Which do you think is the most overused buzzword in 21st century business? ‘Agility’ probably takes first prize, at least in the boardrooms of those firms so vast and cumbersome that their turning circles make the Titanic look nimble. In start-up-land, however, there’s no question the answer is ‘disruptive’.
If you look hard enough you’ll find entrepreneurs attempting to disrupt everything from professional services and taxis to birthday parties and your morning toast. Disruptive has come to mean ‘new and cool in a way that will make me lots of money’ – a far cry from its origins in Clayton Christensen’s 1997 book, the Innovator’s Dilemma.
‘It’s very frustrating. We didn’t realise how quickly control of a concept could be lost. These people who misapply it have never read the theory,’ Christensen tells MT, more resigned than miffed.
He draws parallels between his twin concepts of disruptive and sustaining innovation, and Nobel laureate Daniel Kahneman’s Type 1 and Type 2 thinking. ‘If we’d said there was Type 1 innovation and Type 2 innovation, maybe we’d have forced people to take the time to understand what it’s about.’
Christensen is unlikely to have the same issue in his latest book, Competing Against Luck. At its heart is the somewhat less punchy but still interesting theory of ‘jobs to be done’. Broadly, this is an attempt to go beyond the simple concept of customer ‘needs’ and look at the social, functional and emotional context of why they make purchases.
(As an example, Christensen talks about a property developer who was struggling to sell to older, 'downsizing' couples, despite the homes having everything prospective buyers said they wanted. By talking to those who actually did buy one, however, the developer figured out the sticking point: the family dining table, and all the memories that come with it. The new homes were too small to fit most people's tables in. The developer extended the dining rooms, and sales boomed.)
Despite seeming initially quite distinct from disruptive innovation theory, Christensen says jobs to be done theory is in fact its logical extension.
‘We started [in the 90s] with the question of why is success so hard to sustain. We realised there was a particular type of innovation that’s toxic to successful companies. What was odd about it was that this disruptive innovation brought products to market that weren’t actually as good as the products the incumbents were making, but were accessible to people who historically couldn’t afford it,’ he says.
The logical conclusion is that businesses need to come up with simple products. ‘Well what kind of simple product? Will any simple product do? It comes down to "can I predict what customers will buy", and we’ve been at that question for 20 years. That’s how jobs theory fits with disrupters.’
How successful companies lose touch with their customers
The initial offering of any successful company is always built around a customer’s job to be done, Christensen says. If they lose sight of that, they become much more vulnerable to the disrupters.
Unfortunately, this is exactly what tends to happen as businesses grow and inevitably become more bureaucratic.
‘Little by little the people who understand the customers get displaced by people who are able to manufacture things at low cost or who know how to squeeze another pound of free cash flow out. All of a sudden you look around the table and there’s no one who understands the context of the job to be done. You’ve lost your ability to understand the customer,’ Christensen explains.
He also offers another, perhaps more surprising reason for companies losing their way: data. Managers, Christensen says, are deluged with data as their businesses become more successful. The problem is that it can be too much and of the wrong kind.
‘It turns out God has never created data,’ Christensen explains, in full Harvard professor mode. ‘Every piece of data was created by a person. It isn’t real. It’s a representation of phenomena... but there’s a lot about the context in which customers live their lives that doesn’t get incorporated into data of the type most of us imagine.’
Understanding how someone feels buying a new house is important, then, but doesn’t find its way onto the spreadsheet likes sales or profits do.
Beware the spreadsheet
The humble spreadsheet is in fact the target of some of the gently-spoken Christensen’s strongest fire. It contributes, he says, to the kind of short-term thinking that leads to successful businesses being disrupted.
‘When [Excel] spreadsheets were developed in the 80s, it allowed analysts to start analysing companies not on whole numbers but on ratios.’
Metrics like gross margin or rate of return on investment allow analysts to compare quite different companies, but it can also lead to the tail wagging the dog.
Take gross margin, or profit divided by assets. You could improve the ratio by increasing profits, or by reducing assets, commonly achieved by outsourcing. If you want a better rate of return on investment, meanwhile, you could simply invest in shorter-term projects.
‘It causes businesses to manage by the balance sheet, rather than the income statement, and they’re not able to innovate.’
Christensen ends by quoting a Taiwanese beneficiary of western outsourcing, whose balance sheet had swollen as a result: ‘I’ve never found a bank that will accept deposits nominated in ratios. They only take cash.’
Competing against Luck: The Story of Innovation and Customer Choice is published by Harper Collins.
Image credit: World Economic Forum/Wikipedia