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Clayton Christensen on "Innovator's Dilemmas" and "Innovator's No-Brainers" The Harvard B-school prof and author talks about how the Net changes the rules of business Clayton M. Christensen takes a probing look at how companies struggle to adapt their businesses to major technology changes in his book, The Innovator's Dilemma. First published in 1997, sales have really zoomed in the past few months -- breaking into the Business Week Best-Seller List in February. Apparently, the sales surge results partly from the emergence of the Internet as a fundamental tool for commerce for companies of all types. Edward Horowitz, the executive in charge of advanced technologies at Citigroup Inc., for instance, sent a copy of the book to each of the company's 200 top executives. Christensen, an associate professor at Harvard business school, recently spoke about the the innovator's dilemma and the Internet with Business Week Software Editor Steve Hamm. Here are excerpts of their conversation. Q: What is the innovator's dilemma?  A: The dilemma is that the criteria that managers use to make the decisions that keep their present businesses healthy make it impossible for them to do the right thing for their future. What's best for your current business could ruin you for the long term. They've been trained to listen closely to customers and do things that improve their margins. Those things are mandatory to keep your present business healthy and stock price high. But they can prevent you from addressing the Internet. Q: How do the Internet and E-commerce challenge companies to change the way they operate? A: When the trajectory of improvements in products and services that a good company offers overshoots what customers in a tier of the market want, it opens the opportunity for a different approach -- typically simpler and cheaper ways of doing business. That's the kind of new opportunity that the Internet offers. Think about Amazon.com, the online bookseller. The old model in bookselling was to build ever-larger stores with more inventory -- but that had reached the end of the game, and still reliablity and convenience were inadequate. Amazon.com has found a new market opportunity based on convenience and reliability, and it's changing the scale of the economics. Barnes & Noble is aggressively trying to respond. But they started late. Another example is investment banking. The kind of services that Goldman Sachs and Morgan Stanley offer are very important at the high end -- for the very best investment banking customers. But for other companies that want to sell stock, there are now other ways it can be done -- using the Internet. Bill Hambrecht just announced that his new investment banking company, OpenIPO, is going to use an auction concept. Hambrecht puts out a prospectus with no price. Then he conducts an online auction, gradually reducing the price until someone bids, and continuing down as more people bid, stopping when all the stock is sold. In the end, everybody gets the same price -- the lowest one -- but people get allocations of stock depending on how early in the process they bid. It changes the rules of the game. Now, investment bankers price arbitrarily and sell most of the IPO shares to their friends. Hambrecht can do business this way because, thanks to the Net, the cost of communicating is so low. Under the old model, a $150,0000-a-year investment banker calls on brokers, who call on the investors. Doing investment banking over the Internet will appeal to the least attractive of the customers of the high-end investment banks, so it's not attractive to those banks to go after the business. But, eventually, somebody like Hambrecht can keep adding capabilities to go after more sophisticated markets -- and ultimately, he can attack the high end. Meanwhile, the high-end firms have a difficult time coming down at him. Q: Which established companies are doing the best job of responding quickly and effectively to this disruptive technology? A: Charles Schwab is far and away the most successful. Their advantage is that there's more distance between Merrill Lynch and the Internet than there is between Charles Schwab and the Internet -- in cost structure. For Merrill Lynch to go after online trading is very difficult. It attacks their own main business of handling customers through brokers. Charles Schwab, on the other hand, is finding out that it's much less costly to do trading over the Internet. It's more profitable to do it that way than the company's traditional means of addressing customers -- by phone or mail. Dell Computer is in a similar spot. They didn't have to break their direct-sales business model to succeed with the Internet. Compaq is now trying to do what Dell is doing because it has become destructive to their business model. If Compaq can come up with a way to keep the two business models separate, they have a chance of succeeding at both. Q: Should companies be reengineering their businesses around the Web media and technologies? A: I don't think everybody should change their main business models. For most of them, there are still a lot of good opportunities in their traditional businesses. An insurance company, for instance, would be foolish to abandon its agents and just sell direct over the Web. They still have lots of customers who need sophisticated services and aren't comfortable doing things on the Net. Their processes and values are tuned to that kind of business. What they need to do is set up a different company that can have a new low-cost structure that can be competitive with new technologies. Digital Equipment is an example of a company that failed to respond to a major technology shift. It saw the PC coming. It tried to attack the opportunity with the existing business model. But the PC was too small a business back then, and the margins were to small for it to successfully compete for resources in the company. The mistake was they didn't set up a different company to attack the PC. In the end, they compromised their mainstream business model and they lost a step there. There are lots of ways the Internet can be used to serve your current customers more reliably and conveniently and and profitably -- the way Federal Express uses it. Those aren't innovator's dilemmas. They're innovator's no-brainers. Q: What hurdles do companies face when they set up independent Internet divisions? A: The idea of setting up a separate company sounds simple, but it's really difficult. You need to establish a different brand and sell different products -- so you don't just cannibalize an existing business. The people who are running these new organizations have to think like the disruptive innovator. Q: Is the Internet disrupting your own business? A: I worry a lot about the Harvard business school. Our business model and our products have become very expensive. They're the highest-performing products in management education. But coming at the bottom are online courses, which can't today appeal to the mainstream of our customers. First, there are corporate universities like Motorola University. They've grown in number from 400 to 1,600 in the past eight years. Our product is just too expensive for them. Then there are online companies like the University of Phoenix and others. They're improving at an alarming rate. Even the business schools that are so good at dispensing advice need to hold a mirror to their face and make sure it doesn't happen to them. We've set up the Harvard Business School Publishing Assn. It has the charter to do exactly this -- publish online and address new customers. We've responded, but there's a long way to go. Want to know more? Chapter One of Christensen's book is available to readers of Business Week Online _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ |
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RELATED ITEMS Chapter One of The Innovator's Dilemma | ||||||
