Clayton Christensen's Innovation Brain

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Andy Grove recognized this a lot sooner than I did. There are many prior connotations in the English language for the word disruption. He was worried that the word would be so misused that he called it "the Christensen effect" internally. The problem was I couldn't call it the Christensen effect. In retrospect, it would have made things a lot clearer had I found a word that didn't have so many other connotations. It gets hijacked.

I hear a lot of managers today talking about trying to create "innovators at all levels" and building innovation into every corner of a vast corporation. Is that a misguided idea? Isn't that contradictory to what you say in Dilemma, which is that disruption happens in "spin-out organizations," as you call them?
Generally you create a lot of hype. People come up with lots of new ideas, but nothing happens. They get very disillusioned. Never does an idea pop out of a person's head as a completely fleshed-out business plan. It has to go through a process that will get approved and funded. You're not two weeks into the process until you realize, "gosh, the sales force is not going to sell this thing," and you change the economics. Then two weeks later, marketing says they won't support it because it doesn't fit the brand, so we've got to change the whole concept.

All those forces act to make the idea conform to the company's existing business model, not to the marketplace. And that's the rub. So the senior managers today, thirsty for innovation, stand at the outlet of this pipe, see the dribbling out of me-too innovation after me-too innovation, and they scream up to the back end, "Hey, you guys, get more innovative! We need more and better innovative ideas!" But that's not the problem. The problem is this shaping process that conforms all these innovative ideas to the current business model of the company.

What are you working on today?
Two books that will be finished by this summer—one looking at the problems of why our health-care system is so expensive and inaccessible and [another looking at] why our public schools struggle to improve. Then I'm working on another project I think is really exciting [about] the misapplied and misleading methods of financial analysis. The core idea is many of the programs we teach are fundamentally biased against innovation. There are just a whole bunch of paradigms of financial analysis that really lie at the root cause of companies' under-investments in innovation.

As an example, discounted cash flow or net present value is the most commonly used method to determine what an innovation is worth today. But the mathematics have an implicit assumption within them that if we don't do this innovation, the way things are today will maintain themselves in the future. That's not true. The company's current financial condition will not persist. By comparing the innovation against the do-nothing scenario, you're biased.

Is there a better way?
There's a method that's the brainchild of Rita McGrath at Columbia and Ian Macmillan at Wharton called "discovery-driven planning." It's a much better way to assess the value of projects. Most companies, when they look at the financial projections [of a potential innovation project], if they look good, they do it. If they don't, they don't.

But the desirability of attractive numbers has never been an issue. Why shine the spotlight on the numbers? Rather, a better way to do it is: We all know how good the numbers need to look for this to be attractive. But what assumptions have to prove true in order for those numbers to materialize out of this innovation? So you focus the spotlight on what assumptions have to prove true, and you launch a project to test those assumptions. It's a much better way.

If you combine Rita's work with mine—that a disruption always creates market capitalization—and if one of the assumptions relates to what job customers need to do when they hire a company's product, the probability of success and of it being big can be assessed without even looking at numbers.

Who or what do you think will disrupt Google (GOOG) or Apple (AAPL)?
It's hard for me to see what will disrupt Google. I think they've got a pretty good run ahead of them. Chapters five and six of The Innovator's Solution describe how at the beginning phases of the industry, in order to play that game successfully you really need to have a proprietary, optimized, end-to-end architecture to your product.

Apple sure has that.
That's why they've been successful. But just watch the [competitors'] advertisements that you hear for the ability to download music onto your mobile phone. Music on the mobile phone has to be downloaded in an open architecture way from Yahoo! Music or someplace else [other than iTunes]. Which means it's clunkier, not as good. Mobile phones don't have as much storage capacity, nor are their interfaces as intuitive [as iPods]. But for some folks, they're good enough, and the trajectories [of people using their phone as a medium for listening to music] just keep getting better and better.

So music on the mobile phone is going to disrupt the iPod? But Apple's just about to launch the iPhone.
The iPhone is a sustaining technology relative to Nokia. In other words, Apple is leaping ahead on the sustaining curve [by building a better phone]. But the prediction of the theory would be that Apple won't succeed with the iPhone. They've launched an innovation that the existing players in the industry are heavily motivated to beat: It's not [truly] disruptive. History speaks pretty loudly on that, that the probability of success is going to be limited.

McGregor is BusinessWeek's management editor.