Monday, February 10, 2020

Clayton Christensen

Clayton Christensen, the Harvard professor who popularised the idea of 'disruptive innovation', passed away recently. Schumpeter pays him a in tribute in the Economist.

Schumpeter explains Christensen's contribution:

In a nutshell, Mr Christensen’s insight was that it is not stupidity that prevents great firms from foreseeing disruption but rather their supreme rationality. They do “the right thing”, focusing on better products for their best and most profitable clients, often to the point of over-engineering (how many Mach and Fusion blades does a chin need?). But that is “the wrong thing” if it blinds them to the threat from poorly capitalised upstarts offering cheaper stuff in markets too obscure to worry about. Such threats can swiftly turn existential if the rivals move upmarket and go for the jugular.

I am not sure that great firms focus merely on "better products for their best and most profitable clients". They are also trying to grab market share by reducing costs and the prices of their products. Take banks, for instance. When they manage to increase the proportion of low cost deposits in their liabilities, banks compete for the best companies and retail borrowers on price.

Secondly, the idea that companies are trying to improve their products without seeing challenges emerging from altogether new ways of satisfying the customer is not all new. Peter Drucker spoke about it long ago and Theodore Levitt elaborated on the same theme in his paper on 'Marketing Myopia'.

It may well be that, in the era of the Internet, Christensen's idea caught the imagination of large companies in a way that Drucker and Levitt had not. So, as Schumpeter points out, big firms have moved to buy up challengers as Google did with YouTube and Facebook with WhatsApp. But the idea that, in a market economy, upstarts are forever dislodging entrenched giants is an old one. As Schumpeter points out, disruptive innovation merely builds on Joseph Schumpeter's idea of 'creative destruction'.

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