The Book On How To Fail
By Fred Barbash
Sunday, January 14, 2001 ; Page H01
In his 1997 book "The Innovator's Dilemma," Harvard Business School professor Clayton M. Christensen demonstrated how "sound decisions by great managers" confronted by disruptive technologies can systematically lead to corporate failure.
It was a chilling read for many CEOs -- "really scary," as one described it. All the right moves suddenly looked like all the wrong moves. They saw the enemy, and it was them.
This scholarly counterintuitive work, now a classic, established Christensen as one of the leading theoreticians of our technological era. With so many companies, markets and investors now in techno-turmoil, I couldn't think of a better person to call for perspective.
I got an earful -- about fundamental misperceptions of Internet technology, about wrong turns being taken by some of today's great firms, and, most vigorously, about the idiocy of Wall Street. This is the first of two columns I'll write off my conversation with Christensen.
The central thesis of his book, subtitled "When New Technologies Cause Great Firms to Fail," was best summarized by Christensen in a Harvard Business Review article last year.
"In any industry, a disruptive innovation sneaks in from below. While the dominant players are focused on improving their products or services" in response to the demands of their best customers, "they miss simpler, more convenient, and less costly offerings initially designed to appeal to the low end of the market."
Meanwhile, upstart companies seize on those offerings. And "over time, the simpler offerings get better -- so much better that they meet the needs of the vast majority of users." The dominant player misses the boat -- until it's too late to board.
The best example in the book is a detailed history explaining how big companies such as Digital Equipment Corp. and Seagate Technology Inc. lost out in the PC revolution.
The best current example, he said, might be the possible "disruption" faced by EMC Corp., the maker of large data-storage equipment, as it confronts Network Appliance Inc., the maker of smaller data-storage equipment.
What comes to my mind at the moment is the Palm handheld computer, which many people are now carrying with little portable fold-up keyboards in place of laptop computers that cost 10 times as much.
Lest you think I exaggerate Christensen's influence, hear the words of Henry B. Schact, CEO of Lucent Technologies, when asked by Business Week magazine in October why Lucent was in so much trouble.
"We were listening carefully to our customers. But for reasons I'm not fully conversant with yet, we did not ask the question 'instead of what you're asking for, what would happen if we could give you something else.' . . . That is a classic innovator's dilemma, and we just plain missed it."
I asked Christensen, did everyone run out, read "The Innovator's Dilemma" and still blow it?
"I suspect that a lot of what happened was that people misread it," he said. They decided that the disruptive technology he described had to be the Internet, which would mean sudden success for some companies and sudden death for others.
In fact, he didn't even mention the Internet in the first edition, and in the second he referred to it only in the preface. He never thought, and does not believe now, that the Internet is "intrinsically" disruptive. It might be and it might not be, depending on how it's deployed, under what circumstances and in what sort of market.
For example, Schwab and E-Trade managed to disrupt Merrill Lynch using the Internet, Christensen has written, just as Dell deployed it to "disrupt" Compaq.
"I really think the people who invested in Internet-based companies were not guided by any kind of theory that would help them predict what kind of business model has a higher or lower probability of success.
". . . I was at a conference sponsored by Merrill Lynch in San Francisco [Christensen serves on Merrill Lynch's technology advisory board]. They invited me to play Larry King on this panel that included Henry Blodget," the company's famed Internet analyst. "I said to Henry, 'You've recommended that people put money in stocks that have made them a lot of money and then lost them a lot of money. What have you learned?' "
Blodget, said Christensen, responded that "people need to understand that they're playing where early-stage venture capital was five or six years ago."
"I said, 'Henry, you mean all you learned was that it's a crapshoot?' "
What else is going wrong? I asked.
A number of large technology companies in America, "major engines of value creation in the past, basically have reached the end of their ability to grow," he said. He cited Dell, Microsoft, Compaq and Intel in particular, the last interesting as he has served as an adviser to Intel executives, helping the company decide to market the lower-cost Celeron chip as an alternative to the Pentium.
Some of these companies have "worked themselves into a trap," said Christensen. Instead of moving downmarket, where there are more customers, they are moving upmarket, to more expensive, higher-margin products. Dell, for example, facing declining profits from PCs, is now making servers. Historically, that is precisely the strategy that's led to trouble, said Christensen. "It's quite an interesting phenomenon," he said. ". . . It's almost like a death march."
For both situations, he holds Wall Street professionals partially responsible as aiders and abettors.
First, they oversold the Internet to investors as a necessarily disruptive technology.
When the Internet led to market disasters, analysts rediscovered profit margins and fixated on them. Now, said Christensen, they are "hammering" the Dells, the Intels and the Suns (Sun Microsystems).
"When Wall Street hammers stock, management is compelled to stop investment" in innovation in order to strengthen its core business.
Companies in these situations should be trying out innovative approaches for new customers, or better yet, creating new companies unburdened by old customers, he has written. Instead, they continue heading upmarket, old customers in tow.
"They're losing their ability to grow because they're moving into smaller markets," he said.
Where should they be heading? I asked. What is a potentially disruptive technology right now?
"Mobile telecom smells like a classic disruptive technology in every dimension . . . handheld wireless communications devices. It is such a small and poorly defined market. . . . When Dell thinks about where it should focus its researchers, it [decides it] makes no sense to pursue this low end. Dell just keeps looking at that [handheld devices] and says, 'I know it's going to be big some day. But not today.' They're smart people. But they're in the very same trap that everyone else has been in."
Before any investor gets excited and does something rash in response to Christensen's observations, I should point out that he makes no pretense of being a stock picker or an investing guru or the man with the plan, which he says many of his book's readers didn't quite get. "They were looking at the book for answers rather than for understanding. They were saying 'tell me what to do' as opposed to 'help me understand so I can decide what to do.' "
Christensen is a theoretician and proud of it, which leads us back to Wall Street analysts.
"They're theory-free investors," said Christensen. "All they can do is react to the numbers. But the numbers they react to are measures of past performance, not future performance. That's why they go in big herds.
"Wall Street professionals and business consultants have enshrined as a virtue the notion that you should be data-driven. That's at the root of the inability of companies to take action in a timely way. If you wait until the data is clear the game is over."
But, I said, how can businesses or investors make decisions based on theories?
"The word 'theory' gets a bum rap," he said. "It's associated with 'theoretical,' which suggests impractical. But it allows you to take action without getting data.
"You can predict that if you step off a cliff you'll fall. You don't have to collect data on that."
(Note: In last week's column I misstated EMC Corp.'s closing price on Jan. 2. It was 54 cents. I also referred to JP Morgan and Chase bank as two companies. They became one on the last day of 2000.)
Fred Barbash can be contacted at barbashf@washpost.com. Of the companies mentioned above, he owns shares of Lucent Technologies.
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