You can invest to create the new growth business while the core business is still growing, because new business units don’t need to get big fast. But when the core business stops growing, investing to create new growth businesses becomes impossible. To prop up the stock price, managers have to turn down the screws on everybody. That forces them to cancel all the projects that would lead to future growth in order to drop money to the bottom line. This is HP’s dilemma today. Once a company’s growth has stopped, the game as we have known it is over. It’s a scary thing.
S+B: So would you say managers fail to see the disruptive bullet coming because they are misled by data that shows their current business enjoying healthy growth?
CHRISTENSEN: Right. When management waits until the data is clear, the game is over. But that means management has to take action on a theory rather than evidence. Unfortunately, the word theory gets a bum rap at the Harvard Business School and in business in general because it’s associated with the term theoretical, which connotes impractical.
But actually theory is very practical. Gravity is a theory, for example. It allows you to predict that if you step off a cliff you will fall; you don’t have to collect data on that.
Disruptive technology is a theory. It says this will happen and this is why; it’s a statement of cause and effect. In our teaching we have so exalted the virtues of data-driven decision making that in many ways we condemn managers only to be able to take action after the data is clear and the game is over. In many ways a good theory is more accurate than data. It allows you to see into the future more clearly.
S+B: Can you identify companies that are doing well today, but that the theory suggests are vulnerable to this kind of disruption?
CHRISTENSEN: Look at Merrill Lynch and Charles Schwab. In the boom of 1999, Schwab’s market cap exceeded that of all the full-service brokerages. Each of the full-service brokerages, such as Merrill Lynch, has established an online capability, but has implemented it in a fashion that sustains its current business model. In other words, they use the Internet to get better information faster to their full-service brokers to do a better job serving their high-net-worth clients.
With their cost structures, this is exactly the right thing to do. These firms have billions of dollars of profit more to make before all their high-net-worth clients die. So it is only the theory, and not the data, that would predict that 10 or 15 years down the line, as Schwab moves up market with its lower-cost business model, in pursuit of high-net-worth clients, the full-service brokerages will be disrupted just like Digital was by personal computers.
If you just look at the data, you are led to believe that things are getting better, rather than worse. That’s why the fall is really precipitous, once you hit the ceiling.
S+B: During the late 1990s, a lot of dubious business models were funded on the basis of “this is a disruptive technology.” Now the telecommunications companies that are doing the best are the old regional Bell operating companies, not the Internet-based startups. Some of these startups walked and talked like disruptive innovators, and yet have failed. Are we still too close to the midst of things to get a real read on what is happening?
CHRISTENSEN: When the functionality of a product or service overshoots what customers can use, it changes the way companies have to compete. When the product isn’t yet good enough, the way you compete is by making better products. In order to make better products, the architecture of the product has to be interdependent and proprietary in character.