Professor: Disrupt or Be Disrupted

Q&A: Harvard Business School professor Clayton Christensen handicaps the race for business advantage via technology.

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.