Every few years, a fad comes along that takes the business world by storm. Jack Welch loved Six Sigma, others look for “synergies”, “core competencies”, “blue sky strategies”, etc etc. These fads usually involve over-generalization from a key example or set of examples.
Occasionally, a nay-sayer identifies the over-generalization. Jill Lepore has an article in the New Yorker that goes further by debunking even some of the key examples that underlie the theory of “disruptive innovation” of Clayton Christensen. What is disruptive innovation? Lepore describes it thus:
Manufacturers of mainframe computers made good decisions about making and selling mainframe computers and devising important refinements to them in their R. & D. departments—“sustaining innovations,” Christensen called them—but, busy pleasing their mainframe customers, one tinker at a time, they missed what an entirely untapped customer wanted, personal computers, the market for which was created by what Christensen called “disruptive innovation”: the selling of a cheaper, poorer-quality product that initially reaches less profitable customers but eventually takes over and devours an entire industry.
Another key example for Christensen is the disk-drive industry. Lepore follows the key companies and concludes:
As striking as the disruption in the disk-drive industry seemed in the nineteen-eighties, more striking, from the vantage of history, are the continuities. Christensen argues that incumbents in the disk-drive industry were regularly destroyed by newcomers. But today, after much consolidation, the divisions that dominate the industry are divisions that led the market in the nineteen-eighties. (In some instances, what shifted was their ownership: I.B.M. sold its hard-disk division to Hitachi, which later sold its division to Western Digital.) In the longer term, victory in the disk-drive industry appears to have gone to the manufacturers that were good at incremental improvements, whether or not they were the first to market the disruptive new format. Companies that were quick to release a new product but not skilled at tinkering have tended to flame out.
Josh Gans finds the Lepore takedown to be easy pickins’ and also does a great job explaining why Christensen’s attempt to make his theory predictive contradicted the essence of his own argument. While the takedown does not surprise Gans, it irritates the tech community:
@pmarca: What does Jill Lepore PhD in American Studies from Yale think about Bayesian algorithmic filtering?
To which I replied: “What does Clayton Christensen DBA at Harvard know about ….?” In other words, both are equally qualified/unqualified to discuss innovation. Also, why not attack Lepore’s argument not her?
But I have my own bone to pick with disruptive innovation. Let’s say an incumbent firm has a great product and buys into the disruptive innovation idea. What should it do? Since its core product is under threat of disruption, it seems the company should disrupt it themselves and invest in all sorts of technologies that look weak right now but might improve dramatically. But this does not make any sense because it implies huge costs but with little expected gain because most crappy-looking initial ideas do in fact end up on the shelf. On the other hand not investing opens up the company to disruption. To make the theory operational, we need to understand the tradeoffs. For that, you need a toy model of some sort.
The obvious candidate for such a model is Ken Arrow’s (1962?) idea of the “replacement effect” (this term was coined by Tirole). (We teach related material in our MECN 441 Competitive Strategy elective.) The profits from a new invention that supersedes the incumbent’s old product will replace the profits from the old product. Hence, the bigger the profits from the old product, the smaller are the incentives to innovate. You would destroy your own profits so no need to make the better Rice Crispy when the exisiting one is doing great. Past success rationally constrains incentives for future innovation. This theory would predict that incumbents innovate less than entrants who have no exisiting profit flow to replace. Bit like Christensen’s theory, no? Arrow pre-disrupted Christensen’s main thesis but based on rational choice analysis and with a coherent argument for assessing new investments (roughly, compare the expected NPV of current product with expected NPV of new one minus cost of investment).
As MOOCs come along, Christensen’s employer HBS has to decide how to proceed. The tradeoff is is clear and quite similar to Arrow’s point:
Universities across the country are wrestling with the same question — call it the educator’s quandary — of whether to plunge into the rapidly growing realm of online teaching, at the risk of devaluing the on-campus education for which students pay tens of thousands of dollars, or to stand pat at the risk of being left behind.
Ironically, HBS has decided not to side with Christensen but with Porter who sees no major disruption:
“Do it cheap and simple,” Professor Christensen says. “Get it out there.”
But Harvard Business School’s online education program is not cheap, simple, or open. It could be said that the school opted for the Porter theory. Called HBX, the program will make its debut on June 11 and has its own admissions office. Instead of attacking the school’s traditional M.B.A. and executive education programs — which produced revenue of $108 million and $146 million in 2013 — it aims to create an entirely new segment of business education: the pre-M.B.A.