Summary from The Front End of Innovation Conference-Europe 2008

Clayton M. Christensen is the Robert and Jane Cizik Professor of Business Administration at the Harvard Business School. As author of a series of best-selling business books (“The Innovator’s Dilemma”, “The Innovator’s Solution”, “Seeing What’s Next”) he became one of the most influential scholars in innovation management.
The audience thus had high expectations on his talk. And surely, these were surpassed. As a starting point, he shared his motivation for researching innovation: Why is innovation so unreliable? Why are innovation attempts failing so often?
His answers challenge traditional management schools, as he pointed out that academic principles and management recipes of the past are wrong when applied to innovation. He listed five principles, and elaborated in detail why these can jeopardize innovation. They systematically bias “good practice” management decisions against innovation.
The first established principle tells that understanding the customer is key to developing innovative products. In practice this means vendors are trying to match product and customer categories to find attractive market segments. However, these categories are inherently conventional and do not help in finding innovative products. Christensen proposes a different approach. The value of any product should be described according to how well it serves customers “to get the job done”. In many cases vendors do not know the “job to be done” that is behind a buying decision. Christensen gave practical examples how analyzing the “job to be done” reveals new value propositions which may lead to innovative products.
Another management mantra says that gross margin is a measure for customer attractiveness. Taking the history of the U.S. steel industry he convincingly explained how the integrated steel mills lost one market segment after the other. Seemingly rational focus on the market segments where they could gain better margins ignored lower quality and lower margin segments. These segments became highly profitable for specialized producers using mini-mill technology. He gave some more examples showing that the same principle applies.
When deciding whether to go for an innovation project or not, a third principle is commonly applied. It says the decision should be governed by future marginal outlines and revenues, leveraging sunk costs. Referring again to the history of the steel industry, he could show how application of this principle contributed to the demise of integrated steel mills. He also extended the concept to the case where a disruptive technology enables new applications, not possible before. Often the incumbent vendors, using conventional technologies, try to leverage the disruptive technology to sustain their conventional business model. This usually fails, as they miss the markets out there enabled by the disruption. Christensen proved this with many of examples from various industries.

I was impressed by his mastership as a presenter. The audience listened attentively, as Christensen walked around, talking with his calm, intense voice.
He went on to shatter another management principle which says companies should focus on their core competencies and outsource other activities. Convincingly he told the history of Compaq’s partnership with manufacturing services company Flextronics. At first, Compaq asked Flextronics to produce small boards for them. Over the years, they successively outsourced the manufacturing of motherboards, assembly, supply chain management and computer design. As a result, Flextronics could approach retailer Best Buy, selling direct with a computer product line branded “Best Buy”. But, as Christensen succinctly stated, Compaq had no other choice than outsourcing. Every single outsourcing decision was good management practice and had to be made to maximize profits and shareholder value.
However, is maximizing shareholder value a good strategy for an innovative company? Not at all, according to Christensen. He made his point using two arguments. Firstly, the notion of a shareholder asking for a long-term strategy to increase value is obsolete. When looking at the stock exchange, trading is mostly done based on short term advantages. It is rarely based on fundamentals of a company’s innovation strength. Secondly, the traditional Discounted Cash Flow respectively Net Present Value analysis to get the value of an investment is biased against innovation. The reason is that they compare expected cash flows from an investment to the baseline assumption which is “no value change by doing nothing.” This of course is wrong, as the value of an ageing technology is not constant but degrading in reality. Thus the value of an innovation project is higher than perceived when looking at the results of the traditional DCF analysis.
Christensen’s presentation was packed full with insights, spanned a huge range of topics with examples from many industries, and covered national economy as well as daily decision making of a manager. He made his points very clear, never rushing over a topic and showed proof points for his arguments. In the discussion following the talk, he also gave some advice what to do to escape all those managerial traps shown. A key recommendation was to follow the right business model, defined as the interplay of value proposition, resources, processes and the economic model of a firm. (See Clayton Christensen: Creating Products That Do The Job)

by Ulrich Spalthoff

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