It is not everyday that there is a long New Yorker article sitting squarely in my field — innovation strategy. But this week we have one by Jill Lepore who conducts a systematic ‘take down’ of Clay Christensen. For those of you who have read Christensen’s work and found his cases convincing, Lepore pulls them to bits in ways that are not really new but at least tell you that those cases were hardly a foundation for a new theory of innovation that is sold as applying to everything.
There are so many ways in which Christensen is an easy target. One is that the “theory of disruptive innovation” has been remarkably successful. The word “disruption” has gone from bad to good, from poor TV reception to happening everywhere. All of the noted tech leaders of the past two decades have been influenced by Christensen, including Steve Jobs who took the theory to heart in producing the iPhone and iPad even as Christensen, himself, decried the iPhone as doomed to fail. The word “disruption” is used too often which means that Christensen is an easy mark precisely because that mark has become so wide.
But for every theory that reaches too far, there is a nugget of truth lurking at the centre. For Christensen, it was always clearer when we broke it down to its constituent parts as an economic theorist might (by the way, Christensen doesn’t like us economists but that is another matter). At the heart of the theory is a type of technology — a disruptive technology. In my mind, this is a technology that satisfies two criteria. First, it initially performs worse than existing technologies on precisely the dimensions that set the leading, for want of a better word, ‘metrics’ of the industry. So for disk drives, it might be capacity or performance even as new entrants promoted lower energy drives that were useful for laptops.
But that isn’t enough. You can’t actually ‘disrupt’ an industry with a technology that most consumers don’t like. There are many of those. To distinguish a disruptive technology from a mere bad idea or dead-end, you need a second criteria — the technology has a fast path of improvement on precisely those metrics the industry currently values. So your low powered drives get better performance and capacity. It is only then that the incumbents say ‘uh oh’ and are facing disruption that may be too late to deal with.
Herein lies the contradiction that Christensen has always faced. It is easy to tell if a technology is ‘potentially disruptive’ as it only has to satisfy criteria 1 — that it performs well on one thing but not on the ‘standard’ stuff. However, that is all you have to go on to make a prediction. Because the second criteria will only be determined in the future. And what is more, there has to be uncertainty over that prediction.
To see this, suppose that it was obvious that criteria 2 was satisfied. Then it will be obvious to all — entrants and incumbents — what the future might look like. This is precisely what happened for web browsers when Microsoft ‘wised up’ and saw the trajectory. In that situation, a disruptive technology does not end up disrupting the establishment at all. They have seemingly an equal shot of coming out on top: indeed, a better shot when you consider they already have the customers.
What is required for the theory to be complete is that it is not known whether criteria 2 is satisfied or not. That is what creates the ‘dilemma.’ For an incumbent, it is costly to bet on a new, unproven technology when things are going fine with the old one. And as Lepore points out: there are plenty of situations where incumbents have gone with the new too soon only to have huge losses as a result. Christensen takes on this nicely: basically saying that incumbents are essentially doing the right thing even though they might be doomed. It is the twist that offends no-one while generating fear and debate.
If it had all stopped there, this would have been respectable. But Christensen did not. He saw his theory as predictive even though its own internal logic says prediction is impossible. That’s why he missed the mark on the iPhone. That is why his case studies can be right unless you wait a little longer in which case they are no longer predictive. The Innovator’s Dilemma is like Heisenberg’s Uncertainty Principle. You can’t get around it and Christensen’s failing is that he has sold it as something you can get around.
Take his prescription that established firms ‘disrupt themselves.’ This is crazy talk to an economist (which is one reason he doesn’t like us). Suppose you take resources and invest in your own disruptor. If disruption occurs, you still lose the entire value of your existing business. All that has happened is that you have kept your name alive. The retort may be that something can be preserved but remember, Christensen is essentially saying firms need to act as if nothing can be preserved. I don’t mind the idea that established firms should not be complacent but hastening their demise on speculation seems weird when there is no upside.
Instead, the focus on the doomed incumbent leads Christensen away from the obvious alternative. The incumbent should ‘wait and see.’ They will see all manner of potentially disruptive technologies being deployed and instead of removing them from their radar as irrelevant, they should continue to monitor them to see what happens. Because, when the one in ten or a hundred or whatever turns out to be successful, they can then move to acquire them and realise a more ‘orderly transition’ to the new technology. Indeed, as I read Lepore, I got the sense that even with Christensen’s iconic examples, the end result was incumbent preservation through acquisition. And this is not just theorising. My own recent paper with Matt Marx and David Hsu demonstrates just that: disruptive technologies (identified after the fact) are associated with start-ups competing and then being acquired as much as they are associated with those start-ups growing as independent firms.
And there is one final wrinkle in all of this. What of the prescription that entrepreneurs find industries to disrupt? This is not a bad notion as this can focus you on consumers who are under-served by current incumbents. But I am always reminded of the final (after the credits) scene in Finding Nemo where the fish from the dentist’s tank finally escape and end up in Sydney Harbour in plastic bags saying “now what?” If you disrupt an incumbent, surely you have to ask “now what?” The future is one of relentless competition and margins driven down to nothing. That is hardly the vision of a great return on venture capital investment. Take the classic relentless disruptor of Amazon as a case in point. Disruption is everywhere they touch but in their bottom line.
Lepore only deals with the easy marks in her take down of Christensen and one suspects Christensen and his supporters can easily fend those off. It is the fundamental contradiction in taking a positive theory towards prediction that is where this entire ‘disruption industry’ falls down. I’d like to see journalists engaging more on that level so that we can be done with those bridges too far for good.