Clayton Christensen @ TiECON EAST 2006 July 27, 2006

Professor Clayton Christensen of the Harvard Business School belongs to that breed of management intellectuals which counts amongst its ranks the late Peter Drucker, Tom Peters and Michael Porter.

At a special reception at TiECON East 2006, Prof Christensen spoke about his research and on ‘How to tell if a business idea will succeed or fail’.

In the first part of his talk, Prof Christensen talked of a model he developed as a part of his research, which has two elements; one, any business has a trajectory of improvement and second, that every market has a different trajectory of movement. A company can move up its trajectory with simple year to year improvements and still be of tremendous incremental value to customers. That is, small innovations can bring great satisfaction.

He discovered that the innovation did not have to be groundbreaking but it is enough that there is innovation to ensure that the company stays competitive.

He then went on to describe the theory of what he termed ‘Disruptive Innovation’ This too does not refer to any breakthrough innovation, but simply to innovation which disrupts the trajectory of a firm’s offering to the public. This innovation could even have a negative value for the customer. This is when, he says, companies are caught on the wrong foot and the new comers work fast to muscle in on their territory.

Case Study- Steel Industry

To back this up he delivered an absorbing account of the developments in the Steel industry. The Big Fight between integrated steel companies, and new, quick and compact Mini-mills (operating on electric furnaces.) The small mini-mills kept nipping at the heels of the large, slow integrated steel companies when they first appeared on the scene in the 70s. Now the customer offering trajectory for the Steel industry ranges from re-enforced concrete bars (or ‘Rebars’) at the low end to sheet metal used in auto body manufacture at the high end. Mini-mills automatically gravitated toward the low end product because they could make it easily and cheaper than the integrated steel companies.

Soon, the mini-mills had taken the market from the big, old steel mills (the integrated ones) till they forced the last one out of the Re-bar business in 1979. But oddly enough this did not bother the integrated mills, because re-bars were a low margin product for them and they were glad to have it taken off their plate. But once the mini-mills were the only ones servicing this market now, they no longer had a tangible cost advantage. This happened every decade as the mini-mills moved up the steel product value-chain (they went from re-bar to angle-iron to structural beams to now sheet metal even!) Each time they pushed integrated steel mills out of the next higher-margin category but made life tougher for themselves (each time an integrated mill got out of a product category, the stock of mini-mill companies fell because of heightened competition and loss of competitive advantage).

Today almost all steel behemoths, the integrated steel mills, have shut shop. But the mini-mills are not doing too great either. This is a classic case of ‘Assymetry of Motivation’ as Prof Christensen terms this phenomenon. That is, “A situation where an attacker is keen to get into a market the attackee wants to get out of.” He went on to enumerate other industries where this “small guy gobbling up market share of low value-add product offering” phenomenon held true; the automotive sector (the Japanese ate American share, the Koreans are baffling the Japanese, the Chinese trouble the Koreans and soon the Tatas will offer the world the 100,000-rupee car), the airline sector (long haul routes versus, short/local routes), banks and even countries (like Japan).

The lesson he left us with at the end of the case study was “As a newcomer, you don’t always have to have a better product, you just need to create a situation where the current market leader is motivated to flee the battlefield.” His advice for the incumbent biggies his lesson was “Set up an autonomous subsidiary to compete with the newcomers and allow it to cannibalize the parent-leader” because out of the ashes something new and powerful can be reborn.

He also cited the case of Compaq and Flextronics to give us the next lesson on how to ensure a business succeeds. Flextronics started as a supplier and ended up as a competitor to Compaq because of the modular nature of Compaq’s offering. This was an important lesson in when and how much to forward or backward integrate.

He spoke next of Segmentation. He told all present not to segment only on the basis of the product or the customer category. He suggests instead that, as each product or service is employed by a customer to perform a ‘job’ for him/her, the company should segment based on what ‘job’ a particular product does. Therefore the ‘job’ is the fundamental unit of segmentation.