Know it or not, like it or not, no single business thinker of the past 50 years has had as much impact on the day-to-day way you run your business than Clayton Christensen. With his seminal 1997 work The Innovator’s Dilemma, he diagnosed one of the most intractable problems in all of capitalism: Why do great companies die? What actually happens to them?
The answer, as almost everyone reading this probably knows, was what he termed “disruptive innovation,” the theory that fleeter companies targeting the low-end of markets from software to steel find cheaper, more effective ways of getting customers what they want—and derail their ossified, high-end competitors in the process.
This key insight spawned an entirely new way of looking at competition and served as the intellectual underpinning—sometimes misguided—of the “disruption revolution” fueling Silicon Valley. It would be enough for anyone to dine out on for an entire career, but Christensen continued to develop and refine his thinking over the next 20 years. With his latest work, The Prosperity Paradox, co-authored by Efosa Ojomo and Karen Dillon, he’s turned his study of innovation on the largest, most intractable problem in the world: creating prosperity.
His solution is simple, profound and right in front of your face: See big problems as big opportunities. Look for the intersection of non-consumption and what he calls “jobs that must be done.” Then create products—and processes—that serve those needs. By doing so, you’ll harness what he terms “market-creating innovation”—by far the most profitable, disruptive force in business (think electric light, iPhones and the Model T). Bonus: You’ll help a lot of people, too.
Christensen recently welcomed us to his cozy office at Harvard Business School, where he’s taught since 1992. It’s chockablock with books and mementos of a career enmeshed in the study of how business actually gets done. Our favorite: a chime made of rebar, commemorating his deep-dive into the inner workings of the steel industry. “I’ve learned a lot about the world through rebar,” he chuckles.
Slowed by cancer and a stroke (which forced him to re-learn English from scratch), Christensen is buoyed by his deep Mormon faith and an unending curiosity about other people. He starts the interview by asking us about our backgrounds. With anyone else, it’d seem like studied salesmanship. But not with Christensen. He listens, his eyes focused and glistening with feeling. He’s humbled. He’s happy. He’s learning something new. Ten minutes later, we finally get around to asking him our first question. What follows are excerpts from the conversation with Christensen and his co-author Efosa Ojomo, edited for length and clarity:
Clay Christensen: Well, I’m ashamed to say I can’t remember where I was sitting when we had the insight. But we realized this concept of you can push solutions to the problem of what’s going on in the emerging world or you can make it happen by jumping ahead. Capitalism jumps ahead of the problem. It comes around the problem and just pulls it in, and it fills a [need].
Efosa Ojomo: [Clay’s] theories were leading us. We didn’t necessarily want to write a book about business or capitalism. We just looked at the theories and said, “What does the theory have to say?” There is a way the world works and there’s a way I want the world to work. And those are two very different things.
The first time I went back to Nigeria—which is where I’m from—after being in America for eight years, I visited a village, it was very poor, didn’t have access to water. Women at the banks of a river washing clothes walked miles to get there and would have to walk miles back to the village. Instantly I said, “The solution is a well.” So I pushed a well into the community. I raised money from France, we built a well, we were happy and excited. Then I came back to America. A few months later the well broke down. I couldn’t do anything about it. What I learned is, that’s how I wanted the world to work. You see a problem, you help people, you fix it. But there wasn’t any mechanism, there wasn’t any ownership or organization around the well, and so it just stayed broken.
Christensen: One of the theories that we teach here is the theory of interdependence and modularity. You can’t solve part of the problem if you’re not prepared to answer the whole problem. So Dell, for example, is on the end of modularity and to play in that game you just had to have one of each of the components in a personal computer and Dell could go into his dorm room and assemble and then he just made it available to anybody.
He had the U.S. Postal Service, and he could put his arms around the whole problem, and that’s actually very important. If you just do part of the theory, you can’t solve the problem, you have to be interdependent. Thank goodness we have this theory of interdependence and modularity. You’ve got to put your arms around that whole problem.
I was on the board of Tata Consultancy Services and they spent a lot of money to help a lot of people. They had built a school and paid people to support the school. But at the end of the process the graduates didn’t have a job….
I realized that the whole world wants to put their money to solve the problem in the emerging world, but it’s an interdependent problem, and democracy, for all of its virtue, couldn’t put arms around the problem. One day, we were here trying to solve the issue in this conference room, and [we hit on] the idea that the world is trying to push solutions, and instead, what we need is to pull solutions. It’s a very important idea.
Christensen: The government can’t get on that side of the problem and pull the solution in, the government has to stand behind the problem, push it. And the government can’t put its arms around the problem. Only capitalism can do that. That’s not what we intended to see as we started. One of the key ideas came from the noodle story.
Ojomo: Thirty years ago, it’s 1988, Nigeria is a military regime, very poor, a lot poorer than we are today, 80 percent living in poverty, no infrastructure, I mean the country was just struggling. Many people were running away from Nigeria. These guys, these two brothers, look at it and say, “People need to eat, they’re having a lot of babies, they need to figure out how to feed their kids. I think we can sell noodles in this country.” Mind you, noodles are not part of the staple food, so [people] don’t know what it is and think its worms. But they’re convinced that they see what we call non-consumption: people don’t have access to food.
To create the market, to Clay’s point, they had to wrap their arms around everything. They couldn’t just bring noodles in and take it to the stores and have people buy it. We didn’t have stores so they had to build retail stores. We didn’t have distribution so they had to build one of the big distribution companies in the country. We didn’t have access to electricity, at least the majority of people, so they had to build power plants for their factories and their offices. Water, water treatment, the same thing.
We studied the role of government, and it’s fairly obvious when you think about it. If the government funds schools, roads, water, things like that, society would be better off. We didn’t feel we needed to write a book about that. Instead, what we’re trying to get at is, how do we get governments to get there? If you look at some of the chapters, the evolution of governments has looked pretty similar, maybe not identical but quite similar. When you have countries that are very poor, the governments look pretty similar. They’re not good for the people, crony capitalism and so on and so forth. As people become more prosperous, as these market-creating innovations happen, the relationship between governments and the people starts to change and it becomes less parasitic and more symbiotic.
Christensen: Yes. The way you frame it, exactly.
Ojomo: I think the categorization of innovation, the three types of innovation, helps. Wall Street is optimized to go after efficiency innovations.
We use the word innovation, right? Innovation, it’s flashy, it’s nice, but you know, [Clay] had this insight, he said, “There are three types of innovation.” There are market-creating innovations. These are the innovations that make products simple and affordable so that many more people could have access to them. Fifty years ago, we couldn’t afford computers, now you have a very powerful computer recording this. Now, that innovation creates new markets, it goes after non-consumption, and it’s really the foundation of economic development.
Then you have sustaining innovations, and sustaining innovations make good products better. But from an economic development standpoint, they’re substituting the character. You buy the iPhone X, you don’t buy the iPhone 6. You don’t need a whole new plant to build a newer version iPhone. The last are efficiency innovations, and these are innovations that help us do more with less.
Market-creating innovations require capital when you’re creating the market, any market: Ford Model T, new smartphones, not now but the new ones before when there was no market. Mobile phones in Africa, when they were creating the market, you needed capital.
Christensen: But the insight on this is that this type of [sustaining] innovation doesn’t create jobs. And almost all of the innovation you see when you drive and walk around are sustaining innovations, they make good products better but they don’t create jobs. The efficiency innovations—we haven’t really talked in our research about efficiency innovation before. I just never thought deeply about it. Innovations that help you do more with less. People in Africa get ticked off at Shell Oil because…every time they make an oil well, they squeeze and they don’t create jobs. Their purpose is to eliminate jobs.
We puzzled about why would China have such a vibrant society as a communist dictator-led society and the Russians just struggle to grow? When you look at it from these fronts, there’s almost no market-creating innovation going on in Russia. In China, there’s somebody doing market-creating innovations on every corner.
We saw Mexico. Why are they just forever impoverished? Then we realized that that’s the same problem. Ford can go to Mexico and build a plant and it’s an efficiency innovation. They’re not creating new cars, they’re creating a limb and trying to eliminate cost. Then if somebody creates another plant in Guatemala or in Nigeria, they’re efficiency innovations. So they will shut down the one in Mexico and move this to Vietnam. And we complain that they’re not creating jobs.
Tesla is a sustaining innovation, trying to compete against BMW and Porsche and so on. God bless them if they think they can beat the best at this game of cars. The theory says go down to the bottom of the market—and that’s where you’ll see electric cars emerging.
When you go to Beijing next, go outside the front door and walk for 50 yards left or right and over that distance you will see one or two electric cars. They don’t look like a Tesla. They’re narrow. These are delivery cars running on narrow streets.
Go up and put your hands on one. It’s plastic, and it cost about $4,000. That’s where the theory says the electric car will start: at the bottom of the market, and go up. So if I wanted to create growth in Mexico and I’m on Wall Street and I have all that money, I would go to either Mexico or Nigeria and start [making] one of these little cars.
Christensen: Well, remember that we’re going after non-consumption first. In the process of allocating resources in a corporation, just remember that the corporation is organized to prevent disruption to occur because we’re going after non-consumption. Try to figure out where in this place that we live is there non-consumption going on and where do people have a job to do?
Ojomo: There’s a company in Rwanda that saw an opportunity where most people would not. About 80 percent of people in the country don’t have access to cement floors, they can’t afford it. So instead of looking at that and saying, “These guys are poor, they can’t afford it,” they looked at it through the lens of non-consumption and said, “Look at how much of this cement they’re not consuming.” They knew there was an opportunity there. So they’ve developed these earthen floors that are very similar to cement floors but at about a quarter of the cost, and now they’re creating a new market for affordable flooring that is not just in Rwanda, it has now spread to Uganda and they are looking to go into Kenya.
Christensen: I never thought about cement as being high-end. But it turns out that it’s actually very costly there to get cement. A capital-intensive effort.
Ojomo: So they’re using a completely different product. It’s clay, a composite product that they were able to create out of a lab at Stanford. It’s not cement at all, but it’s hard, it does the job of cement, but it’s not cement.
Christensen: If you go back in any history that we’ve studied, always it’s, ‘This solution was the simplest solution and at the bottom of the market.” Then we could go up.
Christensen: They don’t think through all the other steps in the process that need to be in place in order for it to be viable. In the noodle story, they had to go upmarket to provide the right kind of wheat and then you turn around and go downmarket: “Where will we get the trucks? Where can we overcome dishonesty? Where are we going to get the roads?” Almost always innovation is successful at the point of innovation that we’re looking at—but it fails a step above and a step below.
Christensen: That’s right—and it’s the process that needs to be changed. In the history of retailing, Marshall Field’s was the first retailer. The way they were structured, they turned their capital three times every year and they had to generate gross margins of 40 percent to cover their capital. They earned 120 percent return on capital invested in inventory, and that’s their model. Field’s, Macy’s, that’s their model.
Then Sears comes in and their business model was a catalog company. Their model allowed them to serve the market with 4x turns and they could achieve 30 percent return on capital invested in inventory, so they earned 120 percent return on capital invested. And then Kmart and Walmart came along and they could turn their inventory over [faster]. They targeted the low-end and their margins were 20 percent and that meant that they had to turn the inventory over six times. So they earned 30 percent six times every year so they got 120 percent return.
Then Amazon came in with who knows what kind of margins, but they turned the inventory. Anyway, that’s the simple model. So a board of directors, the stupid thing to do would be to say, “We have to reduce turns, have a target.” That’s not the way it works. There’s a process by which the profit formula is implemented. The board has to think of themselves as they own this but they need to view these other options so that we can achieve this.
Christensen: Well, number one, they should take the time to study the good theory about this problem. We actually wrote a piece about this when Sears was right at the top of their game, recognizing that Kmart and Walmart are already going to disrupt them from the bottom of the market and they would have to set up a different business company in order to survive.
Dayton Hudson set up a completely separate organization in Minneapolis and they called it Target. As they separated it out, and as the old one, Dayton Hudson, hit its demise going after the top of the market, from the bottom of the market came Target and so they’ve been very successful. The board of directors needs to understand both that there is an economic model that they are responsible for—and they hold themselves to the wrong model, I think. Wall Street, when it holds itself to the wrong model, they teach a board the wrong thing.
Christensen: Everybody, including me, wants to find a Holy Grail. “Show us a company that has done this over and over again.” There are very few and it’s ephemeral. IBM, they had a mainframe, and then they had a workstation, and then a personal computer. IBM made their mainframes in Poughkeepsie, New York and the mini-computers in Rochester, Minnesota. In Poughkeepsie they generated gross margins of 60 percent. [Rochester] had a gross margin of 45 percent. Then the personal computer that they made in Florida had a different profit model of 25 percent.
Then the smartphone. Do any of you guys have an IBM smartphone? Find a smartphone made by IBM.
Christensen: The board started focusing on [returns]. They wouldn’t create a different business model that had a different profit formula.
Christensen: Well, I’m coming at you from an academic perspective, which has its limits, but if I were a CEO, I’d take my board somewhere on an island in the Great Salt Lake or something once a year and talk about these principles and report to them on where each of these are: “Where’s disruption happening?”; “We need to grow, how are we gonna do it at that level?” precisely because of the ossification.
You think, “We’ve got to get these returns,” and then you think, “We have to do it in this way.” And when you say, “It has to be done in this way,” then you’re dead. So I’d figure out a way to get people together, teach them the models, not one model but multiple models, just what’s the job to be done? Come to that every year to be sure that we’re organized in the right way.
Christensen: Yeah. I would say on this that Intuit is run by a CEO, Scott Cook, who understands this stuff better than I do. They’ve done Quickbooks and TurboTax and a number of other organizations that they set up separately to give the flexibility.
If I were a doctoral student again, I’d go to Microsoft. The CEO, [Steve Ballmer], he couldn’t see the disruption. Yet, they had enough cash and profit that they could try a new model and another new model. Within about five years they figured out that things are going up to the cloud whether we want to get on that bus or not. I think that they would say that the theory got deep enough in their minds that they actually didn’t sort of need to kill themselves. In contrast, IBM, their model is so…it’s a sad story, but it doesn’t have to be sad.
Christensen: Personally, I have a propensity to try to figure out the causal mechanism behind good phenomena. One day, just on my own, I decided that God doesn’t hire accountants in heaven. What I mean by that is you and I have finite minds and we have to hire accountants to calculate what the invoices coming in and going out need to be and are we winning or losing on gross margins. We have to hire accountants because we have limited minds, we can’t keep all of the detail in our minds at once. We get a sense of hierarchy. So people who are presiding over bigger numbers tend to be viewed as more important than people who preside over smaller numbers. That’s the way we’ve organized our lives.
I realized that God has an infinite mind and because God has an infinite mind he doesn’t have to aggregate people into numbers. For me, that has just been a driving, truly a driving insight, that God does not have to aggregate people but rather, at the level of individual people, God can understand completely what’s going on in this world, he has an infinite mind. Therefore, I better get busy and figure out how I will measure my life so that at the end of my life when God looks at what I accomplished, it will always be assessed at the level of individual people.
My hope is that if that’s the way you think about life, then you as a manager are in a marvelous position. Because every day, I go home from work and think about how could I help the people who work for me to become good people that day?
The innovation in the middle of that stuff is really important to help people become better people because you always want to give them more opportunities. If you believe in God, then you have to go through this logic about how God will assess my life. I think it makes me…it drives me to be a better manager.
Christensen: Yeah. Exactly.
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