May 16, 1999
When 'Good Enough' is Better than the Best Core Incompetencies and the Curse of Good Management Clayton Christensen on the Opportunity -- and Threat -- of Disruptive Technologies
When 'Good Enough' is Better than the Best
Core Incompetencies and the Curse of Good Management
Clayton Christensen on the Opportunity -- and Threat -- of Disruptive Technologies
Report by Michael Finley
The thrust of of Prof. Christensen's thoughts on disruptive technologies is that the new technologies undercut the old by being "good enough" at a lower price. This view is reminiscent of the "value discipline" theories of Michael Treacy.
Treacy saw three emerging trends -- companies that succeeded by having the best products, those that succeeded by providing the best total customer solution, and those that thrived because of superior efficiency.
Christensen's "disruptive technologies" sound an awful lot like Treacy's low-price provider -- Wal-Mart being "good enough" for most people's shopping needs.
And Treacy's "best total customer solution" bears a passing resemblance to Christensen's doomed top tier of companies who offer customers more fucntionality than they could know what to do with.
To brush up on your familiarity with Treacy's disciplines, click on his face.
Christensen's thoughts on strategic capabilities put him somewhat at variance with Gary Hamel, who has spoken several times on core competencies -- but in agreement with Hamel that the complacency of excellence today is a primary predictor of failure tomorrow. Click on the picture of Hamel to see "A Point of View about the Future," to compare Hamel's views with Prof. Christensen's.
The "curse of good management"? Indeed, that is what seems to befall our best companies, says Clayton Christensen, Harvard Business School professor and author of The Innovator's Dilemma.
The very companies that Tom Peters and Robert Waterman extolled for best practices in In Search of Excellence fell off a cliff a short time after that book was published, he noted.
Digital Equipment being Clayton's best example. Hailed by many as the best company of the 1970s, Digital was dead in the water before the 1990s dawned. The tendency is to blame the company's managers for being stupid, or its products for being second-rate, or its attitude toward its customers left something to be desired.
Digital's managers, however, were first-rate. Its VAX computers were the best on the market. And Digital lived and died with its installed base of customers.
Digital, along with every other minicomputer maker, was the victim ofdisruptive technology. A good company, using its wits, can survive conventional challenges from conventional competition, Christensen said. But a disruptive technology -- a whole new level of competitor, whose technology may not even seem respectable at first -- will blow you out of the water every time.
The dinky little PC, with its off-the-shelf components, disrupted the success of Digital. Here are some other industries and the disruptive technologies that paddled in, then sank every boat:
In each case, Christensen said, "superior" technology failed to an up-and-coming disrupter. Why? Because the market was unwilling to pay for the increased functionality of the superior product. Digital's computers were wonderful, but the dinky PC was dirt cheap and "good enough."
The pattern of disruption works like this: the new technology tackles the low end of the market, thriving on low margins and the established technology makes room for it. Eventually, however, the disruptive technology gets better, and starts biting off more attractive market segments. By the endgame, the established technology goes head to head against the disrupter for the choicest markets, and usually loses.
Thus Toyota strips away half of Detroit's market, and eventually outclasses it with a luxury car, the Lexus, all its own. Or massive parallel processing, a cheap alternative to conventional supercomputing, brings down a giant like Cray Research.
Yes, Cray machines offered the more elegant solution, and the greater versatility. But the insurgent solution -- really just a bunch of Pentium chips strapped together -- was "good enough" for most customers' needs.
No one is beyond reach of the long arm of disruption. The American consumer electronics industry of the 1950s did not believe it could be vulnerable to transistorization. Compared to vacuum tubes, transistors were too unreliable. But the insurgents created a niche in the low end, in hearing aids and tiny radios for teenagers. Today, the theme of miniaturization, begotten by transistors and the squawky little radios that contained them, is a meta-theme of the global economy.
The great companies actually did everything right, by the old book. They polled their current customers to see what they wanted. They pleased the financial world by focusing on high-end markets with attractive margins.
But the old book doesn't mention disruptive technologies.
Steeling from the rich
Christensen told the story of how minimill steel overturned the steel industry. We are all familiar with the great integrated steel mills, with their giant blast furnaces and continuous casting, rolling and sheeting mills. It is a spectacular, but expensive technology.
Along come minimills, small affairs that turn steelmaking into a cottage industry by comparison. At first the steel was only good enough for the lower product tiers -- rebar, bars and rods. Since that tier had poor margins, big steel gladly ceded it to the small-timers.
But minimills kept improving, and one by one they climbed up the ladder, creating smaller beams for mobile homes, and even sheet steel. It wasn't good enough for the most demanding applications, such as auto bodies, but by that time it had swallowed up so much of the total market. Eventually, they stole even the highest tier. Minimills disrupted, and destroyed.
What can you do?
Christensen prescribed three steps for identifying when a disruptive technology has you in its crosshairs, and surviving the inevitable impact:
First is to find the missile on your radar screen.You would think it would be easy to spot an incoming missile like this, but the conventional means of detection are no help. Your customers won't tell you your advanced technology isn't worth what you are charging for it. Your people in marketing and finance will be too stuck in their game to notice something outside it. Even senior management will be unaware of the disrupter, or shrug it off as an annoyance. You need a new process for spotting this new competition, and new people to do the spotting.
Second is to show the yellow flag. This is the emergence of a brand new market, one that values the fledgling technology and does not turn up its nose at it -- hearing aids for transistors. It won't emerge where you expect it to emerge, and it will happen in a downscale niche. When you see it, respect it!
Third is to flap the red flag.Now you are in full defensive mode. Your competition is not a rumor anymore -- it's competing, and you must protect the low end of your market against nibbling. Assess your vulnerability: Do you provide too complete a solution to your customers? Is "good enough" all your customers need?
Christensen warned that surviving a disrupter is so unusual it scarcely happens. An article of his on the topic was refused by Harvard Business Review because it offered no hope. But there is hope, for companies willing to do a difficult thing -- start a new company or division outside the current division, and have that new division compete against both the insurgent disrupter and the mother company.
Take it outside
But it has to be done outside the existing company's culture and structure. This is a paradox to some, who can't understand why a company whose "core competency" is serving the same market, with a similar technology. Intel, this logic says, should be able to compete against the AMDs of the world, because its competency is microprocessor R&D.
Christensen disagrees with this understanding of core competencies. Indeed, a core competency of this sort becomes a core incompetency when pitted against a disrupter. Bringing high-end R&D to a low-end market battle is like bringing a knife to a gunfight.
Yes, Intel has both impressiveresources (people, technology, knowledge) and processes (R&D, manufacturing, etc.). But the capability that really matters in a street fight like low-end chip sales is the company's
Yes, Intel has both impressiveresources (people, technology, knowledge) and processes (R&D, manufacturing, etc.). But the capability that really matters in a street fight like low-end chip sales is the company's values. In Intel's case, its nose-in-the-air embrace of high-functionality fatally handicap it for the kind of battle Cyrix and AMD are pitching.
To get down and dirty, and have a chance of winning, the new business has to be outside the mother ship.
The electric car
Christensen likes setting himself challenges, and his challenge at the end of his book The Innovator's Dilemma was to try to find a technology that was not disruptive, and apply sufficient marketing magic to it that it became disruptive.
He chose that most dubious technology, the electric car. Oft heard about, but seldom seen.
The problem with electric cars is not technology, though, but the way we think about them. The government tries to ram them down car companies' throats, with laws like California's requirement that 2% of a car company's sales in that state be electric cars.
But the car companies, wonderful exemplars of the high-functionality mindset we have been talking about -- their products have horsepower that can never be legally used -- can't think freshly about electric cars. They conduct market research which shows that consumers want cars that accelerate quickly and can run for two days without recharging. And the technology isn't there for that kind of power. Not to replace cars as we currently think of them.
But what if we think freshly, as a student of Christensen's, Jeff Thorsen, did about the market for the electric cars we can already make?
Where could you make use of a car that doesn't go too quickly, and that has to be home by midnight or it coasts to a stop? Would parents of teenagers go for such a vehicle? Or how about senior citizens, who just need a glorified golf cart to putter around their retirement villages? How about densely-trafficked inner cities, where cars never make it out of second gear anyhow?
Remember that the disrespected transistor disrupted the entire world -- by making hearing aids smaller. Think marketing, not technology. That's the kind of thinking that must be applied to the insurgent technologies of today.
Don't leave electric cars to the environmentalists. Let teenagers discover them -- then stand back.
When is a technology not a technology?
No one is beyond reach of the long arm of disruption. The American consumer electronics industry of the 1950s did not believe it could be vulnerable to transistorization. They were too unreliable. But the created a niche in the low end, in hearing aids and tiny radios for teenagers. Today, the theme of miniaturization, begotten by transistors and the squawky little radios that contained them, is a meta-theme of the global economy.
Even Harvard Business School, where Christensen punches the clock, is vulnerable. While the school sees itself as the #1 school for corporate leaders, the growing trend is for corporations to train their own in proprietary corporate universities. Harvard is in danger of becoming, in Christensen's phrase, a finishing school for management consultants. Why? Because a Harvard degree costs $200,000, and corporations can create something "good enough" for their purposes for a whole lot less.
The disruption in this case isn't a technology, but an idea. But for the ivied halls of Harvard, which in Christensen's view may find new life as a provider of "subcomponents" -- its remarkable library of 9,000 organizational case histories, it is a difference without a distinction.
Christensen closed with a controversial example of disruption in the healthcare industry. The established technology in question -- if you want to call it a technology -- is the expertise of the personal care physician.
The internal medicine or family practice doctor, making perhaps $150,000 a year, has been caught between two dynamics in recent years. At the top of the market is the specialist and sugbspecialist, capable of making $500,000 per year as a highly skilled medical knowledge worker. At the bottom of the market is the lowly nurse practitioner or physician's assistant. These low-level providers make a third or half what the MDs int he middle make -- yet they can diagnose and treat 90 percent of what comes in the clinic door.
The trend for doctors, for so long the most beloved and most respected members of the community, is not good. Last year Kaiser Permanente laid off 200 of its doctors and hired additional nurse practitioners to take up the slack. The best chance doctors have, Christensen said, is to take work away from the tier above them, the big-bucks specialists.
Can they do it? They can, and for the reason Christensen laid out as his main thesis:
Technology, or knowledge, that exceeds what the market is willing to pay for ceases to be a competitive advantage.
When that happens, look out. You can count on the furniture around you to start rearranging itself -- and disruptions from below to change the way you do business.