Clayton M. Christensen is a professor of business administration at the Harvard Business School. He is the bestselling author of five books, including his seminal work, The Innovator's Dilemma, which received the Global Business Book Award for the best business book of the year, and most recently, The Innovator's Prescription, which examines how to fix our healthcare system. Christensen serves on several public and privately traded boards and is the founder of a successful consulting company and an investment management firm. He holds a B.A. with highest honors in economics from Brigham Young University and an M.Phil. in applied econometrics and the economics of less-developed countries from Oxford University, where he studied as a Rhodes Scholar; he received an MBA with high distinction from the Harvard Business School in 1979, graduating as a George F. Baker Scholar, and was awarded his DBA from the Harvard Business School in 1992.
Question: How can established companies pursue disruptive innovation but yet continue to satisfy their customer base?
Christensen: Well, every business model is an optimized and interdependent system. So, a business model starts with a value proposition that you want to offer to a particular customer base. In order to deliver that value proposition, you’ve got to put into place a set of resources in your company. So, these are people, technology, products, equipment, facilities, and so on. As you use the resources to deliver the value proposition, process is coalesced, just habitual ways of getting things done. And then, as you follow the processes to use the resources to deliver the value proposition, a profit formula ultimately emerges, and the profit formula basically set, dictates how you make money. In order to cover the cost of these resources, we need these kind of gross margins. To break even, we’ve got to be this big. We have to turn the assets over at this pace in order to get adequate returns. And that profit formula then determines the kinds of value propositions that business model can and cannot offer, and, very quickly, all of those four elements of the business model, the value proposition, your resources, your processes and your profit model become interlocked, and it’s actually designed not to change. So, the only way a corporation can continue to lead in the original market it’s serving and also become a leader in a disruptive market is to set up a completely independent business unit underneath the corporate umbrella and give it a charter to create a different economic model for the different need in the market place. And if a, when a corporation is willing to do that, they can succeed at disruptive innovations very well. If they’re not willing to do it, the probability of their success is nearly zero. It’s kind of like in biological evolution. Individual organisms don’t evolve. They are born, they die, but, little by little, the mutants gain market share, and so the population can evolve, even though the individuals within it do not. And the same thing holds true for corporations. The business units within a corporation don’t evolve. They’re designed to profitably serve a particular set of customers who have a particular job to be done, but if the corporation will close down obsolete business units and create new business models, the corporation can evolve quite well. IBM has done that very well, three times created very different economic models as the computer industry has evolved. But they’re the only computer maker from the ‘60s, ‘70s that has survived to this date. When discount retailing emerged, Dayton Hudson in Minneapolis set up a different business model that it called Target, and they were the only department store to catch the wave of discount retailing. All the other 315 department stores have consolidated down now to about 8 because they haven’t created this independent business model.