Clayton Christensen and Disruptive Innovation

[Originally published on Australian Government DesignGov under a Creative Commons 3.0 BY AU licence]

On Wednesday 6 November I was fortunate enough to attend an event in Sydney featuring renowned innovation thinker Professor Clayton Christensen and hear him speak about disruptive innovation.

Disruptive Innovation

Professor Christensen began by outlining just what he means by the term ‘disruptive innovation’. These are innovations that are generally both dramatically cheaper than what existed previously, and offer increased performance. They help create new markets. He shared the example of the pocket radio which was very cheap, and though not a high quality product when it was first introduced, it was infinitely better than the only other option – not having one. The companies that produced the larger and non-portable vacuum tube radios were producing good products, but they were expensive, and ultimately the transistor radio won out.

The Professor noted that such innovations generally change the metric by which the product is compared and measured. In the case of the portable radio it changed the metric from the fidelity of the sound to the portability of the sound.

The Professor ran through a number of other examples where disruptive innovations have upset the structure of industries. In the steel mill, automotive and the computer manufacturing industries new entrants have come in at the low value end of the market which the incumbent firms tend to vacate to let them have it. Over time these new entrants often progress up the supply chain and become the dominant firms.

In none of these cases is it about poor management. The decision makers are acting very rationally – they are concentrating on the end of the market that creates them the most value. Over time the disrupting firms can take that segment from them as well.

Other types of innovation and the Church of New Finance

Professor Christensen distinguished between three types of innovations. He identified market-creating innovations (such as the disruptive innovation examples he referred too), sustaining innovations, and efficiency innovations.

Sustaining innovations make existing good products better. They keep markets competitive and vibrant, but they do not tend to create many new jobs as they are about replacing what already exists with something better.

Efficiency innovations make the same products to consumers at a lower price – e.g. Toyota working out how to assemble a car in 2 days, freeing up a lot of capital that would have otherwise been tied up in inventory.

Professor Christensen outlined what he called the ‘Church of New Finance’. Under revised finance thinking, measures of profitability such as making money have been overtaken by ratio measures such as return on net assets and earnings per share. This sort of financial thinking reduces the incentive to invest in new market creating disruptive innovations which take five to ten years to possibly pay off – the common methods of financial analysis systematically bias managers against innovation. The emphasis is on efficiency creating innovations which create more capital for investors. Professor Christensen said the number of market-creating innovations introduced in the past 20 years has been one third of that created in the 1950s and 1960s.

What helps drive innovation?

Professor Christensen said that firms need to concentrate on what helps the customer. Every customer has a job that they are trying to do that they ‘hire’ products for – firms need to understand what that job is and how their product or service can help the customer do the job. Understanding the job should be seen as an ongoing mining process rather than a single event.

Understanding the job of the customer can increase growth for the product and potentially provide for enduring differentiation from other competitors.

The Professor gave the example of McDonalds and the milkshake they sell in the mornings. Research in the USA found that the customer was using the milkshake not only to fill them up, but also to give them a distraction while undertaking long and dull drives. This insight helped them understand that the ‘competitors’ to the milkshake could be everything from an apple to a donut, and that the features desired in the morning milkshake were things like making it thicker so it would take longer to finish and putting in small bits of fruit to provide novelty.

What might this mean for the public sector?

I think we can take away a few points that can be applied to the public sector:

  • Essentially, though he never used the term or described it as such, the Professor talked about design
  • Design / understanding the ‘user’ is an important part of innovation
  • Understanding how people are interacting with government services and how government interacts with people’s lives will not create profits but it can help unlock new value (and help others create new value in turn)
  • The disruptive innovations are likely to come from the edge/the periphery
  • We need to be careful about the financial frameworks that we use to assess value and innovation and ensure that the do not bias us against potentially significant innovations
  • Data can only provide some of the story – the Professor warned about relying too much on data as it reflects what has happened, not what is or could happen.

It was great to hear from such a leading authority on innovation and to consider what the disruptive innovation model could mean for the public sector. If you would like to know more about that, I recommend taking a look at Deloitte’s publication “Public sector, disrupted: How disruptive innovation can help government achieve more for less”.