{mosimage}Clayton Christensen is widely regarded as the world's foremost management guru of today. In a rare interview, Christensen tells Business Today the relevance of his theory of disruptive innovation and explains with real-life examples how it could play out in today's context. The interview was conducted on phone and email by Anirban Sen, a Bangalore-based freelance writer.

Q. Seventeen years ago, you wrote your widely acclaimed book on disruptive innovation that proved to be an agenda-setter for businesses worldwide. What has really changed since then and how have some of the theories that you explained in your book evolved since then?

A. The diagram of disruption has a vertical axis and a horizontal axis. It's very important in understanding where and how is disruption happening. Because every industry has to have a different metric on the vertical axis. For example, in the airline industry, the vertical axis is the length of the route that measures how successful they are. For an airline, long routes are more profitable than short routes. So, around the world, the big international (airline) firms are trying to focus more and more of their offerings on long routes and big planes. And they don't worry about short routes and regional jets because those are less interesting and less profitable to them. So they are moving upmarket in that sense. The entrant companies like Ryanair in Europe and Southwest in America - they came in on short routes and they are disrupting the airline industry because they go on longer and longer and longer routes. So, that's the mechanism by which [disruption] happens.

And, in the information technology industry, I think the vertical axis is the size of the engagement with the customer. In other words, big engagements with big corporations are much more profitable than short-term or limited engagements with small and medium customers. And so they're going after bigger and bigger clients. And they are doing a great job. Where the disruption comes from is in: are there companies out there that are primarily cloud-based who have business models of going after small and medium corporations? Those are the ones that would be disruptive to the big ones.

Q. Which are the industries that you see getting disrupted a few years down the line or industries that are already on the verge of being disrupted?

A. Higher education, I think, is being disrupted in a powerful way. In software, Oracle is in the middle of being disrupted. In defence, our traditional ways of organising defence is getting disrupted by terrorism. Our armed services are not organised to deal with terrorism as a disruptive force.

Q. Some such as Harvard historian Jill Lepore feel that your theory on disruptive innovation doesn't hold true anymore. What do you say about the arguments that she has put forth?

A. I believe strongly in the predictive power of the theory of disruptive innovation. The theory remains a valuable tool for managers to build successful businesses. We've improved our understanding, and its predictive power, from our first discussion of the disk drive industry and we continue to improve it today.

(The paragraphs below in answer to this question were paraphrased by Christensen from a lecture he gave at Oxford in June 2013.) When considering how theory is built, I often think of the development of human flight. The earliest research into flight involved categorising its observed phenomenon. So researchers studied animals that could fly and they noticed that many of them had wings and feathers. With that observation they built artificial feathered wings and strapped them to their arms. They climbed cathedral spires and jumped but despite flapping their arms as hard as they could, it never worked.

For a long time, people looked at those attempts and ascribed their failure to not flapping hard enough or bad wing design and they tried to solve the problem along those dimensions. But in 1285, [Roger] Bacon changed the entire study by explaining that the attribute that determine whether animals could fly, or are stuck on land, is whether they have hollow or solid bones. Because people have solid bones, we would never be able to fly.

People took that and then began trying to build flying machines but it wasn't until Daniel Bernoulli studied fluid mechanics that we learned that the causal mechanism of flight is the shape of the airfoil of the wing, not the wing itself. After a few centuries of attempting to build wings with effective airfoils, inventors like the Wright brothers were able to create wings that allowed man to fly. However, they still crashed. Those crashes allowed the pilots to understand the circumstances that caused Bernoulli's principle to lead to failure and not flight. They could then create if, then statements that enabled accurate prediction, broad applicability and deep explanatory power.

Similarly, we are refining the theory by observing anomalies to its predicted result and like the researchers of flight, we're developing a larger set of if, then statements to deepen the theory's explanatory power and broaden its applicability.

A crucial element of good theory is that it can be improved through the study of anomalies. If someone has an idea that can't be improved by studying anomalies, it isn't a good theory because it can't be refined to create the "if/then" statements that enable accurate prediction. Many researchers view anomalies as a bad thing, but really, anomalies are the only thing that allow us to improve our theories, so they're really a pretty helpful thing if you can look at them as a learning opportunity.

Q. What's a reliable way to predict that a new technology will be a successful disruptor in the future?

A. When thinking about how to predict disruptions, it's crucial to remember that it's not about the technology itself; disruptive innovation refers to a strategy that employs a technology, but the technology itself isn't disruptive.

(The paragraphs below in answer to this question were paraphrased by Christensen from his book The Innovators Solution.) Consider the case of vacuum tubes and transistors. RCA was the market leader in vacuum tubes. They licensed the transistor technology from Bell Labs and spent great sums of money working to commercialize it. But they always framed it as a technology problem and tried to improve its performance to be superior to vacuum tubes. Consequently, in the hands of RCA, and applied through its strategy, the transistor wasn't disruptive.

Sony, on the other hand, saw the transistor and recognised that the technology could be used in new applications where it didn't matter that it was inferior to vacuum tubes because the alternative for consumers was nothing. So Sony began developing transistor radios, creating a new market, and improving the technology until it was comparable and then superior to vacuum tubes, and the rest is history.

The case of the transistor shows that the technology itself isn't defined as disruptive but rather the application of the technology can be disruptive, or not. Often technologies that are applied in disruptive ways are created by the incumbents but because they try to position it as a performance improvement to their existing offerings, it doesn't become disruptive until an entrant repositions it in line with a disruptive strategy. Therefore, the crucial question to ask is "what's a reliable way to predict that a new strategy will be a successful disruptor in the future?"

There are common elements of all disruptive strategies. First the strategy must target over-served customers or customers in a new market with products that are cheaper and simpler than existing offerings. For customers in a new market, the product must solve a job that they're already trying to solve.

To be cheaper and simpler, the product must possess an enabling technology that allows it to fulfill the job for which it's hired at a lower price than incumbent offerings. The strategy also has to be disruptive to all other strategies; if it's sustaining to an existing strategy, the company with that strategy is most likely to win.

Q. Keeping what you said about bigger IT companies getting disrupted by smaller cloud-based firms in mind, what do you think Indian IT companies need to do? Do you feel that some of them have become so large and so successful, that they have become complacent? [Christensen sits on the board of Tata Consultancy Services (TCS).]

A. Let's go back to the word that you used. You used the word 'complacent'? Absolutely wrong. I only know TCS well. They compete against really capable competitors and they are not complacent in any way. And that then creates problems with disruption because their energy by definition is to have even stronger relationships with even bigger clients. They are very aggressive, they are very capable. So, the only question is can they keep doing that and still go to the bottom of the market? The business model down at the bottom is so different than the business model that they have been going after - the big ones, the biggest clients - that they truly have to set up a completely different business unit that is very separate and managed separately. It's not that this new business of small and medium is less profitable. You can be equally profitable but you earn the profitability with a different formula. So, TCS for one, is really going after that. Whether they'll succeed, who knows? Because it's very hard to create a company that has different processes and different people and different formula by which they make their money.

Q. When you see large Indian companies like Infosys or TCS, do you see them facing near-term disruptive threats of the kind that IBM faced in the early 90s?

A. Again, I think the big one is small and medium businesses. And companies that have business models that are serviced by the cloud. So, do I think that the current leaders of the industry will be disrupted by these things? It depends completely on whether the current leaders recognise this. And, for one, I think TCS recognises this. Then, are they successful in creating a completely independent company to come up with a different business model? And the answer is, you can't predict for sure (laughs).

It's one of the biggest challenges of management that nobody has done it successfully and a few have sometimes. Like IBM. In the hardware business they got disrupted - the mainframe got disrupted by the mini-computer. And the mini-computer got disrupted by the personal computer. And IBM managed those two transitions marvelously. They were the only corporation that made the transition from mainframe to mini and from mini to personal. IBM survived those and became a leader in the next generation. But everyone else in the world was disrupted. And then the next time around with the smartphone, IBM just completely missed that. I was discouraged when that happened because I realised that nobody has transitioned across that over and over again.

I have a lot of hope that these disruptions, when small and medium businesses are serviced by a new business model from the IT companies, the market is going to grow a lot. And I think that the existing players will be able to make this transition like IBM did. Now, if you look at Cognizant, 10 years ago they were not viewed in the same league as Wipro, TCS and Infosys. And I think Cognizant played this game. They came in very aggressively with smaller clients and they've gone up.

Q. What makes you so confident about TCS? What are some of the things that you think TCS is doing well in and will ensure survival from possible disruption?

A. I will tell you that I've been on many other boards of directors of companies. And at all of those other board of director meetings, I come prepared to give input. And to disagree with the management and you know, I go feeling like I have a lot to add. But when I go to the TCS board meetings, I just take an open notebook to take notes! These are very good managers, they're just extraordinary. And when I finish the meeting, I feel like I went to school. And I was not the teacher! (laughs)

Anyway, I can imagine that the leadership at the other majors are very good too. What I'm inspired by at TCS are a couple of things. One, I would say in America nobody is emulating this one - that is, TCS hires 40,000 software engineers every year. 40,000 is a big number. So what they do is that they take them through a process that takes about six months and they unteach some of the fundamental things about software that these engineers just finished in college. And TCS has a different way to think about it. And in six months, they have created engineers that have no parallel in the world. If they can take these engineers and send them across the world to solve the world's most complicated IT problems, it's just extraordinary. And that exists in the process by which they teach their engineers how to solve software problems and how to build software solutions. That's the most impressive thing about management that I've observed - boy, they think a lot about how they train their people and to do it better and much lower in cost than anybody else that I know of.

The second one is that they really are up there with their senior management. They've taught them a lot about how to identify new growth opportunities in their broader space. Quite a lot of companies, if they want to grow, they will establish at the corporate office a chief strategy officer or chief-something officer. As if what they're doing is, delegating the responsibility for growth to a corporate office. And I think TCS, in contrast, asks growth is in shortness of things to focus on for everybody in the company because it's really the engineers who are managing projects all around the world - they really see what's going on in the market and how you solve those problems. And most companies don't have the ability to identify these opportunities and build a business around them. And somehow TCS has a mechanism towards identifying these cases as they bubble up in each project and create new growth opportunities around those and keep them separate.

We'll see how that works, but it's kind of like a metaphor - if you wait until the weather is so hot and then and only then do you plant a shade tree, it doesn't have much impact. You have to plant the shade tree long before it gets hot. And I think TCS for one understands that competition and growth, once you've penetrated the Global 2000, there are not bigger clients than the Global 2000. You know that the world is gonna change and I think TCS is planting some good shade trees so the heat doesn't kill them.

ABOUT: A professor at the Harvard Business School, Christenson is known to push the envelope of management thinking, be it in innovation and growth or the ethics of management.