Clay Christensen: Hi, this is Clay Christensen and I want to welcome you to a podcast series we call The Disruptive Voice. In this podcast we explore the theories that are featured in our course here at HBS, Building and Sustaining a Successful Enterprise. In each episode we'll talk to alumni of our course and others who are trying to put these theories to use in their lives and in their organizations. It's great fun to hear from them, and I hope that you find these conversations inspiring and useful. If you have an idea about a topic or a speaker you'd like to hear more about or if you'd like to comment on our work, please reach out to us here at the school.

Derek van Bever: I'm joined here in the Klarman Hall podcast studio by two guiding lights behind the BSSE course here at the school. One, Clay Christensen, is the creator of the course and is well known to all of our alumni, while the other, Joe Bower, is less well known by name perhaps, but is no less influential to the course and to Harvard Business School generally. Good afternoon, gentlemen.

Clay Christensen: Delighted to be here.

Derek van Bever: Professor Bower is the Donald K. David Professor of Business Administration Emeritus here at Harvard Business School, and he could fairly be referred to as the father of the modern study of resource allocation. His thinking and findings, his intellectual fingerprints are all over the BSSE course, and he and Clay have been friends and colleagues for over 30 years. In particular, Joe put the study of resource allocation on the map with the publication of his 1970 book, Managing the Resource Allocation Process. This book makes Clay smile every time he sees it on his shelf, and he pulls it down often as an example of how good research should be done.

Derek van Bever: Any BSSE alum who remembers the phrases "RAP" or "impetus" can get an immediate sense of the extent of our debt to Joe's work. Joe, I wonder if you could start us off and tell our listeners a little bit about the background to that 1970 book. What prompted you to conduct that research, and how did you find your way to the firm you called National Products?

Joe Bower: Well, it all begins with an MBA. I had studied economics before that, and problem that I think interested me most was capital budgeting in firms, because in some way that seemed to me the clearest example of where economic theory was being applied in companies, and that seemed pretty exciting. When I became a doctoral student, I spent a lot of time talking to John Lintner, who had really built some of the important theory of the firm, and he encouraged me to study capital budgeting. I was also very interested in the business policy course as a way of thinking about long-range planning in the firm. We don't have that course anymore. We have offshoots from it, but it was in a sense what long-range planning was all about, but made much more practical, and in fact it was a much more subtle theory, I learned over time.

Joe Bower: It's funny how Clay remembers when he and I were talking. I remember I was at a symphony and I was thinking about capital budgeting theory and long-range planning theory, and it occurred to me that they really were in contradiction to each other. Clay calls that an anomaly, but basically capital budgeting, the idea is that all the thinking about businesses and what's going on in the world is done lower in the organization and captured in proposals to spend capital money. Those move up the organization and they're filtered in effect by the cost of capital. The theory is that everything that is going to return more than the cost of capital should be chosen.

Clay Christensen: I think there are certain images that if the researcher comes up with the image, it starts to have an impact. In my research, the model or the image of disruption in the rebar part of the steel industry. That sticks with people. And in your research, the bubbling up has had a comparable impact, that people think of the resource allocation process is that it bubbles up, and without the bubbles it wouldn't have impact.

Joe Bower: And of course long range planning theory is just the opposite. Basically, it's this idea that very smart people at the top, supported by staff, figure out what's going on and then tell the company what they should do, and that filters down. But it's absolutely contradictory, because in one case, understanding of the world is at the top, and in the other case it's at the bottom.

Clay Christensen: Guys, remember that bubbles always go up.

Joe Bower: And so I decided I would study it. By that time I'd gotten my doctorate and I made a proposal. The Ford Foundation funded it, and I spent a year, actually a year and a half, living in a company, which I called National Products. It was a Fortune 50 company, and they gave me complete access, which was amazing, because I guess I was then 24 or 25. We picked four projects they helped me identify, and I spent time with the teams that were working on them. I told doctoral students that basically I was a camera. All I did was sit and take notes. I just wanted to know what was happening. And I remember I left my notes one time, and of course the people that I was studying looked at them. They said, "All you're doing is writing down what we say," and that's all I was doing.

Joe Bower: Obviously, over time I would play poker with them at night. I got to know what was going on. They'd call me if something was happening that I didn't know about that they thought I should know about. And so when I was done, I think I had a hundred pages on each of four projects, chronicling them. That was the data. And then the question was to figure out what was happening. And that just took a lot of time, but it was clear over time that the substance was being shaped by bringing together functional views. Then depending on the skill of the general manager, project manager, program manager, whatever it was, department manager running the project, it would start moving up the organization.

Joe Bower: When I would interview the people at the top of the company, they didn't have a clue, and anyway, they were looking at hundreds of these things. There was no way they could really sort them out. I began to understand what they were doing, and what they were doing was looking at the signature on the proposal. If it came from Clay, it was always going to work, because he was very, very, very careful. And it came from Joe, they were very skeptical, because he was, let's say, very ambitious or optimistic. They spent most of their time in the middle, trying to sort out projects where they were uncertain. And that's how they were making their decision. So the real question is who signed it? And they were in the middle.

Derek van Bever: Students of BSSE will remember no doubt the DuPont Kevlar case study. And when Gordon Swank goes up to the top floor of the Nemours Building with a proposal for a tire factory under his arm, they know who Howard is.

Clay Christensen: That's exactly right. And that case is still in our course.

Joe Bower: And then we wrote several cases based on those four projects, and they were taught for a long time. For a while they were best sellers.

Derek van Bever: So Joe, your symphony moment was maybe the beginning of your realization that the way that we conceived of the strategic budgeting process, of the project approval process here at the school or in the confines of academia was very different from what happened in the real world. And you found that who's behind a project matters. What else really matters to what you called impetus or project selection? What really drives what gets approved?

Joe Bower: I mentioned the substance, and then there's the question of what was driving projects. And the third was what I called context, because it became very clear that what was happening is that the forecasts as to what the sales might be that would drive it were being made by the sales organization, or marketing, depending, and the cost estimates were coming from engineers. Estimates when there was new technology involved were out of research. Depending on how they were being managed, most of the time it was being thrown over the wall. So the salesmen would say, "Here's the forecast," and basically the salespeople didn't want to run out of capacity.

Joe Bower: On the other hand, the manufacturing people didn't want to have overcapacity. They wanted their capacity utilization to be very, very high. And the engineers and researchers wanted things to be new, and they wanted to keep working on them forever. So the quality of the proposal in some sense depended on whether there was someone who was a real business manager who put it thoughtfully and integrated it, but many times it was just assembled and not very good. What you could see is often, and I began to study other companies, what got built was when the factories were out of capacity. It was very hard to build ahead of demand, which actually is quite critical strategically, if you're on to something.

Clay Christensen: You know, today the concept that you've just described is a part of the key library of insights in the BSSE course. The image that many of us use is a big oval in the classroom. We say, "Who's sitting at the chairs around that table and what did they bring to the table and what do they keep away from the table?" And that concept of yours is still very much in the core.

Joe Bower: When I took this thinking, I was asked to bring it over to the Kennedy, they were building the Kennedy School, and I got involved in that, what used to be called public administration when they really cared about how you ran things rather than policy. The phrase is, "Where you stand is a function of where you sit." What I found was absolutely critical was how people were compensated, because if they were paid from meeting earnings forecasts, that's what they did and that shaped their proposal, even if the company's public documents said that they were looking for rapid growth. What they cared about wasn't the words on paper, it was how they were paid, how they were evaluated. And that really drove things, in particular since in those times the differences in compensation weren't huge the way they are today. They were important, but who got promoted was important, and you got promoted on your track record. And your track record meant you met your forecasts.

Derek van Bever: To quote Clay, one of the jaw-dropping insights from your work, Clay writes in one of our notes, "The actual mechanisms by which resources are allocated and prioritized are unruly, disobedient, strong-minded processes that operate almost without regard for the will of senior management." And that idea that senior managers have much less awareness of what's going on below their field of vision is a stunning insight. In many different ways, we try to get our students to understand that they need to get out of the C suite and get around and get deeper into the organizations. How did that present to you in your research?

Joe Bower: What I could see was that most of the top managers really didn't have a clue. First of all, it was a highly diversified company, so even if they knew a lot about whatever it was, one part of the business where they had grown up, they really didn't know a lot about the keys. I think over time, partly Clay's work but partly the work at the Boston Consulting Group that introduced the concept of a business portfolio was very important, because then they began to look at a business. If you were funding a business, then you had to fund the projects, and if you didn't like the return then you worked with the managers to see how you could improve the expected returns. You didn't say no mechanistically. And if the business wasn't any good, you could have very high returns lowering costs in a terrible business. But that was a waste of money. So that was a big step forward. A lot of the work in the consulting groups in the '70s was really putting all that together.

Derek van Bever: Those two ideas that you have of your reputation is built on the projects that you green light or that you sponsor and that there's so much more going on inside the firm, there's so much more variety in terms of ideas than senior management ever see, that's a real puzzle. How do you as a senior executive understand the breadth of creativity and all the different ideas, including the disruptive ideas, Clay, that you could potentially invest in? They seem to be kind of locked from vision.

Joe Bower: I think it's Andy Grove in my mind who put the idea that you have to have knowledge power and position power in the same room for a long period of time, so that the people who really understand what's going on, even sometimes quite low level if there are some technical issues, are in the same room with very senior people who are going to have to make the judgements on risk.

Joe Bower: The case example I used was the IBM 360, where the math involved in putting together the 360 was captured in an entire Journal of Applied Mathematics. It was one of the most important developments of that period. Thomas Watson spent two or three days doing nothing but discussing that project with the key managers and the scientists, and then they decided what they were going to do. But that was bringing together all kinds of knowledge and all the power in the company.

Derek van Bever: Clay, you've repeatedly said how much Joe's work shaped and influenced your own. Could you talk about that? How did you first come to work with or be a student of Joe's, and what was it about that study that makes you smile every time that you pull it down?

Clay Christensen: Well, the puzzle that I brought to the game was it seemed to be so hard for companies to sustain success. And in the Boston area there was a very successful company called Digital Equipment Corporation. When you read articles about why Digital had become so successful, inevitably it was attributed to the brilliance of the management team. And then a company like Digital Equipment fall off the cliff, and what was a successful company overnight became unsuccessful. When people would try to explain why Digital Equipment had stumbled so badly, it was always attributed to the ineptitude of the management team. And it's the same people running the company, and smart people just don't get stupid that fast. There had to be something else going on. That was the puzzle that I brought to the equation here.

Clay Christensen: I had two or three really important events. One was, I was fired from my company. I had five kids, needed something to do with my life, and Joe Bower was the head of the doctoral program at the time. Over a weekend they made a decision to admit me to the doctoral program. And then I found myself needing a topic to study, and this puzzle bubbled up to the top of my mind about why is success so hard to sustain? I talked to Richard Rosenbloom, who advised me to go where data is. I had an idea of something that I might study as a doctoral student, but he said, "Why don't you study disc drives?" He knew nothing about them, but he said, "There's a lot of data about disc drives." And so I did, and I assembled, with the kind help of several people, a set of data.

Joe Bower: Amazing database.

Clay Christensen: Yeah, it really did. It had data in it that described every technology used in every component used in every disc drive anywhere in the world. And I had to dive into that data to figure out who succeeded, who failed, and why. And then that guided me to interview people out in Silicon Valley over and over again to figure out, can you explain this? Joe Bower was the doctoral head. One day we had a seminar on his research, and we were standing right in the center of the lobby of Cotting Hall, and it just occurred to me, looking at who failed and who succeeded, that Joe Bower's research would give me the explanation.

Clay Christensen: And so that was the second big idea. And then the third one was just a month or so later, I was in Silicon Valley, and right there in the middle of the street this diagram of intersections just coalesced in my mind. Those events kind of sent me on a trajectory that I will be forever grateful.

Joe Bower: I actually remember, we were talking and Clay was describing, I think at that point you'd begun to see the difference between what the companies could do and what was very hard.

Clay Christensen: Yes.

Joe Bower: And you were telling me about that, and I remember saying, "The context is set up to punish those new ideas, because the salespeople don't like them, it's the wrong... It's just wrong in every way." And then you said, "Bingo, that's it." He went off, he was all excited. And then of course it's just the thing you have to understand is how much data he had. I mean, he took in some ways four cases. It takes time and it's hard to do. And then figuring out what it means. But getting that distinction, when did you get the sense of the difference between what were sustaining projects and which projects, you didn't call them disruptive yet, but the ones that were new markets that were performing poorly but were lowering costs or were improving in other dimensions?

Clay Christensen: Well, Joe, looking back on it, one of my contributions to the field is I did a study of the steel industry, in which it turns out the very same process by which the personal computer disrupted Digital Equipment, these mini-mills came in at the bottom of the market with-

Joe Bower: Inferior product.

Clay Christensen: That's right. It turned out that that little diagram has had a huge impact on how people think, because we need a simple model. We need a simple language. What I learned is that a common language and a common way to frame the problem is critical to manage the resource allocation process, because without the language then the resource allocation process simply is an observation that Joe Bower made. And I was able to bring to it the language that has influenced how the Department of Defense organizes terrorism activities, from all of that range to smart phones.

Derek van Bever: What struck a number of us is that one of the things that unites you and Joe is this determination to go deep. You talk about doing census-level research, which as Joe says, you did in the disc drive industry. Joe, you talk in the beginning of your book about how people will raise the question, why don't you study multiple companies? But you developed a whole language and armature around how to discuss this by going incredibly deep and understanding how one company works and doesn't work according to its lights.

Joe Bower: For reasons I do not understand, although I've written about it, I still don't understand why so few business academics think it's important to study what's going on in the business. I remember we had one of our faculty wrote a book. He was studying group vice presidents, way up, so the top, the group, and then divisions. He never talked below the group. So how did he know what they were doing? He didn't even talk to people they were managing, and that's at Harvard Business School. Now, at other places they don't even go to the companies.

Clay Christensen: That's right. They think that data that is broadly available, which I can then buy, stick into a computer and analyze it, they think that that's cheaper than going out into a company and creating the data.

Joe Bower: Well, they've created a value system that's not just cheaper, it's better, that if you don't have lots in performance...

Clay Christensen: Yeah, that's right. Thank goodness, you, and then following in your foot place a series of companies like Boris Groysberg and others.

Joe Bower: Well, Clark Gilbert and-

Clay Christensen: Clark Gilbert.

Derek van Bever: Keying off of that, Joe, it's been now since 1970, almost 50 years, since the publication of your landmark.

Joe Bower: Oh, my.

Derek van Bever: Clay, you just celebrated the 20th anniversary of the publication of Innovator's Dilemma. I'm curious, what have we learned and what have we not learned? Are business people today generally taking on board the insights that you've studied? Do you find that they're more sophisticated in their understanding of resource allocation or disruption? Do we continue to make the same mistakes over and over again?

Joe Bower: Well, I think two things. I think on the one hand there are companies that are extraordinarily sophisticated in their thinking about resource allocation, and they really do a good job, really understand that there are categories of activities, some of which have to do with operating effectiveness and some of which have to do with expanding the business. And they are set up to think about that, and then they know they also have to keep reinventing their company.

Joe Bower: The very sophisticated companies are really able to deal with and use all the thinking that has developed over the last 50 years. But we're facing another problem, which is that the financial markets have changed a great deal and there's so much liquid capital. When I was doing my research, essentially a company was allocating its own, today we call it free cashflow. The idea that you would borrow more money or set up, do project finance, none of that was really happening. And today these very, very liquid markets are used by a whole set of players, hedge funds and others, to buy companies, essentially allocate resources so as to drive up earnings quickly, and then sell them. And you can do that. You basically cut everything that's long term. You cut research, you cut marketing, and drive up earnings. You borrow, you buy back shares, the share price goes way up, you sell and then go on and look for another company. That is really making it difficult for companies to do a good job.

Clay Christensen: I would say what you've said absolutely is true. And I would just add to that that when people lose their jobs and go to another job or retire, much of the instinct of the resource allocation process goes with them. As an example, I was invited in the late '90s to go to the Pentagon, and Secretary Cohen, who was the Secretary of Defense, wanted to understand the resource allocation process. I had written my book, and he thought this might be interesting. And so he invited me to come in to speak with the Joint Chiefs of Staff and the secretaries of the Army and the Navy and the Air Force. They were all of his direct reports came together. And over the course of a couple of months they made a decision that they were organized incorrectly and were unable to go after terrorism. They had been arguing about that question for six years, but there was no data about the future.

Clay Christensen: He called me up and he said, "Finally we made the decision to separate out a special organization," they called the Special Forces Command, "and allocate it separately, so that we can go after disruption at the bottom of the market." And Secretary Cohen called to explain what they were doing, and he said, "You know, the common language and a common way to frame the problem that your study of the mini-mills had just made all the difference in the world."

Clay Christensen: This is very hard, and the defense is a extraordinary complex. Many years later I read they had just fired somebody in the organization, and he was the last one who understood the resource allocation process. Very quickly the organization focused right back on how the very phenomenon that you and I had talked about, that person was fired and there was no understanding in the White House.

Joe Bower: Or DoD, yeah.

Clay Christensen: They need to have the BSSE course being taught everywhere, because the world would be so much more efficient and effective if we had a mechanism to train people how to think about these problems.

Derek van Bever: Joe, what advice would you give our listeners who are leading organizations, who want to understand how complete a picture they're getting of the potential for their companies, what's going on in the lower levels?

Joe Bower: Well, I find some of Clay's language quite felicitous as a way of thinking about it today, which is in a sense what problems for the customer are you solving? We both knew a wonderful CEO named Alex d'Arbeloff, who built a firm called Teradyne, and he talks about sitting in the cafeteria and asking his engineers. He made a practice of not eating with executives. He'd eat with the... And he'd ask them, "Why are the customers buying our products?" And inevitably they would tell him about the products, and then he would say, "I didn't ask you that. I said why are the customers buying?" So that's the first thing.

Joe Bower: Once you ask that question, you can then ask the next one, which is, is someone else going to solve those problems in a better way? It's really two-sided. One, what opportunities are there to solve it in a better way? And on the other hand, who else might be? I mean, the classic example there is that Nokia, which was regarded as a fantastically successful firm doing brilliant strategic work with cell phones, when you look at their strategic plans sort of one year before Apple was in the market and beginning to really crush them, Apple wasn't even listed as a competitor.

Joe Bower: Then the third is really, just the third is who are you hiring? Because if you don't have really smart people, that's a problem. And they are difficult. But my mantra is, you can give a horse everything but speed, and in a company, you can give people everything except smarts and understanding. The rest you can teach them.

Clay Christensen: Joe, to me, I have only one point on the question you asked us, Derek, and that is, as an executive, point number one is you need to be a professor and you need to teach the principles of how to think about the allocation process and why it happens the way it happens, and teach people how to think. And much of that question of how to think about problems is right there in Joe Bower's original book. We just have to think about it and then teach others how to think about that and teach it over and over and over again.

Derek van Bever: To the generations of BSSE students who will be listening to this podcast, we close out our last class very often by saying that you've come to HBS as students, but you have to leave here as teachers. And Clay, to what you just said and to the privilege of being in your company, Professor Bower and Clay today, thank you very much. And to all of you who are trying to understand how better to get your arms around the organizations that you're leading and how to make sure that you're building for the future, we could recommend no better than the work of these two men, and we thank you very much.

Clay Christensen: Thank you for listening to us at Disruptive Voice. If you like our show and want to learn more, please visit us at our website or leave us a review on iTunes. Until next time, good luck everybody.