The Boy Scout Who Brought us the Age of Disruption

19:39Clayton M. Christensen:Don't ask your customers what they want. They don't know is what he's saying here. And even if you could tell customers, you're wrong, you're going to want this in the future, there's another big force holding incumbent companies back, and that is money and investors. After the break.

20:02Thank you.

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23:21And we are back. Clay Christensen took all his research on disk drives and steam shovels, and he put them into book form in 1997. Was it a children's book? No. It was The Innovator's Dilemma. It sold over a million copies, as the sticker, I'm sure, said on the front of it. And it won all the big business book awards. And the timing was really perfect, 1997, because it came during the rise of the internet, the dot-com bubble, the dot-com crash, like all of a sudden it seemed like disruptive innovation was everywhere. It was picking up at fruit fly speed. Big companies were vulnerable. Everyone wanted to be the flashy new startup.

23:59After reading the book, Jeff Bezos of Amazon.com said,

24:03Clayton M. Christensen:if you want to give us this. Dot-com. My mother-in-law calls it Amazon.com. Jeff Bezos said, as a company, one of our greatest cultural strengths is accepting the fact that if you're going to invent, you're going to disrupt. A lot of entrenched interests are not going to like it. And can I just mention, I'm just going to do a little Jeff Bezos aside here, because there's this story of him when they created the Kindle. I'm a fan of the Kindle. He created this Kindle group and said to them, your job is to destroy our book business, right? Like he understood the implication and what it meant. I feel like at this point, if you're an entrepreneur writing any sort of press release, there's a little thing that pops up and says, do you want to use the word disrupt?

24:44You should use the word disrupt. There's a conference called disrupt. Literally called disrupt. Somebody should start a cheaper conference that everybody goes to instead. That's a little bit worse at the beginning. Now, that's a natural thing, but I'm more interested in the poor middle manager of a giant company. They're in an airport in 1999. They're looking through the innovator's dilemma. And if you read the whole book, you start to realize there is not a lot you can do to stop disruptive innovation, to stop Jeff Bezos. The thesis of the book is that big companies have such a strong incentive to keep doing what they're doing.

25:19And we talked about the pressure from customers to keep serving the same products, you know, maybe slightly better, right? But there's also pressure from investors. Jacob, if you're an investor in a company, which I know you are, what do you want it to do? You want it to make money. Exactly. That's the whole point.

25:37Clayton M. Christensen:If you give a dollar to a company, you want it to spend that dollar on the thing that makes the most profit. Yes. Profit maximizing. That is the term of art. And every business is resource constrained. So if you spend money on one thing, it means you're not spending it on another. And so you want the business to focus on the thing with the highest return. Clayton argued that disruptive technology isn't just worse than old technology. It usually has lower profit margins at first. Profit margins are a huge deal for businesses. And investors, serious investors, want those margins to go up. And they certainly don't want them to go down.

26:14Clayton M. Christensen:Clayton illustrates this profit margin incentive with a story about steel mills. Steel mills. Okay, that seems up your alley. Ah, I know. These are all 12-year-old boy examples. Have you been to a steel mill? Oh, of course I've been to a steel mill. Both abandoned and actual working steel mill. and the thing that's amazing about them is the integrated steel mills the big steel mills are huge acres and acres and acres and they got train tracks coming in for iron ore and coal and you know the buildings are enormous and there's lava looking stuff pouring out so amazing and it's also so expensive you know we're talking billions of dollars to to build the plant billion to operate it every year.

26:59This is the classic big business. Heavy industry. Yeah. The heaviest. So if you have a very expensive industry,

27:09Clayton M. Christensen:Jacob, if you're a salesman for the steel company, what do you want to do with your steel? I want to sell it for as much as I can. Yeah. So you look for the richest people you can sell steel to. So car companies who want gleaming steel for their cars. Planes. Planes, absolutely. GE turbine systems, industrial appliance makers. Like that is where you make your profit margin because it's so expensive to make steel. Now, you know, the disruptions coming here, but it's always surprising when it happens. Tell me the story. I do better than tell you the story. I found another children's book. So it features a unicorn on the front and a steel mill.

27:49So what's it called, Reverend? It's called A Recycling Adventure to the Steel Mill. Is that a real book? It is a real book. But this essentially tells the story of the disruptive innovator in the steel industry and of unicorns, too.

28:06Clayton M. Christensen:You're saying unicorn. You don't mean a billion-dollar startup. You mean a horse with a horn on its head. That's how you make it interesting, yes. Okay. Today, you'll see how scrap metal gets turned into brand-new steel using something called an electric arc furnace. And there's somebody else pointing at say, and they say, that's ferrous metal. It's magnetic because it contains iron. Yes, yes. Should we point out that there's a building that says Nucor on top? That seems quite important from what I know of this story. They are one of the disruptors, yes. And probably paid for this book. It has that look.

28:42Clayton M. Christensen:Okay, do I keep going? Yeah, one more page. First, we pick up the scrap metal with an electromagnet. Next, the metal is dropped into an electric arc furnace. Then comes the biggest fireworks display you've ever seen. Woo! So, Nucor, the company featured in the book, in the late 1960s... It actually says Nucor on the cover. I know. I don't think this book is on the up and up, Robert. So, before they got in the publishing industry, Nucor is the largest steel mill and children's bookmaker in the country, the combination. So, in the late 1960s, they opened what is called a mini mill, which is just a kind of a tiny steel plant.

29:22And instead of using coal to have a giant furnace,

29:26Clayton M. Christensen:they use electricity. And just to be clear, at this time, they're like a startup doing this? So no, they are a large company that's been around for a long time, but they have a division that's providing steel to another one of the divisions. Got it. So they designed this thing, this mini mill. It's about 10th the size of the big steel mill. Okay. And a 10th of the cost. They use the recycled steel. And they were a classic disruptor because they were cheaper, they were smaller, they required less labor, and they made kind of crappy steel. It was weaker steel, it was bumpy, it was ugly. Like, no car company is going to want mini-mill steel.

30:07But, Nucor and these other companies knew that there was a market that didn't care about shiny, nice-looking steel. And that was, get excited, rebar. Oh, I love rebar. Yeah, rebar is the stuff you put in concrete to make it tougher. That's like a breakthrough, right? Like when you're building a building, the rebar-concrete combo is like a huge innovation of its own. Yeah. When you go to the developing world, for whatever reason, it's like ubiquitous, right? The building where there's like, they built two stories, and you can tell they're planning on building a third because there's the rebar sticking out the top.

30:43And, you know, if you want the rebar, you don't really care what it looks like.

30:47Clayton M. Christensen:You just want the cheapest rebar. You're not going to see it. Now, this is key. The big steel mills, they had been making rebar, but it was such a low profit margin. It was like 7 % profit margin, much lower than selling steel to GE. So when Newcor and these small mini mills came around, the big companies were like, thank God. We don't have to be in this dog-eat-dog commodity business anymore. And getting out of that business presumably would mean their margins go up, which is what they want, right? You get out of the low margin business, your overall margin is going to go up. This is exactly right.

31:23And the big steel mills, they were suffering from, you know, foreign competition in the 70s and the 80s. And they really needed this high profit steel to look good to investors. And for a while it worked. It worked great. Until, until, of course, new corn, the mini mills, they get better. They get better at making steel and they expand into angle iron. Oh, that's fine. I don't know what it is either. It's like iron and angle and bars. They make corrugated steel, you know, for Quonset huts, you know. But they're moving up the quality ladder here.

31:58Clayton M. Christensen:The Quonset hut business, look out. And eventually they make the massive structural beams that are good enough. And then they make rolled up steel, which is the nice fancy steel. And Nucor has vacuumed up the customers from the bottom up. And the next thing you know, Nucor, hero of our children's book, is the biggest steel company in the United States. Classic Checkmate. People in business love these stories. I kind of felt it as I was reading Clay Christensen's books. It's like a horror film for executives. And the key to a horror film is you see the evil thing coming. You know it's coming somewhere.

32:41You just don't know when they're going to jump out at you with a knife. I mean, also maybe, I don't want to go too far here, but it's a little like a classical tragedy, right? Like the Greek tragedy, where like there's this tragic flaw, right? The need to be a profit maximizer, the need to listen to your customers. And that is the sort of inevitable undoing of the incumbent, of the hero.

33:04Clayton M. Christensen:So I imagine the executives of these companies, they read the innovator's dilemma and they're terrified. They're properly scared. And remember, Clayton M. Christensen is a Harvard Business School professor, so he knows what to do next. He's going to sell the antidote to this poison. In 2003, he publishes The Innovator's Solution. Come on. In 2009, he publishes The Innovator's Prescription. No! In 2011— They can stop! This is the horror movie! In 2011, he put out The Innovator's DNA. No, he didn't. He did. I'm a little disappointed in Clay Christensen, Eagle Scout. Oh, he had to make the money.

33:47There wasn't to that. No, it's totally fair. Serving the customers. Chicken soup for the CEO's soul. They love business books. So the good news for corporations, there is a way to fight off the disruption. The bad news is you have to start to act like a disruptor. After the break.

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36:40We are back. Clayton M. Christensen did pretty well for himself. After the success of his many innovators' books, he started his own consulting firm, but he stayed a professor at Harvard for 28 years, writing case study after case study on failing companies. He was a Mormon, and he moved up the ranks of leadership roles in the church. And near the end of his life, he started to write more books about personal meaning and finding your way in relationships. And just like in The Innovator's Dilemma, happiness, he says, is a matter of resource allocation. Why don't you give a little life lesson from Clayton?

37:18The secret to happiness is having strong, loving relationships and intentionally investing time in them. Seems reasonable.

37:26Clayton M. Christensen:We're now a happiness podcast. I mean, I'm not out on that. I basically agree with that. Yeah. No, it's good. It's so simple. But in terms of fixing your company, well, Clayton had sort of a more complicated prescription. He basically said there are three solutions for a big company facing disruptive innovation. Number one. A list. Wait it out. Wait it out. When the new technology is mature enough and profitable enough, then you have all the money and you can just move into the industry and blow away the little guys. Okay, right. So you see the disruption coming, but when it's still really cheap and crappy, you don't get involved.

38:06You wait till the new technology, the disruptive innovation is big enough, and then you move in.

38:11Clayton M. Christensen:Rarely works, he says. Rarely works because at that point, the disruptors are better at doing the thing. Aha, right. It's their whole business. They've been learning it. Yeah, and they have different techniques, and they're smaller, and they're more nimble, all of this sort of stuff. But it does happen occasionally. I think about Apple. It used to be Apple computers, right? It's hard to think about anything that Apple was first to. There were smartphones before the iPhone, but they were kludgy, low bandwidth, low profit. Exactly who you expect to be the disruptor. Was the BlackBerry those things?

38:45Clayton M. Christensen:It was a BlackBerry. It had a little thing. It was definitely, I mean, I mean. I remember the low bandwidth. I mean, I tried to navigate on a little map on my BlackBerry. And it was super hard. It was basically for email. It was basically good for email. Yeah. Apple moved in with the iPhone at just the perfect time, just as mobile internet was getting better, getting faster. And, you know, it made the phone beautiful and intuitive. So it pulled this off, but it's very hard to do. So Clayton has solution number two. Buy your competitors. That's the one they're all doing now, right? That's what all the big tech incumbents are doing.

39:21They're buying everybody. Yeah. And, you know, old steel and steam shovel companies probably didn't have a billion dollars laying around. Like literally laying around. Literally laying around to buy their competitors. But the internet economy companies do. and founders these days have such control that I think that they don't care as much about their investors and about maybe even their customers. Like they are more willing and have more control of their company and they've read The Innovator's Dilemma. Well, right, they've internalized it, right? They understand, like it is more fruit fly-like now, right?

39:58We are not in that 1995 era where the biggest companies in the world have been around for a hundred years. The biggest companies in the world now are largely run by the people who found them who were themselves disruptors. So they are built to be afraid of being disrupted.

40:12Clayton M. Christensen:Yeah, Facebook, right? Huge disruptor. But by 2012, Facebook is the big social media company. Their investors were thrilled. Their customers were thrilled. Everybody loved the Facebook, right? But inside the company, Mark Zuckerberg was noticing more people using mobile phones. And he knew that Facebook was big on the desktop computer, that maybe the demographics were getting a little bit older than he liked. And he notices a company called Instagram. Zero revenue, 13 employees, 30 million users. So very good. But Facebook had a billion users. And Mark Zuckerberg, you know, I'm sure he read The Innovator's Dilemma.

40:52And he did something that seemed sort of insane at the time, which was he bought Instagram for a billion dollars. Like a billion dollars. Zero revenue. 13 employees. Took them three or four years to get ads on there, right?

41:06Clayton M. Christensen:But the disruption was averted, you know, at least for Facebook. Yes, and then they did it again with WhatsApp a few years later, right? Exactly, when they saw that internationally they needed something that people could message on. And, you know, Google bought Android, Apple bought Siri, Salesforce bought Slack. Good luck to them. But it doesn't always work. You know, Yahoo bought Tumblr. Don't know which one's in worse shape now. Okay, so first two ways to avoid disruption, have the timing genius of Steve Jobs or the spare cash, Mark Zuckerberg. And then there's the third way, which I find really interesting, create a small disruptor within your company.

41:47Clayton M. Christensen:Culturally, that one is super interesting. Yeah, and hard to do because you can't fake it. You can't just put a conference room aside and say, you're the disruptors. Because what it really means is if it works, the disruptors should put most of your company sort of out of business, right? As a company, it'll still work. But the people who've been spending their lives selling the incumbent thing aren't going to like the disruptor. They're going to think it's bad. So the companies that have succeeded at this, Hewlett Packard, HP, maker of printers and many other things, they had in the 1980s this amazing new product called the laser printer.

42:27Shoots out printed copies of things. I don't know why I'm explaining what a printer is.

42:33Clayton M. Christensen:I'm so used to explaining. Wait a minute. You're saying. You're saying you type something. I've created a white piece of paper. And it comes out not white with symbols on it. I know. I know. So Hewlett-Packard is number one in laser printers, and there's this new technology called inkjet printers. It's a smaller printer. It has these little buckets of ink in there, and it's kind of blurry and doesn't work that well. It's slower. HP, Hewlett-Packard, sees that this could disrupt their big laser printer business. And so what they do is their printer division's in Boise, Idaho. They send a bunch of people to Vancouver, Washington, whole new office, give them their own budget, their own decision-making power, and essentially say, put us out of business.

43:18Like, do the best inkjet printing you can. And this is the essential thing.

43:23Clayton M. Christensen:You don't have to be as profitable as the rest of the company. Right. The margin. They are solving the margin problem. You just need to make enough money to make more inkjet printers and come up with a solution. And eventually the HP inkjet printer becomes big because everyone wants a small, cheaper thing that they could put next to their laptop computers. It's cheaper until you have to buy more ink. That's the other thing is once they figured out that you could make the printer that only accepts HP ink, then you could sell them ink forever. If you think about it, that one seems really hard to do because the fundamental thing they're doing is agreeing to lower their margins, right?

43:57To whatever extent they're putting capital into this little inkjet division, they're accepting that their overall margins are going to come down, which is antithetical to what executives want to do. That's why that one seems hard. Very hard. And few people do it. But if you can pull it off, then you get to be the disruptor and the incumbent company at the same time. Woo! It didn't cost you a billion dollars.

44:23Clayton M. Christensen:Jacob, it's time for the To Be Fair section. To be fair, none of this is true. It's true in a business school sort of way, which is it is a smart and a useful theory that you see everywhere these days, but it's not a law of nature. And I think Clayton admits to this too, that he picks companies to profile that fit his thesis. There's lots of companies that don't work this way. Like lots of times the big company is fine. The disruptors all fail. Pushkin's own, very own Jill Lepore used to host a show called The Last Archive. About a decade ago, she was writing for The New Yorker. She pointed out that Clayton often doesn't include complicating factors.

45:08For instance, she pointed out the fact that the big steel industry had unionized labor and a lot of the mini mills did not. So it is easier for them to be nimble and profitable if they don't have to deal with legacy union contracts. She also pointed out that Clayton started an investment firm to invest in disruptors. He had this big idea, why not make money off of it? And it ended up losing money and he shut it down. Because like predictions harder than describing the past. But despite all this, like, I think it's fair to pick Clayton as our third American genius because his ideas are so core to how we think about business today.

45:53Even just psychologically, everyone wants to be a disruptor. You know, even the largest companies on earth call themselves disruptors. And you can't launch a business without putting out a press release saying you're disrupting something, right? So Casper Mattresses said it was disrupting the sleep industry. Which it kind of was. It kind of was. Yeah. I'm sure the people selling mattresses at the time said, those mattresses are terrible. Like, I don't even know, but I'm sure that it happened. That's what you say. You can't even lay on them before they ship it to your house. Yeah, who's going to want that?

46:25Rubicon, the Uber of trash. What? Says they're disrupting waste management. Uber for trash? The founder of Nature Commode. Toilet company? A composting porta potty says, this is a quote, we're looking to disrupt an industry that is ripe for disruption.

46:45Clayton M. Christensen:Well, that's the place to disrupt. Two disruptions in one sentence. Ripe is a good word in the toilet business. And I've been most fascinated by what we've seen over the past two years in the AI world. The largest corporations, literally the largest corporations in the world, are panicking and trying to disrupt themselves by spending billions, it totals trillions when we look at all the companies, to innovate in the business that they're in. So I think before Clayton Christensen, Microsoft might have thought, or Microsoft, like we're an invincible software company. Why do we need to be an AI company?

47:23Same with Meta, X, Google. They're the top of their businesses. Why spend this enormous amount of money on AI? Because I think they now feel this panic that the innovator's dilemma put in every business person's soul. You don't read the book and say like, yeah, it was a good run being an incumbent company. You look at it and say, I want to do that. Yeah. I want to not die. I want to not die. Yeah. And now if someone were to tell you that there's a chance that Anthropic, an AI company with 4 ,000 people, could unseat the largest corporations in the world, we're like, yeah, that could totally happen.

48:04We don't question it at all anymore. And this is the power of the idea that Clayton unleashed. It's terrifying. It's motivating. And no one wants to be the case study in whatever the next sequel is. The innovator strikes back. The last innovator. The last innovator. Like, you should write that. Today's show was produced by Gabriel Hunter Chang, engineered by Sarah Bruguer. Our video editor is Matt Nielsen. We're on YouTube. Our showrunner and editor and best friend in the UK is Ryan Dilley. My name is Jacob Goldstein. My name is Robert Smith. Thank you for listening to our show, Business History, a show about the history of business.

48:46Clayton M. Christensen:Email us at businesshistory at pushkin.fm. We read them all. Running a business shouldn't feel like surviving a software group project. One app for accounting, another for inventory, another for sales, and somehow none of them talk to each other. That's where Odoo comes in, an all-in-one business management software that brings every part of your business together, from sales and accounting to inventory and marketing, all in one powerful platform. No messy integrations, no bouncing between tabs, and best of all, no spreadsheets. Stop managing software and start managing your business with one unified system.

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