| BUSINESSWEEK ONLINE : JUNE 28, 1999 ISSUE | ||||||||
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| COVER STORY
A Brutal Survival Plan The Innovator's Dilemma by Harvard Business School associate professor Clayton M. Christensen has become required reading for Internet managers. Christensen believes that the Net offers a superior business model with the potential that will displace those companies unable to adapt. Christensen recently talked to Business Week reporter Paul C. Judge. Note: This is an extended, online-only version of the interview that appears in the June 28, 1999, issue of Business Week. Q: What's the lesson today's managers should take away about the Internet? A: There are certain dimensions of managing the flow of information over the Internet that help make your product or service better in the marketplace you currently serve. Using the Web in ways that can sustain your existing business model is an absolute imperative. But in other ways, particularly in retailing now, the Web can be what I call a disruptive technology, and historically, those are what cause companies to fail. Q: Do you see those disruptions now? A: Oh yeah. Online trading of securities is creating an enormous disruption to the full-service brokerage firms. It's gone from 3% of trades in 1997, to 14% in 1998. And underwritings are beginning to be done over the Internet, as well. Q: What's the most common mistake made by managers confronting disruptions? A: The typical pattern is that your best customers will be among the last to embrace this sort of disruptive technology, because usually a disruptive technology does not provide the same kind of service and performance that your best customers prefer. The people who will embrace these technologies first are the ones that you have trained yourself to pay the least attention to. It can creep up on you like a stealth attack, until it's right on you. Q: How are the fundamental measures of business value being challenged? A: Look at bookselling. Once you've got a bookstore, the way to make more money when you're starting out is to try to operate the store at full capacity -- pack in as much selection and as many customers as you can fit. But after you've achieved capacity, the only way to increase business is by boosting margins. On the Internet, there is no limit on the capacity of the store, or the number of customers who can come in. Therefore, percentage margins really aren't important. What's important online is the total dollars you can bring in divided by the total amount of capital required to get those customers. I calculated that Amazon could equal the return on investment capital that a bricks-and-mortar bookseller achieved if Amazon had only 5% gross margins, vs. 30% for a traditional retailer. It's so different because of the scale available to stores online. Q: Can you point to others? A: Financial services. The impact the Web will have there is to fragment and render irrelevant the integrated financial institutions like commercial banks. It will take time for this to happen. But consider a business like credit cards, where four variables determine 99% of the variance of whether someone will pay their debts or not. You can apply for a credit card over the Net, get it over the Net, and have it serviced over the Net. Because of that, nonbanks, and ultimately Internet banks, will capture that business. Ten years ago, that was a very profitable piece of business for banks like Citi. But that will just go away. Same for the mortgage business and auto loans and small-business loans. Those kinds of things will begin to be conducted more and more by specialized financial services companies using the Net. Q: Can old-line companies that excelled before the Internet master this next phase? A: They can do it, but the only way is if they set up a completely independent organization and let that organization attack the parent. If you try to address this opportunity from inside the mainstream, the probability of success is zero. I've never seen it happen. Q: Do you expect a new business hierarchy to emerge led by the Net companies? A: You won't see the old-line retailers or brokers disappear. But to survive, those guys will have to move toward products whose metrics can't be clearly specified and measured. In retailing, there's already been one big disruptive wave: discount retailers disrupting traditional department stores. Look at the patterns: They stole the market dominance by starting with branded household goods -- not big appliances, but little ones, kitchen goods where clear metrics existed. Things you did not need to try on. Gradually, they migrated their product lines to higher and higher gross-profit-margin tiers in the market. The Internet is the ultimate wave coming in that way. Q: How can executives balance managing for a future that's being changed by the Internet without sacrificing results today? A: The current business doesn't fall apart. You need to have a different business organization concentrating on building a business model appropriate to the future, while the existing business organization can focus on being as successful as possible with the client base that's still uncomfortable with the Internet. Citi can't escape the cost of its legacy customers. But it simply can't burden the new Internet business with serving those customers, because Citi will be competing against Internet banks without those legacy customers. The only way to compete is to have an organization focused completely on the new opportunity. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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