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 / Fourth Quarter 2001 / Issue 25(originally published by Booz & Company)


Clayton M. Christensen, The Thought Leader Interview

In the early years of the mainframe computer, for example, you could not have existed as an independent contract manufacturer of mainframe computers, because the way they were made depended upon the art that was employed in the design. The way you designed them depended upon the art that you would employ in manufacturing. There were no rules of design for manufacturing.

Similarly, you could not have existed as an independent maker of logic circuitry or operating systems or core memory because the design of those subsystems was interdependent. The reason for the interdependence was that the product wasn’t good enough. In every product generation, the engineers were compelled by competition to fit the pieces of the system together in a more efficient way to wring the maximum performance possible out of the technology that was available at the time. This meant that you had to do everything in order to do anything. When the way you compete is to make better products, there is a big competitive advantage to being integrated.

S+B: So you’re suggesting that today, when broadband performance is still not good enough, the old integrated telecom companies are at an advantage?

CHRISTENSEN: Right. The strategy of CLECs [Competitive Local Exchange Carriers] like Northpoint was to provide only DSL service, and just plug into the infrastructure of the telephone companies.

But there were too many unpredictable technological interdependencies between what CLECs did and what the telephone companies had to do in response — interdependencies that existed because the technology is not yet good enough. When there are unpredictable interdependencies, the integrated player is going to win.

Regulatory fiat cannot create a market at a technologically interdependent interface. And by the same token, regulation and so-called monopoly power rarely prevail at modular interfaces between stages of value-added technology.

S+B: So is there really only an opening for a dis-integrated play when the interdependencies are well defined, like the programming interfaces to a software program?

CHRISTENSEN: If I know what to spec, and I can measure it, and there are no unpredictable interdependencies between what you do and what I must do in response, then an economist would say that is sufficient information for a market to emerge between you and me.

Capitalism has taught us that markets are always more efficient than hierarchical managerial coordination. But in a situation where those three conditions aren’t met, I can’t outsource or partner with you because markets don’t function in the absence of sufficient information. Management has to provide the coordinating mechanism between what the supplier provides and what the user needs in not-good-enough situations where product architecture is consequently interdependent. Management always beats markets when there is not sufficient information.

S+B: As the performance of the products improves, to the point where it’s good enough or more than good enough for most customers, when the knowledge of how to achieve that performance is commonly available, then does a market emerge that supports the dis-integrated model?

CHRISTENSEN: Yes. When this happens, the way you compete has to change. Now speed-to-market begins to matter, and the ability to conveniently customize the features and functions to the needs of smaller and smaller niches is critical.

In order to compete in that way, to be fast and flexible and responsive, the architecture of the product has to evolve toward modularity. Then, because the functionality is more than good enough, you can afford to have standard interfaces; you can trade off performance to get the advantages of speed and flexibility. These standard interfaces then enable independent providers of pieces of the system to thrive, and the industry comes to be dominated by a population of specialized firms rather than integrated companies.

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