Professor Clayton M. Christensen is all for disruption, which, he maintains, is good, while ignoring it can be harmful. The tall, strapping Robert and Jane Cizik Professor of Business Administration at the Harvard Business School is also the author of three best-selling books: The Innovator’s Dilemma (1997), which received the Global Business Book Award for the best business book published in 1997; The Innovator’s Solution (2003); and Seeing What’s Next (2004). He is widely known for his “disruptive innovations”—disrupting successful business strategies or acquiring competitive advantage by way of products or business models that create entirely new markets.
In an exclusive interview with Campaign’s Rajeshwari Sharma, Christensen says large companies often ignore or delay responding to emerging business opportunities because they are focused on their core areas. By the time the emerging market becomes big enough, start-ups would have already gained a considerable market share. Excerpts:
Asia, specifically India, is playing an increasingly important role as the driver of growth in the global economy. What kind of disruptive innovation opportunities are present in India?
There are two kinds of disruption. The first one, called low-end disruption, is a low-cost business model with low-cost inputs, which works at the lower end. It works as long as it has a cost advantage, which is why it is transitory. The other type is called disruptive business model innovation. It has a much greater economic impact and involves creating a business model by competing against non-consumption. Almost every industry starts with products which are complicated and expensive and, as a consequence, the only people who can use them are those with a lot of money or skills.
Non-consumption creates a market for big volumes and success. And one of the most exciting things about India is the non-consumption that exists here. Let’s take an example to understand this. A Chinese textile company, Galanz, got into the microwave oven market in the early 1990s. It adopted a three-pronged strategy: first, called sustaining strategy in our parlance, making microwave ovens better than those of Panasonic; second, creating low-end disruption through low-cost ovens priced at $39 and developing and exporting cheap ovens using low-cost Chinese labour; and three, competing against non-consumption. The low-cost ovens were not very good, but they afforded an option where there was none. The advantage for Galanz was that it had a huge customer base which wanted an affordable and simple oven. When Galanz started off, only 2% of the Chinese population used microwave ovens and its share went up from zero to 40% of the world market in eight years. The key is whenever consumption is constrained because the product is expensive, complicated or inaccessible to a large consumer mass, there’s a significant business opportunity. Tata’s Rs1 lakh car is one such business opportunity.
What can countries do to effect leadership in the global economy?
I had a very interesting conversation with a Chinese economist who was a Marxist and had come to Harvard to study democracy and capitalism. I was surprised to learn from him that religion was critical to the functioning of free markets and democracy. I had never put the two together before. He had observed that the rule of law and transparency driven by religious values was what allowed free market societies to evolve and succeed over time. When corruption permeates an economy, it can, almost never, become efficient and innovations get stymied at every turn. So, the most important thing a government can do is to ensure that clarity of rules, honesty and simplicity permeate the economy. When all this is in place, innovation will thrive.
As an outsider, my perception of India is that there’s a lot of corruption up and down, and back and forth. And one reason why the IT sector in Bangalore has been successful is that the Internet gave the companies a conduit to escape corruption so they could compete in the world economy. I think Indian government officials now recognize that this kind of competition does help the economy—every time they deregulate, it takes out a load of potential corruption. I believe that the government can play an important role in making the economy efficient and innovation possible.
What can companies do to become leading players in the global economy?
Indian companies can do so by following a strategy of disruption, using the inherent competitive advantages that exist in India and competing against non-consumption by making products affordable and simple. By starting thus, they can gain a huge advantage in ultimately becoming predominant companies in the world. That’s where all of today’s leading companies of the world started—at the low end of the market, making simple and affordable products available to a huge consumer base.
That’s how Tata Consultancy Services and Infosys Technologies Ltd started. They used low-cost simple coding and grew bit by bit to become two of the most sophisticated IT services companies in the world.
How important is inclusive growth in developing economies? If you take a look at the Indian economy, the focus seems skewed on certain industries at the cost of sectors such as agriculture, and small and medium scale enterprises. What are the dangers of lopsided growth?
If you go by history, almost every economy that has moved from poverty to prosperity did not neglect the agriculture sector. In fact, the farming sector grew and became prosperous at a rapid enough rate to turn into a net supplier of capital to the industrial sector through its savings. I am not aware of any economy prospering at the cost of its farming sector. South Korea had a very successful programme in the 1970s that transformed its rural sector. So, history would indicate that the balance between the rural and industrial sectors is very important. Every country has some industrial sectors that lead its growth and it wouldn’t worry me that in India, steel and automobiles, telecommunications and information technology lead the other sectors. But, yes balance is the key.
New-growth businesses always look small at the outset and large companies, therefore, tend to ignore them. How can big companies deal with these business opportunities, that are often taken up by start-ups?
I can offer three rules that they can follow. One, they cannot wait until their own revenues begin to plateau to start new-growth businesses. The reason is that when revenues plateau, it creates extraordinary pressure for any new business to get really big really fast and small, emerging markets don’t solve that problem. So, what they have to do is to launch initiatives to create new-growth business when the core business is still healthy and growing. For a company like TCS, which is growing very rapidly, now is the time to create new-growth business, which in my view is to go down to the bottom of the market and offer IT services to small and medium-sized companies. The best rule is to invest to grow when you don’t need to grow.
The second rule is to be flexible about having multiple business models under one corporate umbrella. The original business model requires high profit margins and products sold at high prices. And if you are going to start with disruption, you have to start with low prices, low overheads and enter the market in a different way. You should be able to tolerate two different economic models under one corporation—a small opportunity looks big to a small business unit, but if you don’t have flexibility, a small opportunity may not seem worthwhile.
The third rule stems from the evidence that more than 90% of all new businesses which ultimately succeeded didn’t have the right strategy when they started out. It takes companies two or three mid-course corrections before hitting upon a model that works. Big, successful companies don’t have to do that kind of experimentation. They have a business model that works and a market and customers.
Therefore, they don’t know how to make their way into new-growth business. It takes two different strategy-making processes to be successful.
Small start-ups are quicker to recognize new markets and work their way up, while the bigger companies take longer to do so despite having resources and financial strength. Why is that?
The mistake that big companies make is that because they have a lot of money, they invest heavily in new ventures and keep their money parked for long periods.
Given that 90% of all strategies are wrong at the beginning, they end up wasting money and time. The advantage that small start-up companies have is not having much money. So, they are compelled to get into the market quickly and experiment to find a model that works. If a big company is trying to start a new-growth business, it needs to put in just a little bit of money to force itself into the market quickly and find a strategy that works. rajeshwari.s @livemint.com