn to shift their research and development focus? Christensen:
I have come to rarely use the term innovation, just because it is such a broad concept that it has almost no meaning. And so, we've identified what I think is a meaningful distinction between what we call sustaining innovations and disruptive ones. So, sustaining innovation is anything that helps a company that is a leader in its industry to make better products that it could sell for better profits to its best customers, and you manage sustaining innovation very differently than you manage disruptive ones. So, to get really good at sustaining innovation, you really have to have your people right out there, living with the customer, understanding what they're trying to accomplish, what are the jobs in their lives, and then reflecting that back in the properties of your next generation products. A disruptive innovation, you will never see the opportunity if you're face to face, living with your customers. And so, finding those opportunities is a very different process. As we've talked about before, you've got to watch where are their people who can't afford or don't have the skill to use what the mainstream business is doing. So, you've got to have two groups of people: one to pursue the sustaining ones, another the disruptive.
Question: Can a company disrupt itself? Christensen:
A business unit inside of a corporation cannot disrupt itself. It can only apply resources to and successfully commercializing innovation if it helps them do a better job making more money serving the customers that they serve. If they take their eye off of that ball, the customers will either leave them or the competitors will kill them. So, a business unit cannot disrupt itself. It can only implement new technologies in a way that sustain its current business model (this was the underpinning of the EBO -Emerging Business Opportunity- organization setup at IBM).
So, the only way a corporation can evolve is if it sets up a different business unit, and a great way to illustrate that is online stock trading is a disruptive technology relative to the full service, brokered system that characterized our world before the mid-1990s. And so, the technology was available to all the stock brokers. One of them was Charles Schwab in San Francisco and they executed trades at $79 per trade. They had offices all over the country and in order to do it you had to call a broker on the phone or go into one of their offices and the broker would execute the trade for you. When online trading became available, Schwab set up a different company underneath the corporate umbrella, and the employees that were going to be on the online unit, Schwab and his co-CEO, David Patrick, forced those employees to walk clear across the Golden Gate Bridge and come back again as employees of the new company, and it just took off. Ultimately, within less than a year, so many of the customers of the original Schwab, at $79 a trade, instead opted to do it online, but they shut the old company down, folded all the rest of the customers into that, and they became what they became.
Merrill Lynch had access to the very same technology, but rather than, they didn't want to set up a different organization, to commercialize it with a different business model, and so they gave the technology to their existing organization, and the existing organization could not use it to cut the price of executing a trade. It just, it would ruin their profitability. And so, they implemented online trading as a mechanism to help their full service brokers do a better job serving the needs of their high net worth clients, to bring them better information faster. And so, they implemented the technology in a way that sustains the Merrill Lynch business versus in a way that disrupted the core business.
Question: What are the signs that you are in an industry that is about to be disrupted innovatively? Christensen:
When you, your sales people come back into your company and you hear them curse their customers, you know, those stupid idiots! Don't they understand that we make a product that's better than anybody else and yet they're just treating us like a commodity. When you hear that, it's a signal that you've actually improved the product beyond the point that customers can utilize the improvement. Now, when the product is more than good enough, it creates a vacuum underneath you for somebody to come in with a problem, with a product that is less expensive and is good enough. And so, you set up that condition there. That's how you know that you're vulnerable. And then, when a company down there actually beginning to do it, then you realize that the disruption is afoot, and you better acquire that company or start one of your own.