Professor: Disrupt or Be Disrupted

By eweek  |  Posted 2006-06-28

Professor: Disrupt or Be Disrupted

Disruption in business is the focus of Harvard Business School professor Clayton Christensen, who has carried out groundbreaking research into how small, underestimated companies can disrupt and unseat established and seemingly invincible firms.

Christensen has raised flags of both warning and hope for big companies with books titled "The Innovators Dilemma," "The Innovators Solution" and "Seeing Whats Next."

In addition, he is co-founder of Innosight, a management consulting and education company in Watertown, Mass. He also serves on the boards of directors of four companies, including India-based IT outsourcer Tata.

Consultancy Services and W.R. Hambrecht, which hosts online auctions of initial public offerings.

eWEEK Executive Editor Stan Gibson interviewed Christensen June 7 in Christensens offices at Harvard Business School in Boston, where Christensen offered provocative insights on companies use of IT to disrupt their competition.

Do you see any companies that are using IT to be disruptive?

Thats how Wal-Mart has disrupted the full-service department stores. They manage the flow of inventory so that their turns are high.

In retailing, the way you make money is you have a gross margin, times inventory turns. So if the department stores turn their inventory over three times a year. In order to earn an adequate return, their gross margins have to be about 40 percent.

If you turn your inventory over six times per year, then your gross margins can be 20 percent and youll earn an adequate return. Its key in the retail business to have that. I think they made very good investments that way.

Theyve been trying to push RFID [radio-frequency identification]. Is that disruptive?

It is. However, the prediction would be that Wal-Mart, although they aggressively seek RFID-compatible suppliers, will probably be one of the last companies to adopt RFID.

The only way it would make sense would be if RFID performs better in terms of cost and reliability and accuracy than bar coding. They are the worlds state-of-the-art practitioner of bar coding. Theyve got billions of dollars every hour staked upon the accuracy of that system. My models would predict that where you see RFID take root will be where bar coding is impossible or very cumbersome, and then, adding those new applications, RFID will get better and better until ultimately its good enough so that a complex operation like Wal-Mart could adopt it.

Lets consider Nick Carrs famous article, "IT Doesnt Matter." Do you think IT matters?

I think it matters tremendously. Let me revise that—it could matter tremendously. But it matters when the IT system is interdependently woven into the operating processes of the company.

When IT is simply an information system that exists independently of the operating processes, then it actually does get commoditized.

Carrs thesis, though, is that IT is like electricity, and he notes that we dont have electricity managers at companies anymore, although we apparently once did. Do you agree with that big picture?

Its hard for me to agree with it. Toyota is an example. It has an information system where the key pieces of information actually travel with the product as it goes through the system. Its an IT system that is just totally woven into the operating processes at the company.

I dont think that is like electricity. It is a productive process. Southwest Airlines has an IT system where, again, the information system is connected right to the customer, right to the planes, right to the baggage. And so I dont think its electricity. I think you would say the same of Wal-Mart.

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These are pretty disruptive companies that initially had a cost advantage in low-cost labor and low-cost planes, but theyve migrated their competitive advantage to the process. I think that process-based advantage is in the IT system that is knit inextricably into the business. They cant outsource their IT stuff.

Do you think General Motors, which has a fully outsourced model and is using multiple providers, is on the right track?

Given the nature of their product line, its probably the right thing to do—just like when Compaq kept outsourcing to Flextronics, it was the right thing to do—in that, if you dont do it, youll get killed sooner. And if you do do it, youll get killed later.

That sounds really bearish.

Theyve been disrupted by Toyota, which is being disrupted by Hyundai and Kia, which are being disrupted by Chery in China.

Next Page: Disrupting the disrupters.

Disrupting the Disrupters

Can GM disrupt the disrupters from China?

Thats my prayer. I think my work has influenced them to do what they are doing to set up their operation to sell $3,000 cars. But theyve got to be purposeful about that. They cant say, We dont play at that end of the market, and come out with $15,000 cars. The OnStar business is a great business, however.

Its not really the auto business though, is it?

And thats why. Its not. [OnStar has] negative net assets. Its really an IT company. Your car can send you an e-mail every week. OnStar collects 1,500 points of data from every one of GMs cars. Theyll tell you that you dont need to change your oil yet and, at the rate youre driving, you probably ought to do it on July 1.

And your brake pads are 80 percent worn, so you need to get into a dealer within six weeks, and your left rear tire needs 15 pounds of pressure, which is costing you a quarter of a mile per gallon. Its a good business for GM.

On the vendor side, where do you see disruption coming from in the computer industry?

You see it in mobile phones—in the ability to bring content and functionality to mobile phones and BlackBerrys. There are some exciting opportunities in that space. There are opportunities for mobile phone companies to become banks.

You take your purchase to the merchant and key in a four-digit code and the price of what you want to buy and press "send." The money transfers out of your phone account into the merchants account—and the phone company becomes a bank. They start to lend when they see which customers regularly replenish their prepaid account.

The phone companies can handle a transaction at a fraction of the cost that MasterCard and Visa can. Technologies have been developed in Japan where you can just tap your handset on the merchants counter, and the transfer happens. Its really an exciting growth opportunity. Its hard to draw the boundary around an industry.

We think of computers as computers and mobile phones as mobile phones and banks as banks, but things are blurring.

In your research, you note the need for larger companies to think small. How can IT vendors do this?

Intuits QuickBase is really interesting. Intuit has a business model to market toward small businesses. To them, a medium-sized business—a car dealer, for example—is a big business.

In software, what Intuits QuickBase offers is the ability—in a very simple, convenient, fast way—to build your own ERP [enterprise resource planning] system.

Were writing a case study about this now. Theres a car dealership that bought QuickBase. For a car dealership, the functionality in an SAP system makes no sense. So these guys got QuickBase and developed their own ERP system.

When a customer makes a reservation to drop a car off for service, the QuickBase system sends a message to the salesman who sold that customer the car, so the salesman can come and greet the customer when he arrives.

That ability to customize is the way youve got to compete down at that end of the market.

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SAP and those guys feel the market is not growing. Oracles got to acquire PeopleSoft so that they can feel like they are growing. Thats really a consolidation in response to that market not growing. But at the bottom of the market, things like QuickBase are just growing [like] gangbusters.

Regarding IBM, this year it may lose the No. 1 position in the industry to Hewlett-Packard as CEO Sam Palmisano pursues a profit-first strategy. Is IBM doing the right things?

I dont think so. Theyve done some good things. Really, the only way for a huge company to continue growing is for it to become a composite of small businesses. Because a small business can see small opportunities that are going to be big tomorrow, but a huge monolithic business has a hard time seeing small opportunities.

The Indian companies believe they will do to IBM and others what Toyota did to GM. Can the Indians disrupt and displace the established players?

I think there is a high probability of that. But the very same opportunity exists for IBM and Accenture. They have a big presence in India. But right now, all of those guys are competing head-on for the business of large global companies.

The next wave of growth will be small and medium-sized [customer] companies, domestically in India and then abroad. And so the providers also need to be small and medium-sized or have an economic model that can make money solving those kinds of problems.

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