MATT: Professor
Christensen is one
of the most thoughtful
and interesting
and engaged people that
I've had a chance to work
with in my time at Google.
And I'm really, really
excited to allow all of us
to share a little
bit of that today.
So without further ado,
Professor Clayton Christensen.
[APPLAUSE]
CLAYTON CHRISTENSEN:
You're very kind, Matt.
And I'm just delighted
that you guys would be it
worth your while to come
here and talk about some
of the things that
I want to propose.
There are three main
objectives in my talk.
The first one is, my gosh,
Google is in a wonderful spot.
And almost never in
the history of mankind
has anybody seen to be
so successful in much
that you're trying to do.
And the reason why
I worry about that
is that success is
very hard to sustain.
And if you look across the sweep
of business history, almost
every company which
at one point were
widely regarded as
unassailably successful,
10 or 20 years later, you find
them in the middle of the pack
or the bottom of the heap.
And I'll get into a little
bit about that later.
But the scary
thing about this is
that it's actually
good management that
causes successful
companies to stumble.
And so, the solutions
that you might think about
are not solutions at all.
So anyway, that's
one reason why I
came is to just share
the despair that
comes with success.
[LAUGHTER]
And then, the second one
is that growth is actually
a huge issue everywhere.
Not just American companies, but
Japanese and European companies
are even more
desperate for growth.
In China, which
has been on a roll
for over the last 10 years,
find themselves not able
to grow there.
And politicians are
worried that we can't grow.
And they have no
idea where growth
comes from at the level
of national economies.
And if our nations
are not prosperous,
then companies find it
hard to be prosperous.
So that's what I want to talk
about if that's all right.
And what I'd like to
offer to you, which
is my third objective
today, is that I
want to talk to you about
theories about management.
And the word "theories" gets
a bum wrap with managers,
because the word
"theory" is associated
with the word "theoretical,"
which connotes impractical.
But a theory is a
statement of causality.
It's a statement of what
causes what and why.
And when you think
about it in those terms,
you as technologists or
managers are voracious consumers
of theory.
Because every time
you take an action,
it's predicated upon a
belief that, if you do this,
you'll get the
result that you want.
And every time you
put a plan into place,
it's predicated upon a set
of theories, which tells you,
if you do these things,
you'll be successful.
But most of the people aren't
even aware of the theories
that they use.
And many times, the
theories that you use
are destructive rather
than productive.
So this is why I have spent
much of my academic life trying
to understand theories
about management.
So there's not one grand
theory of management
that solves all
problems of managers.
But there really are theories
about different dimensions
of a manager's job,
which are quite helpful.
And you'll see some of those,
as I'll present them today.
And it is as if, if
you came to my office,
there would be a shelf there.
And on the shelf will be a set
of theories about management.
And some of them have
emerged from my own research.
And next to them are
theories about management
that other members of
our faculty have offered.
And there are a few
slots on the shelf that
aren't filled, because
there are really
important theories about
management for which nobody
has provided a theory yet.
So for example, metrics
and how you measure
things is a huge deal.
And yet, there isn't a
theory about metrics.
But with these as a
set of building blocks,
if somebody can then come
to us with a problem,
rather than giving them
my opinion about how
to solve the problem, instead
what we're able to do is say,
well if that's the
problem, you know,
then we have a theory
on the shelf called
the theory of disruption.
And I bet you that
if we put that theory
on like a set of lenses
and examine this problem,
we might be able to
understand what's going on.
And so that's what I want
to do is explain to you
a set of problems for which
good theories might help you.
And I picked these ones
because I think you probably
are facing similar problems.
So if you think about
our economy much,
you'd realize that occasionally
we have a recession.
And when our economy
goes into recession,
we'll hit bottom at some point.
And then, it takes some
time before companies have
to start hiring people again.
Because the people
who are on board
can satisfy the demand
of getting more orders
for a while.
And we have had nine
recessions since World War II.
And in the first six of
those nine recessions,
on average, it took
our economy six months
from the point when they hit
bottom to get to the point
where they needed to
hire more workers.
But we had a recession
in 1991, '92,
where it took our economy 15
months to get to the point
where they needed to
hire people again.
Then, we had a
recession in 2001, '02.
So it took us 15 months in that
recession to get to the point
where they had to hire people.
Then, we had a recession in '01,
'02 where it took our economy
39 months, in aggregate,
to get to the point where
they're hiring more people.
Then the most recent
recession it took us
our economy nearly six
years to get to the point
where we needed to
hire more people.
And what seems to be
happening increasingly
is these rebounds appear
to be financial, not
real in character.
So the people who have money
get a lot of money a lot faster.
But the rest of
us, there are not
jobs into which we can
be slotted in anymore.
And something fundamentally has
gone wrong with our economy.
And what we see
in the economy is
a summary of what's going on
in most companies as well.
So I want to propose
that there are four
different types of innovations.
And the reason why I'd
like to focus on innovation
is because, whenever a
company makes an investment,
they invest in an innovation
of one sort or another.
And so, what I want to
do is describe these four
types of innovations and
then teach a little bit more
about whether and why and
where they will create growth.
There are potential
products, meaning nobody's
figured out what these are yet.
Then the second one are
sustaining innovations that
make those products better.
The third are disruptive
products that grow markets.
And then, the fourth are
efficiency innovations
in which they sell them off in
order to get their money back.
So let me start with
potential innovations.
Almost any study
about innovation
will say that, of all of
the products whose product
development are initiated in a
company, only about 15% to 25%
of them will become
financially successful.
And it's broadly viewed that
innovation is a crapshoot.
The more projects you launch,
the more success you'll be.
But in its end,
it's a crapshoot.
And what we've concluded
is that it's not true.
The reason why it appears that
we can't predict in advance
whether a customer will buy the
products that we're developing
is that people at business
schools like Harvard
teach marketing
in a perverse way.
And in particular, we've decided
that understanding the customer
is the wrong unit of analysis.
So to illustrate that, just
look at me for a second
if you wouldn't mind.
My name is Clayton Christensen.
I am 64-years old unfortunately.
I used to be 6 feet 8
inches, unfortunately.
And I now am 6 feet 6
inches, unfortunately.
And I married a wonderful
wife, fortunately.
We have five kids.
The third of them,
Michael, unfortunately
came here to Stanford.
[LAUGHTER]
And I have all kinds of other
characteristics and attributes,
as you can see.
But none of my
characteristics or attributes
have not yet caused me to buy
the "New York Times" today.
There might be a correlation
between the propensity
that I will buy the
"New York Times."
But my characteristics
don't cause me to buy it.
Nor do our characteristics
and attributes
cause us to buy any
product or service.
And yet, almost all
of the work that we
do in assessing
market potential,
we look at the
characteristics or attributes
of the potential customers.
And a better way to
think of it, we decided,
is that, darn it, every
day stuff happens to us.
Jobs arise in our life.
And when we these
jobs arise, we need
to find some way to
get the jobs done.
And some of the jobs are
simple incremental things
that happen regularly.
Others are dramatic and
important breakthrough
problems.
But whenever we
have a job to do,
we have to find something
and pull it into our lives
in order to get the job done.
And what we decided is
understanding the job
is the critical key
to develop products
that we can predictably make
and find the customers to buy.
So to illustrate this
point, a number of years
ago, as this idea of
the job to be done
was emerging from our
research, McDonald's was
trying to decide how
they could improve
the sales of their milkshakes.
And as some of you might
know, McDonald's is
a very sophisticated
marketing company.
And they have data out the
gazoo about every dimension
of what they're doing.
And so, when you
go in, on the menu,
behind that there is a profile
of the demographic profile
of the quintessential
customer that
likes to buy that
product when they come.
And so, what
they've done is they
have these cohorts
of people who are
the quintessential milkshake
customers, for example.
And it turns out that I
fit that profile perfectly.
So they would take people
like me into conference rooms
and ask, can you
just help us how
we could improve the milkshake
so you'd buy more of them?
The customers would
provide very clear guidance
about how to improve it.
They would then improve the
product on those dimensions.
And it had no impact or sales
whatsoever on the product.
So what we decided is that
that's not the right way
to frame it.
But rather, there's
got to be a job
out there somewhere that
people find themselves needing
to get done for which they go to
McDonald's to hire a milkshake.
And we need to understand
what the job is.
So one of our colleagues
stood in a restaurant one
day for 18 hours and just
took very careful notes on,
what time did they
buy these milkshakes?
What was he wearing?
Was he alone or
with other people?
Did he buy anything else
or just the milkshake?
Did they eat it in the
restaurant or get in the car
and go off with it?
And it turned out that
about 50% of the customers
bought the milkshake
before 8:30 in the morning.
It was the only
thing they bought.
They were always alone.
And they always got in the
car and drove off with it.
So we decided we need to
understand, what was this job?
So we came back the next day
and we positioned ourselves
outside the
restaurant so that we
could confront these
people as they were
emerging with their milkshake.
[LAUGHTER]
And in language that they could
understand, we asked them,
I got a problem with
your behavior here.
What job were you trying to do
that caused you to come here
to hire this milkshake?
And as they would
struggle to answer,
we'd try to help them by
asking, well, look, think
about the last time you
were in the same situation,
needing to get
the same job done,
but you didn't come here
to hire a milkshake.
What did you hire to do the job?
And it turned out that they
all had the same job to do.
And that is they had a long
and boring drive to work.
And gosh, one hand had
to be on the wheel.
But somebody gave
me another hand.
And there isn't anything
in it to drive with.
And I just need to do
something while I'm driving.
And I'm not hungry yet,
but I know that I'll
be hungry by 10 o'clock.
So I also need something that
will just go thunk, and stay
there till 10 o'clock.
So when I have this problem
to do, what else do I hire?
And one guy said, I never
thought of it in these terms.
But last Friday, I hired
a banana to do the job.
Take my word for it.
Never hire bananas.
They're gone in
less than a minute.
I'm hungry by 7:30.
Another guy said, you promise
not to tell my wife please.
But I hire donuts a lot
to get this job done.
But they actually
don't do the job well.
I promised my wife that
I'm going to lose money.
But I add it.
And they crumble
all over my clothes.
And my fingers get gooey.
And I put that on the wheel.
And another guy said, yeah,
I do bagels sometimes.
But geez, the bagels are
so dry and tasteless.
I have to steer the
car with my knees
while I put the cream cheese on.
And then, if the phone
rings, I got three problems
and two hands.
And one guy said, I hired a
Snickers bar to do the job.
But I felt so guilty I've
never heard Snickers again.
But let me tell you,
whenever I have this job
and I come here to hire
McDonald's milkshakes,
it is so viscous, it
takes me 23 minutes
to suck it up that
thin little straw.
Who knows what the
ingredients are.
I don't care.
All I know is it's in
my stomach all morning.
And it fits right
in my cup holder.
And it turns out the milkshake
does the job better than any
of the competitors.
And the competitors are
not Burger King milkshakes.
But it's bananas and donuts
and bagels and Snickers bars
and coffee and a
few other things.
And then, it turned out
that in the afternoon,
it was hired for a
very different job.
And that is somebody
is a parent,
just needs to have a
sweet uncluttered time
to talk about whatever's
on the mind of their child.
And they hire the
milkshakes to do this job.
And it does that job very well.
But it's a very different job
than what the morning job is.
And it turns out that
this is not unusual
that almost always,
Peter Drucker said,
the customer rarely
buys what the company
thinks it's selling them.
And that's why I
said at the beginning
that understanding the job is
what's critical in developing
successful products.
The customer is the
wrong unit of analysis.
Because the customer
finds herself
needing to have
different jobs to be
done over the course of a
day or a week or a month.
So there's a job out
there somewhere near here
that needs to get done.
And people find
themselves needing
to get this job's job done
in different frequencies.
And that is, I need
to get this from here
to there as fast as possible
with perfect certainty.
How many of you
have found that you
needed to get this job
done in the last year?
Almost everybody.
It turns out that Julius
Caesar had this job to do.
But when he had
the job, he could
hire a horseman and a
chariot to get the job done.
Queen Victoria had the
very same job to do.
But she could hire the
telegraph and the railroad
to get the job done.
And Winston Churchill could
hire a airplane to get it done.
And now, our leaders
can hire DHL.
But the job itself has been
fundamentally unchanged
over these centuries.
And that's a
characteristic of most jobs
that they are very
stable over time.
But the technology that we
could hire to get the job done
changes at a scaring
rate in some times.
And so, if we think of the
business that we're in as,
I'm in the business of DHL
and I compete against FedEx,
my life is very unpredictable.
But if I think of the job to
be done as the core business,
then life is very stable.
And it makes it a lot easier
for us to predict what
will be the next technology.
Let me just
describe-- I'm sorry.
I need to tell you a
couple things about myself.
I'm stumbling
around, because I've
had a couple of rounds of
chemotherapy for cancers
that I've had.
And one of the side effects
is that I can't feel my feet.
So when I'm looking
at you, I don't
know if my feet are
over there or here.
And then, I had a stroke.
A clot came from somewhere
and lodged itself right there
in my brain.
And it formulated the portion
of my speech where we formulate.
It killed the
portion of my brain
where you formulate speech.
This happened about
four years ago.
And just like that, I
lost my ability to speak.
And I've been trying to
learn how to speak again.
And there's a program called
Rosetta Stone for English.
Turns out, it is very good.
But you see in my
language, sometimes, I'm
struggling to come
up with the word.
And that's because I lost it.
And I'm learning how to
speak from the other side
of my brain.
And I noticed that
I notice that I'm
speaking to the floor a lot.
And the reason why is,
if I look at the floor,
I can focus on what the
next sentence has to be.
And if I look at
you, you distract me.
So it's not that I have
become shy all of a sudden.
So I apologize for that.
Anyway, there is an architecture
to every job to be done.
So the fundamental
foundation is there
is a job that I
need to know, given
the situation that I'm in.
And that's an important reason
why understanding the customer
is the wrong unit of analysis.
Because the
situation that I'm in
has a huge impact on
the nature of the job.
And every job has a
functional and emotional
and a social
dimension to the job.
And the mix of those three
depends upon the application
of the situation they're in.
If we understand
what the job is,
then we can ask
the next question.
So what are the experiences
in purchase and use
that we need to provide in
order to do the job perfectly?
And if we understand what
those experiences are,
then we know what to integrate
and how to integrate it
so that we can provide
the experiences needed
to get the job done.
And if we understand that, then
it tells us what kind of brand
we need to apply
to that product.
So that when they
find themselves
needing to get the
job done, that brand
pops into their head.
So to summarize why it's
important-- the reason
why we need to understand the
opportunity in terms of the job
rather than the customer.
We need to understand what the
job the customer needs to do.
We need to understand how
customers will choose us.
And we also need to
then be able to say
what we can do that
other people can't,
which is how we integrate.
And finally, how
will everyone know
what product does the job best.
There's a job that
arises in people's lives
that happened to our son
Mike when he came out here
to start at Stanford.
And after a couple
days out here,
he called Christine and me back.
And he said, Mom and Dad,
I found our apartment.
And I need to furnish
my apartment tomorrow.
And so there's a job that
Mike needed to be done.
That is, I need to furnish
my apartment tomorrow.
When you find that you
have that job to be done,
is there a brand that
pops into your mind that
says, this is what I can do to
get this job done perfectly?
AUDIENCE: Ikea.
CLAYTON CHRISTENSEN: Ikea.
How many of you said the
word Ikea in your mind
when I told you
what the job was?
Look around.
Isn't that interesting?
And that's what we mean
by a purpose brand.
We need to organize our product
around a job that does it
so perfectly that anybody
around the world who
find themselves needing
to get that job done,
they think of Ikea.
And Ikea has no competitors.
There are other retailers
that sell furniture.
But there is nobody in the
world that is organized
around that job to be done.
As a result, they are
wildly profitable.
And you think about
this for a minute.
Their owner is the third
richest guy in the world.
The quality of the furniture
that they buy is marginal.
And they sell it to the low end
of humanity, college graduates.
[LAUGHTER]
And clearly, they are
able to get a premium.
Their customers are
delighted to pay a premium
price for their products.
And the reason why
that is is that,
if you hire a product to get
the job done and it doesn't
do the job well, then
you have to take it back
or throw it away or give it or
repair it and go out and find
something that will
do the job done well.
And if that doesn't
do well, then you
have to test it and
talk to your friends.
And when you find
yourselves buying a product
and you find that it
doesn't do the job well,
it is very costly to find
something that does it well.
And that's the
reason why it can be
so profitable if you organize
around a job to be done.
Because the customers will
be delighted to pay a premium
price for your product, because
the alternative of something
that doesn't do the job
well is very costly.
So that's the first
type of innovation.
And we call them
potential products,
because we don't know their
potential unless we understand
the job to be done.
The second type of
innovation we call
sustaining products that
make good products better.
And so, the day after we
launch into a new product
where you figured
out there's a job
to be done-- we have a
product to do the job well--
immediately, we start
improving those products.
And we call those products
sustaining innovations.
And they're important.
When we look around the world
as we walk around, almost all
of the innovations that we
see are sustaining products.
They help companies keep
their margins healthy.
They are the mechanism
for gaining market share.
And those of you who
are working on AdWords
and other of your
products are engaged
in sustaining innovations.
They're critical.
But because they replace
older products with new ones,
they don't create growth.
So imagine that I'm
working for Toyota.
And I convince you to buy
the Prius, the hybrid car.
Then, you won't
be buying a Camry.
If I sell you this
year's best product,
you won't buy last
year's best product.
And so, by their very nature,
sustaining innovations,
although they are important,
are replicative in character.
And most of what we think about
as innovation are of this sort.
So that's the second
type of innovations.
The third type of innovation
we call disruption.
And they create growth.
So let me describe-- this
is going to be a complicated
slide before we're done.
So I apologize in advance.
But you'll see these
three concentric circles.
And what they're
made to represent
is that, actually,
you can describe
the history of any company in
terms of these three circles.
The innermost circle
represents the customers
who have the most money
and the best access
to a product or service.
And then, as you go
to the larger circles,
they represent
larger populations
of people who have
progressively less money.
Almost always, industries
begin in the center,
because the first
products and services
are so costly and complicated
that only people who
have a lot of that are
able to buy it and use it.
So given that, I want to then
describe what disruption is
and why it creates growth.
So I'll put on the vertical
axis the performance of product
or services over time.
In every market there
are two trajectories.
The first one is,
in every market
there is a trajectory
of improvement
that customers are able
to utilize in their lives.
And we don't think
about this very much,
but our lives
don't change a lot.
And that's why this is so flat.
Then, in every market,
there's a different trajectory
of improvement that
innovating companies
provide as they keep introducing
better and better products.
And the most important
finding about this
is this trajectory of
technological progress
almost always outstrips
the ability of customers
to use the product.
And what it means is
that a technology,
at the beginning that
isn't very good actually
is prone to overshoot what
those same customers are
able to utilize at a
later point in time.
And there's not much
gray hair in the room.
But if you talk to somebody
who was in their teens
or 20s in the 1980s,
we were, at that time,
trying to figure out
how to use, learning how
to type on those early
personal computers.
About every 30 seconds, you had
to stop and let the Intel 286
chip catch up to you.
Because the world's fastest
microprocessor could not even
keep pace with our fingers
on the left-hand side.
But if you take your
computer apart now and just
look at the
microprocessor there,
we utilize only about 15% of the
capability of that processor.
Intel has just way overshot what
most customers in mainstream
applications are able to use.
Now, some of the innovations
that help good products better
are incremental innovations.
Others are dramatic
breakthrough innovations.
But we use a word
for them that we
call sustaining innovations,
which was on the last slide,
because they're
really important.
Almost always,
incumbent companies
who are the leaders on the
left-hand side of the diagram
find themselves still
on top of the industry
when these battles of
sustaining innovation are over.
And if you want to
start a new business
and you want it to
be successful and you
think you can beat the
incumbents by making better
products that you could
sell for better profits
to the customers
best competitors,
they will kill you.
And the evidence is
really very strong.
It doesn't matter how
big or powerful you are.
If you think that you can beat
the incumbents in their market,
they will kill you.
And we could spend a
lot of time on that.
But there's another
type of innovation
that we call
disruptive innovations.
And disruptive
innovations transform
products which, in
the middle, were
too complicated and expensive.
Now, disruption makes it so much
more affordable and accessible
that many more people are
able to use those products
or services.
And almost always, entering
companies typically
win at disruption.
And that's exactly
what Google did, right?
Because advertisement and
finding customers and making
things known-- you had
to have a lot of money
to play in that game.
And then, your
technologies and services
made it so that
anybody could find
what they needed, whether
you're a buyer or a seller.
And you changed
the world by making
it affordable and accessible.
And none of the incumbents
who you guys beat
are around today, because
entrants typically win.
And let me describe why.
So living in Boston as we have
for the last three decades,
there was, in the 1970s and
'80s a company there called
Digital Equipment Corporation.
And at that time, Digital was
widely viewed as Google is now.
It was the most widely admired
company in all the world.
And when you read
explanations about why
they were so successful,
always success
was attributed to the brilliance
of their management team.
Then, about 1988,
Digital Equipment
just fell off the cliff and
began to unravel very quickly.
When you then read
explanations about why
they had stumbled
so badly, always it
was attributed to the ineptitude
of the management team.
And the very same people
were running the company.
And for a while, I framed
the problem as, gosh,
I wonder how smart people
could get so stupid so fast?
And that's really
the explanation
that most people churn up
when a company stumbles.
That somehow, a company that
the management team that
had its act together at one
point were out of their league
at another time.
But the real reason why the
stupid manager hypothesis just
didn't feel right is
that every company that
made the same class
of computers-- we
called them mini-computers.
They were about the
size of this pulpit.
Every company that made
that were killed in unison.
It wasn't just
Digital Equipment.
But it was Data General,
Prime, Wang, Nixdorf, Hewlett
Packard, Honeywell.
And you'd expect these
people to collude on pricing
occasionally.
But to collude to
collapse was a stretch.
[LAUGHTER]
And trying to understand
why they'd do that
was the puzzle that we had.
So as we understood it
a little bit better,
we realized that
this minicomputer
was quite a complicated
product that
had to be sold direct
to the customer.
And the selling process involved
a lot of training and support
and service and software.
And you had to have a cost
like that in the business
to play in the game.
And that meant that
Digital Equipment
had to generate
gross margins of 45%
on computers that
sold for $250,000.
And that's how they
made their money.
Now, in their company,
as in every company,
there were people coming
in through the 1980s
all the time with
ideas for new products
that they could develop.
Some of these entailed making
better products than they
had ever made before.
In fact, these mini-computers
would be so good
that they could reach up
into the tiers of the market
where people historically had
to buy mainframe computers.
You looked at those
business models.
They could generate
gross margins of 60%.
And you could sell the products
for twice as much money.
So while the
management was trying
to decide if that's
what they should do,
there were other people
coming in saying, ladies
and gentlemen, you don't get it.
Just look out the window.
Everybody is buying
personal computers,
which was the case in
the 1970s and '80s.
But when management
would look out, in fact,
they could see that everybody
was making personal computers.
But there were a
couple of other things
that bothered them a lot.
The first one-- do
you remember how
crummy those early
personal computers were?
Apple sold the Apple II
as a toy to children.
Not a single one of
Digital's customers
could even use a personal
computer for the first 10 years
that they were in
the management.
And then, they got no
signal from their customers
that the personal
computer mattered.
Because in fact,
it didn't to them.
And then, when you looked
at the business details,
it looked a lot worse.
Because these small
computers only
generated gross margins of 40%.
And they were headed
to 20% quickly.
And you could only earn
those paltry percentages
on computers that
sold for $2,000 bucks.
And so, the question that
the management had to address
was, gosh, guys,
let's sit down here.
I wonder if we should
make better products
that we could sell for better
profits to our best customers?
Alternatively, maybe we
should make worse products
that none of our
customers would buy
that would ruin our margins.
What should we do?
[LAUGHTER]
And it is a very,
very hard problem.
And we call it the
innovator's dilemma.
Because doing the right
thing is the wrong thing.
And doing the wrong
thing is the right thing.
Can you think about where
else you've seen this happen?
Where somebody comes in
with a simple product going
after customers who historically
couldn't have access to it
and then it just grew up
and killed the leaders?
AUDIENCE: Blackberry.
CLAYTON CHRISTENSEN: BlackBerry.
Yeah, they just knocked off
sitting down with a laptop.
And then, Apple
disrupted BlackBerry.
And now, Samsung and
Huawei are in the process
of disrupting Apple.
It's a good one.
Where else have you seen it?
AUDIENCE: Disc drives.
CLAYTON CHRISTENSEN:
Disc drives.
The big ones disrupted
by the little ones.
And then, the flash
disrupted disc drives.
And almost all of them
are out of business now.
That's a good example.
You guys look like you
make a lot of money.
[LAUGHTER]
And I saw Lexus outside left
and right in the parking lot.
But that's not how Toyota
entered America, with Lexuses.
Toyota came in with a
rusty little sub-compact
in the 1960s called the Corona.
And it was so much more
affordable and accessible
that the rebar of humanity,
people we call college
students, could own a car.
And so, they came out here
by making it affordable.
And in the backplane,
General Motors and Ford
were making big
cars for big people.
And people would see
Toyota coming in.
And Toyota went from a Corona
to a Tercel, Corolla, Camry,
Avalon, 4-Runner, Sequoia,
and then the Lexus.
And as Toyota were
coming up there
going after new
customers, they'd say,
we ought to go
get those buggers.
And so, they'd design
a Pinto or a Chevette
and try to sell subcompacts
into the marketplace.
But then, their finance
people would look at the money
that they could
make in subcompacts
with the profitability
that they could
making bigger SUVs and
bigger pickup trucks
to even bigger people.
It absolutely made
no sense to defend
the low end of the business,
when they had the opportunity
to make good products better.
Who's killing Toyota?
They don't feel like they're
getting killed, incidentally.
AUDIENCE: It's
probably [INAUDIBLE].
CLAYTON CHRISTENSEN:
Yeah, the Koreans are just
killing them at the low end.
And Toyota is doing
the right thing.
Because why would they
ever try to defend
the low end of
their business when
they have the privilege of
competing against Mercedes
at the high end?
And then, the Chinese
manufacturers are coming next.
And we seriously don't
need to worry about them.
[LAUGHTER]
And one of the reasons
why this is so hard
is that what is coming
out in this dimension,
in the third dimension,
is that it competes
against non-consumption.
Because the products are so
costly and expensive that
behind them there
are no customers.
They are potential
customers, but if you make
it affordable and accessible.
And so, looking
at their world, it
looks as if they're
doing just fine.
And it's why, almost
always, you have
to have a new company
with new people
who are looking in
the other direction.
Because you're competing against
non-consumption by making
it affordable and accessible.
And that's why growth
comes in this dimension.
And almost always we find--
AUDIENCE: Huh.
So I guess, do you have
examples of companies
that have successfully
taken advantage
of this notion of disruption
where they themselves
[INAUDIBLE], within their
own company, that disruption
to take place?
CLAYTON CHRISTENSEN: Yeah,
it's a great question.
It turns out that
there really are
a few who have done that,
where they were the leaders
and, then, they became
the leader in the new wave
without getting
killed in the old one.
But only a few.
And in every case,
they succeeded
by setting up a completely
independent business unit
and gave it able to create
a different profit formula
and develop different processes.
So as a good example, IBM
just dominated the mainframe
business.
But there were eight companies
that made mainframe computers.
The other seven all got
killed when the mini-computer
came in underneath.
But IBM succeeded
by setting up-- they
made their mainframes in
Poughkeepsie, New York.
And they made their
mini-computers
in Rochester, Minnesota.
And there were nine companies
that made mini-computers.
Only one of them,
IBM, succeeded.
And they did it by setting
up a different business
unit in Florida and
made them figure out
how to make products at
25% gross margins, instead
of 40% or 60%.
Hewlett-Packard did it once
when the laser printer got
disrupted by inkjet printer.
And they set up the ink
jet separately in Vancouver
and had their own sales force.
And they did very well.
But both of those companies
are in deep trouble now.
Because they haven't
continued to follow
that of launching disruptive
innovations and keeping
it separate.
So we've had three
types of innovations,
potential innovations, which
we understand by understanding
the job to be done; sustaining
innovations make good products
better; efficiency innovations
helps us to do more with less.
The role that they
have in growth
is that they keep
us competitive,
but they reduce jobs.
But they do create
free cash flow.
And so Wal-Mart is an
efficiency innovation.
The Toyota production system
is an efficiency innovation.
And again, they're important.
Because if we're not
getting more efficient,
otherwise we'd get killed
sooner rather than later.
So this is a view of
where growth comes from.
So the first step is we've
got to understand the job
and develop a product
that does the job well.
And essentially, what
that does is it puts us
in the center of the market.
And then, disruptive
innovations make
products better and accessible.
So they create growth.
Sustaining innovations
make good products better.
And efficiency innovations
allow us to make more with less.
And that's a manager's view
of where growth comes from.
Now, why are we not
able to keep the growth?
And I put the problem at
the feet of finance people
who are taught finance
at places like Harvard.
So there are two elements
that are quite important.
One is a doctrine that they
teach in finance that we
call abundance and scarcity.
Now, what that means is, if
I've taken a order from you,
in order to deliver what
I tell you I will offer,
I have to array the
inputs required.
And some of the inputs
will be costly and scarce,
like platinum.
And you've got to be
really careful about how
you use platinum.
And others are abundant
and cheap, like sand.
And I can waste sand.
So we have to take
care of what's costly.
And we can waste
what's abundant.
And you'll see in
finance, historically,
we needed to carefully
husband the use of capital,
because capital was
costly and scarce.
But now it's abundant and cheap.
And the world has
really changed on us.
The second element that
finance brought to us is they
decided that we should measure
our success using ratios
rather than whole numbers.
Now, when I studied
finance in the 1970s,
we were taught finance
by whole numbers,
like millions of
dollars or tons of cash.
But starting in the mid
1980s, shortly after,
Dan [? Dricklan ?]
developed the spreadsheet,
the analysts who grabbed
a hold of the spreadsheet
started to be bothered
that, as analysts, they
wanted to be able to compare
Cisco with Sun Microsystems.
And they're different companies.
And so, if I compare
them with whole numbers,
I couldn't make much sense.
But what they realized is
if they measured success
by ratios, then you could
compare two companies
that are not comparable.
So if they want to
compare you with Microsoft
in whole numbers,
it makes no sense.
But in fractions, then it
commoditizes everything
around the denominator.
So fractions-- I got back
to my fifth grade math.
A ratio is a fraction.
It has the numerator
and a denominator.
And so, if I want to grow,
there are metrics that we used.
And one is return on
net assets or RONA.
And another one is internal
rate of return, IRR.
And these are fractions.
So if I'm the manager and
I want to get RONA up,
sure, I could be more profitable
by being more innovative
and put the profit on the
numerator of the ratio.
But holy cow, if that's hard,
the denominator is assets.
And I just have to outsource
everything to get assets off
of the denominator.
But either way,
improving the numerator
or decreasing the
denominator, RONA goes up.
And it turns out
that it is easier
to outsource than it
is to make more profit.
And so, in the pursuit
of RONA, we just
outsource more
and more and more.
And then, internal rate
of return is a ratio.
The numerator is profit.
The denominator is, how
quickly do I get my money out
after I put my money in?
And either way, the
internal rate of return
improves by doing the
numerator or the denominator.
And because profit is harder
to achieve than to only invest
in things that pay
off in the short-term,
more and more companies
are investing only
in short-term payoff
projects, because that's
the way they get IRR up.
And so, what's happening
to us as a nation--
and I think you
guys temporarily are
doing a good job-- is we're
losing our growth because
of what finance taught us to do.
So just imagine that I'm making
a really good job at efficiency
innovations.
And that creates free cash flow.
And we have so much cash that we
have to ask analysts to tell us
where we should put our money.
So the analysts will look
at that disruptive history.
And they say, we
ought to use our money
to create disruptive companies.
But the problem is, if we
invest in disruptive companies,
they pay off in
five to 10 years.
And so internal rate
of return will tank.
And if we start to create
disruptive companies,
we'll have to put assets back
onto their balance sheet.
On the other hand,
if we use our money
to do another round of
efficiency innovations,
they pay off in six
months to three years.
There is no risk.
The market is there.
It creates free cash flow.
So if you wouldn't mind just
this once, what I'd like to do
is use our money to do
another round of efficiency
innovations.
And I do that.
And the problem is, we
have more free cash flow.
And we've got to
figure out, what
do we do with all of this stuff?
So can we look at
the analyst, say,
just take another deeper look
at disruptive innovations.
And so, he does.
And he said, the problems
are just the same.
If we invest to create
disruptive products,
they pay off in five to 10 years
and IRRs are going to go down.
And RONA goes down,
because it needs assets.
So if you wouldn't
mind, I'd like
to just use our money
just one more time
to do another round of
efficiency innovations.
And the problem is, it
creates more capital.
What are we going to do
with all this capital?
My gosh!
And so, I just do it
again and again and again.
And that's what's
happened in our economies
in Japan and Europe and,
increasingly, in North America.
Because we have chosen
to measure success
with these ratios, our analysts
grab that free cash flow
and use it to create
more free cash flow.
And if you want to know what's
going to happen to America,
just look at Japan.
Because in the '60s, '70s,
and most of the '80s,
Japan's economy was growing
at unprecedented rates.
And the reason why
they were growing
was because they had
companies in that economy that
kept investing in
disruptive innovations.
So Toyota made cars
affordable for mankind.
Honda made motorcycles
affordable for mankind.
Sony made a 10-transistor pocket
radio that allowed teenagers
to listen to rock-and-roll.
And the reason why
you guys have printers
in your offices and your homes
is that Canon disrupted Xerox.
But because they made things
affordable and accessible,
billions of people
around the world
were able to own and use
things that historically
had been beyond their reach.
And that forced these companies
to make more products.
And that meant that they
had to hire more people
to make them and distribute them
and sell them and service them.
And for 30 years, they had
no economic recessions.
They had no unemployment,
because they
were going after people
who were competing
against non-consumption.
And in the late 1980s,
the analysts in Japan
started to measure their
success as gross margins
and net present values and
internal rates of return.
And since 1990, in
Japan, they have not yet
generated a single new
disruptive innovation.
And their economy
just went "ppt."
It's been flat-lined
for 25 years.
And they have
capital everywhere.
And the cost of
capital is nearly $0.
And yet, they can't grow,
because of the metrics
that they have chosen.
And that's what I worry a
lot for the United States.
Increasingly, the
financial analysts
are causing us to use our
capital to create capital.
And the cost of
capital is nearly $0.
And yet, most companies aren't
organized to invest to grow.
And you guys are doing
a good job temporarily.
[LAUGHTER]
Anyway, those are just
a few of the thoughts
that we have about
where growth comes from
and how to deal with it.
AUDIENCE: So for a
company like Google,
what metrics would you
suggest to break out
of this vicious cycle?
CLAYTON CHRISTENSEN:
Well, there is no metric
that any analyst has developed
or is motivated to develop.
So there are analysts,
like Moody's and S&P--
any indicator that they
have is very short-term.
They have their metrics about
this year and next year.
But that's it.
And we don't have a metric
that will allow an analyst
to say, for this company,
10 years from now,
they are going to
be in great shape.
Because these are the products
that they have in the pipeline.
And so, you guys have
to develop your own.
It turns out that God didn't
tell us to use those metrics.
Somebody decided to
use those metrics.
But it wasn't God who told us.
And so, we ought to
then say to those--
whoever it was that told us
the metrics-- screw you guys.
Here's the metric by which
we want to be analyzed.
It's a great question.
Yes?
AUDIENCE: So you opened talking
about how the labor force takes
a long time to
come back and it's
because people are investing
in the things that give you
more capital efficiencies.
And one of the ones that
I think is the bigger
investment that you
see here at Google
is artificial intelligence.
So if you look at
humanity as a job
to be done, before the
Industrial Revolution
you had to get
things built or made.
And human muscles were
a good way to do that.
And this decade, we're
looking at, the job to be done
is people need to think about
things and solve problems.
And human brains are
pretty good at that.
But now, AI is coming.
It's cheaper.
It's more scalable.
What are going to be
the jobs that humans can
do after this AI revolution.
CLAYTON CHRISTENSEN: Yeah,
that's a great question.
So these are just
a couple of things
that I worry about
in that initiative.
So we might think, by
analogy, a driverless car
as a technology is a
complicated problem.
If we are targeting
the California freeway
as the application
for a driverless car,
that is a very
complicated application.
And there are all kinds of
legal issues that are just--
and the technology needs
to be pretty sophisticated.
And maybe that'll happen.
Maybe it won't.
But we don't think
about, if we change
this, what are all of
the other things that
need to change in order
to enable this technology
to develop?
And so, our theory says
that where you ought to look
is on a farm.
And John Deere has wireless
tractors going up and down.
And the application
is very simple.
And almost always,
when you try to make
it affordable and
accessible, you
start with very
simple applications
and then, little by
little, do that on.
But competing with
non-consumption
is really critical.
And so, AI-- what
I worry about is,
although we think
that it will make
us be able to be better
thinkers at lower cost,
I worry that the
applications of these
are actually quite complicated.
And that we don't
think about, what
are all of the other things
that have to occur in order to
for our piece to make it?
And so, it could be a big thing.
But I'd bet that,
in the process,
we'll realize that we should
go after simple applications.
And that typically forces
us to hire more people.
But it's a good one.
Because whether you call
it an efficiency innovation
or a disruptive innovation
makes a big differences
as to the outcome.
Thanks.
AUDIENCE: I just want to
say, thanks for coming.
Reading your book was actually
one of the reasons I did my MBA
and ended up here.
CLAYTON CHRISTENSEN: Oh geez.
AUDIENCE: So you had a pretty
tangible effect on my life.
But--
CLAYTON CHRISTENSEN:
Oh, you're kind.
AUDIENCE: So I want to see
if you could help clarify
the way that we talk
about disruption in regard
to the technology itself.
And we have a couple of
technologies at Google
that could be considered--
that are often
called disruptive technologies,
artificial intelligence,
machine learning, which is very
much being built internally
to the organization.
It's helping improve
what we do as a company
and could be seen as a
sustaining innovation.
And then, we have
autonomous cars,
which are being treated--
built at X, external-- much
more in line with
the disruptive model.
So is it the technology
that's a disruption?
Or is it the application
of the technology?
Is it the market effect
that makes it disruptive?
What is it disruptive to?
CLAYTON CHRISTENSEN: Yeah,
that's a great question.
It's actually really
important for you
to say what you just said.
Because in many ways, I made a
mistake calling the phenomena
disruptive disruptive.
Because there are so many
connotations of the word
disruptive in the
English language.
And so, there are
a lot of people
who call anything that
is a dramatic improvement
or a breakthrough--
we call it disruptive.
And that's not true.
So almost always, disruption
is built within the business
model of the enterprise, not by
developing the best technology.
Because typically, you
can take a technology
and deploy it onto
the California freeway
or on a corn field in Iowa.
And how you deploy it
determines it's disruptiveness.
And that's really an
important one to do.
And people say that I'm a
Jewish mother of business
in that I'm always
worried about everything.
But I worry about you guys.
Because I think
that you are very
good at developing potentially
disruptive innovations.
But I don't think
you worry nearly
enough about the
business models that you
have to build that
would then take
your technology into an
application that competes
against non-consumption.
And I think that's a
very important concept.
And I don't think I'm
totally wrong about that.
AUDIENCE: So I also want to
start by praising your book.
I think it's the best
book I've ever read.
And it's hard to think of
something else that has
impacted how I think as much.
But--
CLAYTON CHRISTENSEN:
You're kind.
You have low standards, but--
[LAUGHTER]
AUDIENCE: You think so?
Well, here comes the but.
So I've been wondering
this for a little while.
But how do you explain
certain products
that have transformed industries
and up-ended incumbents
but don't fit into the
framework of low-end disruption?
So off the top of my
head, Uber, iPhone, Tesla,
all started from the
very, very highest end
of the market and trickle
downwards from there.
CLAYTON CHRISTENSEN: Yeah.
Well, let's take them one at
a time, because those are all
really good examples.
So the theory would
say that Tesla is
a sustaining innovation, right?
So they come in at the
high end of the market.
And they're deploying it in
a very demanding application,
which is the California freeway.
And what the theory
says is that they
might be able to
develop the product that
is the best in the world.
But if they go after the
best customers of the leaders
up there, these guys are going
to harness whatever they can.
And they will do their
best to knock them out.
Or they will acquire them.
So in a lot of ways, you
could think of disruption
as a theory of
competitive response.
If I do this, what will
the competitors do?
And when Toyota came in
with the simple product,
the theory predicts that
Detroit will just ignore them.
And so, what's
happened is, yes, Tesla
is the best with
the best product.
But Porsche has spent
$1 billion dollars.
And they have a completely
electric car now.
And you can just smell
BMW all around them.
And so, the theory
might be wrong.
But the theory would say that
these other guys are either
going to kill Tesla
or acquire them.
And that's what it would be.
But just like a $100,000 Porsche
has not transformed the world,
a electric car at that
price point actually won't.
And that's what the theory says.
And Christine and I were
in Beijing four weeks ago,
walking down the road.
And here is this electric
car that was as wide as me.
And if I had a passenger I
had to fold her up and put it
in the boot.
And it cost $2,500.
And that's where I think the
transforming technology will
come from.
Apple-- there are a
couple of answers to that.
But what allowed
them to survive when
they came in at the high end
of the wireless phone market,
is they came in to
disrupt the laptop.
And they have
disrupted the laptop.
And that's why they
have succeeded.
If they had stayed
and simply tried
to compete against BlackBerry--
they had the benefit
for a while of-- the BlackBerry
had an architecture that was
excruciatingly interdependent.
And so, you couldn't
develop apps for it.
And then, Apple came
up with-- internally,
it's interdependent.
But there was a standard port,
so apps could be developed.
And that blew BlackBerry
out of the water.
But then, the Android operating
system and Huawei and Samsung
are just killing Apple.
Because they're being disruptive
in the conventional way.
So on average, I think we can
understand why it's happening.
But sometimes, it takes a few
years rather than a few months.
AUDIENCE: So what about Uber?
CLAYTON CHRISTENSEN: Yeah.
AUDIENCE: The incumbent's
not going to acquire Uber.
CLAYTON CHRISTENSEN:
That's right.
And it taught me a lot
about the theory with Uber.
So it is true.
Well, first, they
came up and they
disrupted the black sedans.
And that's unambiguous.
But then, they came
down and they're
making a better
product than the taxis
at roughly the same price.
And they've blown
them out of the water.
They didn't come
in at the bottom.
And what we realized
is that there
is a correlation
between their coming
at the bottom of the market and
being successful as disruptors.
But the reason why that's
correlative not causal
is, you look at the
business model of Uber,
and the taxi is very
asset intensive.
They own the car
and the medallion.
And their costs are
fixed cost intensive.
And they just had to have
these taxis on the road 24/7
in order to make money.
And the Uber business model
is they have no assets.
And their costs are all
variable, not fixed.
And the taxis actually just
can't get there from here.
And so, in our
thinking, we've decided
that we don't want to say they
always start at the low end.
But they have to
develop a business model
where the incumbents just
can't get there from here.
And that's what
makes it disruptive.
So I learned a lot from that.
AUDIENCE: Thank you.
CLAYTON CHRISTENSEN:
You're welcome.
Thank you.
MATT: All right, I'm going
to read one from the Dory.
What did you notice in your own
life or the world around you
that inspired you to write "How
will you Measure your Life?"
And how can companies
and institutions
help their employees approach
measuring their lives
in a better way?
CLAYTON CHRISTENSEN: Wow.
Thank you for your question.
We're hitting at 3 o'clock.
So can I answer this one?
And for you guys, can
we just talk afterwards.
I'm sorry to do that to you.
AUDIENCE: Yeah, sounds good.
CLAYTON CHRISTENSEN:
So why we wrote
this book about how
you measure your life
is just I described here how
the metrics that they were using
caused them to spend their
time and energy in developing--
they did not intend to do
what they actually did.
And what I realized
is why they so
invested in things
that cause them to fail
wasn't that they were stupid.
But the resource
allocation process--
the metrics caused them to
put their money in a direction
that they did not
intend to pursue.
So anyway, where I worked at
the Harvard Business School,
the core competence of the
Harvard Business School
is we are really good at soaking
our alumni for donations.
[LAUGHTER]
And so, every five
years, we invite
all of our alumni to come back.
And we remember them to
please bring their wallets.
And we're really good at this.
So because Christine and
I have lived in Boston
ever since I
graduated, we've gone
to all of these 5,
10, 15-year reunions.
And I remember when we came
back for our fifth reunion.
Oh my gosh!
Most of my friends
had married people
who were much better looking
than my friends were.
They had kids that
were well-behaved.
And their jobs were going well.
And just everything that
we imagined would be true
was unfolding as we thought.
But then, I noticed
for the 10th reunion,
gosh, a lot of people who I
was looking forward to seeing
didn't show up.
And when I asked common
friends, where is so-and-so?
More often than I ever
imagined the answer
was that he's in the
middle of an awful divorce
and he just doesn't
want to talk about it.
And for the 15th reunion,
there were even fewer people.
And when I'd ask about
them, more often it
was not, it's he's in an
awful divorce or their spouse
remarried and now they're
raising their children
on the other side
of the country.
And they just don't want to
talk to anybody about what life
had turned out the wrong way.
And then, by the 20th
and the 25th reunions,
it was really scary.
And it was the same problem.
I can tell you with
perfect certainty
that not a single
one of my classmates
when we graduated
from Harvard planned
to go out and raise
children who hate their guts
and get divorced one
or two or three times.
Our intention was to
create homes where
there was happiness there.
And it was a source of happiness
for the rest of our lives.
But that was what
we intend to do.
And how we spent
our time and energy
was just the opposite of that.
And the reason why is
the very same thing.
It's the metrics.
So those of us who are
driven to achievement--
that includes at
least 100% of us--
when we have that
need for achievement,
then, when we have an
extra 30 minutes of time
or an ounce of energy,
we instinctively
spend our time and energy
on whatever activities
will give us the most
immediate and tangible evidence
of achievement.
And our careers provide that.
So every day at work, I ship
a product, I finish a project,
I get promoted, I get paid,
we close another deal.
And every day, I get immediate
and tangible evidence
of achievement at work.
And then, when I walk
into the front door,
there's not a lot of
evidence of achievement
when you look at your kids.
On a day-to-day basis,
they misbehave every day.
The place gets
cluttered every day.
And it really is not
until 20 years down
the road when you're
able to look at your kids
and put your hands on your
hips and say, my gosh,
we created a wonderful
young man or woman.
But on the day-to-day basis,
there's no evidence of that.
And as a result of that, we
invest our time and energy
in our careers and
under-invest in our children
and our spouses,
even though we plan
to have that be the
source of energy.
And so, that's why I decided
I would write that book, "How
Will You Measure Your Life?"
Anyway--
[APPLAUSE]
