Tracy Kim Horn: Welcome to the Disruptive Voice. I'm Tracy Kim horn. This will be the final episode of season one. We're going to take a two month break from publishing new episodes and in the language of our theories shift from an emergent podcasting strategy into a deliberate one. Check back here this fall for an all new lineup of guests, research questions and more. For a sneak preview of what we hope to add in season two, we hope you'll enjoy this, A question and answer session with professor Clayton Christensen. Earlier this summer, Clayton invited his former students back to campus to spend an afternoon together. He spoke about his goals for his signature course at the Harvard business school BSSE or Building and Sustaining a Successful Enterprise and then he took questions from the audience. Let's tune in.

Clayton Christensen: I had a student in class about five years ago who was sitting right up in there, raised her hand right in the middle of the session and two thirds of the way through the course and she said, "Excuse me, but I got to ask this question. I actually don't know what this course is about." And it took me by such surprise. And so I said, give me overnight to think about what this course is about and I will report tomorrow.

Clayton Christensen: This was my response to her. And I said, "The way you can think about BSSE is this way. If you go back in the history of Judea-Christian thought, the original concept of God is that, God exists inside of the universe. And God's power doesn't come from his personality per se, but rather God's power comes from his understanding, all of the vectors and forces and constraints and roadblocks in the universe. And by understanding how the universe works, then God could do remarkable things like create planets and create life and so on. That was the original view of who God was. Power comes from understanding how the universe works. And then when Christianity and Judaism merged with the Greeks, the Greeks view of God was Zeus, who didn't live in the universe, but lived on top of the universe. And Zeus could just sit there on an Mount Olympus and if they wanted something to happen, and it happened. So how does this relate to the BSSE course?

Clayton Christensen: Most people we've observed who are senior managers view themselves as Zeus. They somehow exist on top of the organization. And if they will, something to happen, they can just go with to happen. But the minority view of the CEO is that the senior exists inside of the company and if she's going to be powerful, it comes not from power directly, but rather her understanding of how these messy connections in the organization are. That's what we are BSSE can do for you guys and for us is to understand all of this mess and why it happens so that someday five or 10 years down Steve can come back and say, "You know, actually the CEO is not actually totally incompetent."

Clayton Christensen: Anyway, so that's along the way of what we're trying to do. A report on the electric car, so you probably don't even remember that in the innovator's dilemma in the last page, the last chapter is... This was written in 1970, 1996 and it said, "If the theory of disruption is worth anything, let's take the most complicated and demanding innovation in the world, the electric car and [inaudible 00:04:41] the theory tell us whether it will ever make a difference. And what we said is that, "Everybody who's trying to make a big car electric so that they can compete against regular cars in the California freeway system, the theory says that'll never work.

Clayton Christensen: It's a sustaining innovation. You've got to come to the bottom of the market with simple products and then go out. And so the report is that Tesla is trying to succeed way up at the high end of the market. And what the theory says is, Well, if it's plausible that it could become successful, there are a few other players out there, in our hundred-thousand dollar stats here, companies called Porsche and BMW and Mercedes. You Come down here in the middle and you see [inaudible 00:05:42] and General Motors. And the theory says it will attract a lot of investment to succeed there.

Clayton Christensen: Even if Tesco's successful, one of them will acquire them. So, that's what the theory says. But Christine and I were in Beijing a couple of weeks ago and as we walked down the side walk, there was an electric car that was about this wide. So, the one person could sit in and you could fold your husband up in a box. Clearly it cost about $2,000. And then when you leave here and you go back to wherever you're going on the campus with these cars, they're zipping around our campus. They are electric cars from a company in called Go. And think about what those looked like when you were here. These are not golf carts. These are designed to do serious work and I... Anyway, it's happening. It's taking a lot of time. Questions or observations or criticisms or cannonballs? Yes.

Audience Member: I have a question. Obviously with the fun having the success it's had, there is a lot of it that is still predictable, but it just seems like so much of innovation is shifting to customer experience instead of the features or functionality. And one thing we had to talk about metaphorically about at my company is, you know, the people that built Teslas probably weren't that much smarter or had that much more resources than the people that built Shelby Vaults. And so, it just seems like the intangibles that... Now that we're into the customer experience realm instead of just get an engineer come up with a function, make functionality work. What does that mean for predictability and how do you think about that aspect of it?

Clayton Christensen: Well, let's see, a couple of things. When we study companies like Corny, that Tom referred to that have been able to survive and profitably survive for hundreds of years, one of the things they have in common is that at the level of the corporation they fund R and D on technology depend a do R and D or the equivalent of R and B on business model creation is almost always... You think that if we have the technology put, it into the market and it will work. But it requires innovation on business models that is just as serious a problem as development of the technology per se. And so when you see this kind of stuff happening, I first of all look at, what does the business model look like and will [inaudible 00:09:07] the theory of disruption is not a theory of growth. It's a theory of competitive response. And so if I want to grow, I pull the theory of jobs out and it will tell me that there's a market there. so that's a theory of growth and then I just want to be sure that the big players don't kill me. And so it needs to be disruptive also. And [inaudible 00:09:45]. Yes.

Audience Member: In a mature organization that's likely started to over-serve customers, you're focused on profits. How do you view acquisitions as a proxy or substitute for that, that spinoff unit that you would drive organically? Inorganic versus organic?

Clayton Christensen: That's a great question. So one of our fellows named [Bill Altman 00:10:12] wrote a piece on this that was in HBR like eight years ago. And in it, what we said is that when you acquire a company, you acquire it's business, the jobs to be done, that there's focusing on and you acquire their resources and their processes and performance and their profit formula. And you got to think about, Why did I buy this company? Did I want it's resources? Did I really want their processes and their profit formula?" Because the answer to that question then determines whether you should buy it and integrated into you or whether you should keep it separate and integrate our resources into their processes in your profit formula.

Clayton Christensen: And so a good example of mixing it up is through the 1990s, Dane was a consultant to Chrysler and they came up with the idea of a tier one and tier work through your tier two supply suppliers. And essentially, what they had to accomplish at the level of the tier one supplier is they modularized the architecture of their cars. So they weren't buying components. They were buying some systems that fit together in standardized ways. And because of that, Chrysler was growing link gangbusters. Every year their market share increased a point after point for about eight years.

Clayton Christensen: And so they were, their market share was around 17% of the US market is just phenomenal. They could go from concept to lunch in to two years, which is also quite remarkable. And attracted by their performance, Mercedes bought them and then Wall Street said, "So, how are you going to create value out of this merger?" And they said, "We're going to merge, and we think we'll cut about $8 billion out of the enterprise." And when they then flipped folded Chrysler into Dino, Chrysler's resources overnight were gone and their profit formula was gone.

Clayton Christensen: It took Mercedes five years, not two years to design it, go from concept to launch. And the overhead per employee per car was five X higher than Chrysler and really what Dino should've thought about is, "This is a different model out there and we want to preserve their ability to be fast and flexible at very little cost. We'll keep them separate and we'll take our capital and plug it into them so that they can be successful and instead by doing it the other way they, they disintegrated the value that they thought they were acquiring. And so you have to think about that. That's the basic idea. "We bought all four of these things. Why is it valuable to us?" And it's not that you shouldn't integrate. The question is, Do you integrate this into that? [inaudible 00:00:14:07]. Yes.

Audience Member: We're a startup company that's coming in in the middle space. We haven't come in at the top as well as the bottom, right? And as an early stage company, how much do you need to worry about being disrupted by incumbent in the low end as you're trying to disrupt a higher end?

Clayton Christensen: So sometime in the next couple of days, just walk through whole foods. Just walk around, and after you check out, there are tables and chairs there. And they're there because there's a job to be done. It not just that the need the functionality of fresh food, but there are cross... There are social and emotional dimensions of the job. You look at who's sitting there? Almost all of them are Democrats. But they have to sit there for a while because that's part of their job. [inaudible 00:15:19] where whole foods came into the market, there were above them, small shops, natural food shops that were individual entrepreneurs and they just got wiped down as whole foods went up market, killed them. In a similar way, staples came underneath stationery stores that way.

Clayton Christensen: But then when you emerged from go whole foods, go to supermarket like Kroger's or Star around here and look at how much of their footprint is how allocated to natural foods. Probably 40 percent of their total spaces are focused on whole foods. And they're going up market against whole foods and these guys are getting pinned on the top of the market as these guys come in.

Clayton Christensen: So you're right to look up and look down and you note that if they're under you, you might understand how they're going go up market against you, but you can predict that they will do that. Yes.

Audience Member: In the class you talked about kind of anomalies being the most important kind of sources of theories, what's the current anomaly that's gotten you most excited?

Clayton Christensen: I can say a few things. We'd have to take several.

Audience Member: Oh, what's that?

Clayton Christensen: I think this is a hypothesis, but it came from a class where somebody said, "How come [inaudible 00:17:38] or hotels don't go up market?" Holiday Inn came at the bottom of the market. They didn't move up market. McDonald's came in at the bottom of the market. They go up market. And what we decided is we tried to resolve them anomaly, is the point. We've written the diagram of disruption, the slope of that has been assumed to be a constant and then we thought about it in response to this puzzle and realized that for [inaudible 00:18:24], this is fairly fast and so disruption occurs over eight years in the industry. In the steel industry that's actually pretty stable, earthly, gentle and it's taken 50 years and it's still not over.

Clayton Christensen: And then there are other industries in which it appears to be totally flat. And so for higher education there has been no disruption from the beginning, and as best as we can tell, there has been no innovation higher education either. But then something happened here that we call online learning, and holy cow. And you see some of these things just like jets coming out. And on hotels, there's been very little innovation, fundamental innovation in the business realm, until Airbnb and that technology enabled that to happen. And so we're better... We're more accurate to say this trajectory of improvement is different [inaudible 00:00:19:55], depends upon the industry and technology. And so we can't say that this always happens in every instance, but this is not a constant. These kinds of innovations can make the world change. Did I do okay?

Clayton Christensen: And then what we worry about as we talked about, are the metrics and it just scares me to death that it might be true that if the steel industry would change the metric, people wouldn't be driven to go to the high end of the market because my whole, who I am is predicated upon people killing themselves. Somebody said starting Monday, ladies and gentlemen, let's choose another metric. And then another important one is, there isn't a theory about organization design. And the evidence of the absence of a theory is every five years companies will reorg. And the fact that they have to reorg means that there's no theory. They just keep doing their opinion about this rather than that. They don't know how... It's predictable that it will be wrong. And so we have a project conceived up but we don't have the man power to do it.

Clayton Christensen: There are... Apple is a very secretive company. And you can't... They won't let anybody inside to study them. And I know of the people at Apple university and they won't let me in. We found eight of the alumni of the HBS who historically worked at apple and so they're helping us if there... And one of the things that people say is that there isn't an organization chart inside of the apple anywhere. And our response was, "There has to be an org chart in use even if it's not on paper." And so we're trying to put together what does that org chart in use look like and then we're trying to build from there. What is the circumstance in which you need to have this kind of organization and if you're not in this situation with that one, what does the organization need to look like? And I think that's a very important issue that [inaudible 00:23:01]. Just two more questions.

Audience Member: One of my favorite classes when I took your class, I was lucky enough that you were teaching it, was the last one where your wife came to class and you took your theories and you applied it to life. And so I approached my tenure reunion reflecting on life. And then you went on to write a book on that. So I'm curious as we're talking about the theories and how we apply it to our business lives, but also our personal lives. And so maybe what is your favorite when you take your theories of applying to life, the favorite lessons within there as a top three or what's a new one that you've realized recently that you haven't necessarily shared as broadly?

Clayton Christensen: I would say the two most important ones are the resource allocation process. Managing that and what are the metrics that determine how I spend my time and my money. And everyday of my life I fight the drive to spend my time on activities that will yield the most immediate and tangible evidence of achievement. And I can write that down and we can sell copies of this stupid book. And yet there are almost... Is demon inside of me that drives me to achieve in things that pay off in the short term. And thankfully, Christine is more control her life, you know? And so our kids, I think, are turning out quite well.

Clayton Christensen: But then at least I understand now why raising kids is hard. And then the jobs to be done is to set the next time. I look at the youngest, Katie, unfortunately went to Columbia, but even as the kids are now grown and her gone, we have grandchildren. What's the job that they hire a father to do? I look at them and I say, "I know exactly what you mean." And I just miss. So, again, at least I understand the problem better. [inaudible 00:25:54]. Last one? Yes.

Audience Member: That's probably a better question to finish on. But back on this technology progression. So I think part of the Mini Mills story was, the integrated Mills didn't think the technology would ever work at the rebar at their event eventually over time. So as managers we're often seeing technologies and we have to judge. And of course you going to to have a hotel that becomes Airbnb and that's unperceivable. But Disk Drives or Mini Mills might be... What's the theory have to say about evaluating whether or not technology is going to move up markets so [inaudible 00:26:35] need to disrupt you.

Clayton Christensen: That's a great one too. Somewhere in the dilemma I think there's a statement that says, "When this issue arises, we cannot predict where the technology will come from that allows them, that drives them up market. You can't predict what that will be, but we can predict with perfect certainty that those people are going to try to figure out how to make it happen." And I think that's actually a good answer. We can predict that they're motivated to go off market. And so that car that we saw in Beijing, where that technology is going to come from that will disrupt the low end of subcompact regular cars, we don't know where it's going to come from but we can predict with certainty that those guys are going to try to figure that out and-

Audience Member: Best, keeps you up at night. [inaudible 00:00:27:50].

Clayton Christensen: Well you guys are... What a remarkable career I've been able to build on the backs of the smartest people I know. And it's sort of... I had a stroke a few years ago and I lost my ability to speak and some of you were the victims of that. But what I find out is the teacher all they have to do is to ask the questions and then you guys teach each other and I just get out at the back. And I'm grateful that I am in this situation where I can just listen to you guys. And I am grateful that my colleagues here are part of this with me in trying to change the world.

Clayton Christensen: I just came out of an important meeting in the West where people are just worried sick about what's going to happen to America. Is it a result of the ongoing election and what's going to happen to all of them. And schools and everybody in this meeting just stood up and gave the same call, which is, we need to change. But they have no clue how to change. They don't have a common way. And [inaudible 00:29:58] is we give people a common language, that they can do things that historically seemed to be impossible. And some of you know this, heard this story, but let me tell it again for those who haven't. So this happened in 1999, and I came in and was just minding my own business in my office and I got a call from Secretary William Cohen, who was the Secretary of Defense in the [inaudible 00:30:34] administration.

Clayton Christensen: And he just called out of the blue. I had never met him before, but he said, "I read this book, The Innovator's Dilemma, and I wonder if you would be willing to come down to the Pentagon and make a presentation to my staff about what this research entails." And you know, for me it's a chance of a lifetime. So I said, "Sure." What I imagined what his staff was, was that it would be a few second lieutenants and college interns. But when he got me at the Pentagon gate, he then led me into his staff office, which is the size of this building. And he took me to the front and introduced me to the chairman of the joint chiefs of staff and then introduced me to the secretaries of the army, Navy, air force, coming down to main core, behind them, the under secretaries of defense and behind them, the deputy Secretary of Defense and behind them, the assistant secretaries and everything else. I met 40, 45 people in there. And Secretary Cohen said, "Just present your stuff." That's a quote.

Clayton Christensen: So when I started to explain what disruption was about and I had the same video or slide about steel. I used it there and we've kept using it for all these years. And when I finished describing the consequence... The [inaudible 00:32:20] something, what do you call that? Anyways, the meaning [inaudible 00:32:30]. After I finish that slide, Secretary Cohen, who's the chairman of the joint chiefs, raised his hand and he said, quote "Clay, you're clueless about why we're interested in this." And I said, "I actually am clueless." And so he said, "Let me show you, keep that slide up." And he says, "What you call the steel or I'm in the sheet steel business, we call that Russians. It is the most demanding market that we have ever encountered." Turns out they're not our enemies anymore but we're organized to beat the Russians." And then he said, "What you call the integrated steel companies. We call that the US Department of Defense. And it's organized to solve every problem of defense at anyone of these levels. And then he said, "What you call reorg, we call that terrorism and what you call the mini mills. We call that non nation, nations like Al-Qaeda." This is In 1999. And the he sat down, and I didn't know what [inaudible 00:34:04], I tried to just go on with the presentation.

Clayton Christensen: So what do we do about it? is a big question. And so I said, well, "We've studied this now for some time and the only instances where the incumbent reader cut this next wave and was successful with that was if they set up a completely different business unit that will have a different profit formula, different processes, and the only instances where they could catch this as if they set up a separate organization. And within two months they created the special forces command, which wasn't the Navy, the army, the air force. It was a combination of their technology separated out to go after the terrorism.

Clayton Christensen: And I talked about this with the Secretary for several times and what he said is, they had been arguing about this, how would we respond to these forces, for years? They'd sit around the table and they'd argue with each other and everybody had their data to support their positions. But he said, "What your theory did is it gave us some common language and a common way to frame the problem so we could reach consensus around what otherwise would have been a counterintuitive course of action. And subsequent to that, every time in any organization that I've been associated with, if they're struggling to make a decision and make progress, it's because they don't have A common language and a common way to frame the problem. And that's what I think you're trying to provide to the world. There's a way to frame problems so that they can be solved. Anyway, I love you guys. Nice to [inaudible 00:36:09].

Tracy Kim Horn: The Disruptive Voice is a production of The Forum for Growth and Innovation, a research project at the Harvard Business School, guided by professor Clayton M. Christiansen. The Kim B. Clark professor of business administration. Follow us on medium at HBSFGI.