Clayton Christensen (The Innovator's Dilemma) on How to Build a Disruptive Business | Startup Grind

hi there I am Christie Koerner the director over in Phoenix Arizona most of my career I spent as an entrepreneur but recently I joined our State University as the director of the center for entrepreneurship in this new role I have had a very interesting experience studying how entrepreneurs approach entrepreneurship and how researchers look at it they're both extremely valuable but they are very different our next speaker is a bit of a unicorn in this area not only has he been a very successful entrepreneur built grown and run magnificent companies but he has also been a very successful author with some really impressive books let's just say if you have a dilemma he probably has a book on it right in addition to all of that though he is a tenured professor which is no easy thing to attain at Harvard University whenever I see someone that has both real-life experience and a dedication to studying in industry I listen join me in welcoming to the stage clay Christensen thank thank you well you're very kindly guys thank you well I just am honored to be here Harvard is a wonderful place to work but gosh I wish I wish Harvard was in Silicon Valley we I want to leave as much time as we can for a conversation with Mark Andreasen but I'd like to talk to you about three disruption three theories from my research that I thought would be useful for the ongoing discussion with Mark disruption you know about and so I don't think I'll spend much time about that I would like to talk about a theory called the capitalist dilemma which is a theory about where growth comes from the job to be done is something some of you who have had milkshakes and know what it means to hire a product to get the job done then two other theories the law of conservation of modularity and the law of wasting abundance and the last one applies to unfortunately venture capital so it turns out that if you look at it in a different way there really only are three types of innovations in the world and the reason why understanding innovation is so critical is that's the target of investment and investment is what creates growth so the first type of innovation were called disruption and I described it here as three concentric circles and what they're meant to represent is in the center our customers who have a lot of skill and a lot of money and the larger circles represent larger populations of people who have progressively less money and less skill almost always industries begin at the center because the first products are complicated and expensive so we had mainframe computers you had to be very rich and a lot of skill to have one of those costs two million dollars the personal computer it brought the cost down to two thousand dollars and now smartphones brought it to two hundred dollars and by making it affordable and accessible many more people have access to do it so you have to hire more people to make it distribute it sell it service it and that's why as I say upfront disruptive innovations create growth and they create jobs if the data were available and fortunately or unfortunately they're not I think that almost all of the net growth and net job and net jobs and net growth comes from these types of innovations automobiles is another the early cars were viewed as toys for the rich then Henry Ford made it affordable and accessible so that many more people had access and then when Toyota came in the 1960s with a little subcompact car they called a Corona it enabled the rebar of humanity people call college students could have a car and so this kind of innovation has a role in our companies in our society and that is this is the innovation that creates growth then there's a second type of innovation that we call sustaining innovations and sustaining innovations their role is they make good products better and they are very important in society because if you don't keep making good products better your margins will fall and the company will dissolve so it's very important and when you go out in the world most of the innovations that we see are sustaining innovations but sustaining innovations actually don't create net growth in order they create jobs so just imagine that I'm a salesperson for Toyota and I convinced you to buy a Prius hybrid if I succeed in selling you that then you won't buy a Camry if you buy the next generation of my product which is better than you won't buy the last generation which wasn't as good and so sustaining innovations are very critical they have a role but they don't create growth or jobs and then the third type of innovation we call efficiency innovations and their purpose is to help you make more with less and they also are very important because if we're not getting ever more efficient we'll get killed sooner rather than later but by their very nature efficiency innovations eliminate jobs so when Honda are I'm sorry when Walmart comes into a community it's an efficiency innovation and although they hire people to work for Walmart in the community about 9% of the jobs in retailing are lost because it's a more efficient way of doing things Toyota Production system is an efficiency innovation so they eliminate jobs but they create free cash flow and it's kind of neat as long as these guys are creating more jobs than those guys eliminate and as long as these guys are creating enough Crieff entry Crete increased cash flow to fund the next generation of disruptive innovations the economy works and a company works but what's happened in the last 30 years little by little is that this connection has been cut by unfortunately professors at business schools like me and we have come to adopt a set of principles from finance that are believed these I always call them doctrines and those of us who go to this church to get MBAs come to believe that these are actually true and that everybody should follow them and they in aggregate cut that link that I described so one of the doctrines that we teach in finance is that why we can waste inputs that are abundant and cheap we have to be careful in use scarce things carefully so if I just array in front of me all the inputs required to give you the output by committed to some of these inputs will be abundant and shaped like sand I don't need to carefully husband the use of sand I can waste it if I wanted to but platinum is very costly and very scarce and so I have to be really careful and use it only where it's absolutely necessary and I got to be careful that I don't lose it and thinking about what's gets scarce and what's important is really important so 15 years ago prior to that bandwidth was very scarce and costly and so we designed our systems to account for they the costliness the the cost of bandwidth but then thanks to Corning and a few other people bandwidth became so cheap and abundant we called it dark Philibert it was free and while some companies continued to husband the use of bandwidth a few others Netflix Amazon and Google say hey wait a minute if bandwidth is cheap we can waste bandwidth and by doing that they transformed in the model of the industry and one of the things I want to talk about later is that I think that capital has become abundant in cheap historically it was costly and expensive and we had to carefully husband the use of cap but now by any measure capital is abundant and cheap and then there are other rules that we have to use when we're deciding whether we'll put money in a company or not and they're all ratios so take this one here internal rate of return is a fraction the denominator is profit and the denominator is a measure of how quickly do we get our money out after we put our money in and so if I'm manager the neat thing about a ratio is I got two options sure I could be more profitable and increase the numerator but what the heck if innovation is too hard I'll just only invest my money and things that pay off in the short term either way IRR goes up and I'm a star but the ratio has a big impact as we'll see next the profitability metrics for efficiency innovations always are better than those of sustaining innovations by the math and the profitability metrics for sustaining innovations always or more are higher than the metrics for if disruptive innovations and disruptive innovations always struggle to attract capital and managerial attention and it's in the math and the result of that is that the metrics that we use on the prior slide take the capital of a company and funnel that in the resource allocation process to spend more and more of our money in efficiency innovations and that's the problem so we have a lot of free cash flow so we have to have analysts to figure out where should we put our money so I look at this and I say you know maybe we how to invest our money for a new round of growth in disruptive innovations the d'arnot these things pay off in five to ten years and so ir is going to go down these guys need capital and so rone is going to go down on the other hand if we use our capital to invest in another round of efficiency innovations Rhona goes up IRR goes up there's no risk the markets there so if you wouldn't mind just this once I think I might use my capital to create more capital and then I have a big problem because I got to invest that money too and I look at disruptive innovations and darn it just by the metrics that doesn't pay off so maybe just one more time I'm going to investing and over and over again we invest our capital to create more capital and to create more capital and so there is capital everywhere the cost of capital is needed nearly zero and we continue to behave as if capital is scarce and if you want to know where America is headed just look at Japan because during the 1960s and 70s if you remember Japan was growing at unprecedented rates and what was the engine of that Toyota made products so affordable and accessible that college students can have a car Honda did the very same thing in motorcycles Sony did the very same thing to consumer electronics the reason why you guys have a printer in your office or your home is Canon built Xerox but since 1990 in Japan they use the same metrics of investment and since 1990 they have developed only one disruptive innovation which is the Nintendo Wii but I think it's the only one and all of their money goes into some sustaining but primarily efficiency innovations and boy they are good at that but what has been the result for the last 25 years Japan's economy has just been a flat line there is capital everywhere the cost of capital is zero and they can't invest to grow because that of the metrics put them in that situation and unfortunately thanks to you guys in America we still do a little bit of this but if it weren't for you guys we would be heading down that route even faster than we already are you know the story about milkshakes the theme I'd like you to remember is that what causes us to buy a product is we have a job to do and if you understand what the job is the probability that you'll succeed is very high now understanding what the job is has a big impact on your success so think about the New York Times originally there was a job to do which is I want to know the news and the New York Times on the West the East Coast did that very very well but then they saw that their customers also had other jobs that arise in their lives that they need to get done too and so maybe we ought to get the New York Times and keep adding sections so that you could hire the New York Times to do all kinds of things and so very quickly the New York Times became had a section in it to do all of these things I could have personal advertisements if I need to buy or sell stuff if I need a job I can do that if I need to hire somebody to do a job I could do that to help me be informed that's what the New York Times used to be all about and as they have done that there have been focused competitors around a single job to be done and by focusing on a single job the New York Times which it tries to do everything for everybody just loses its its salience to most people and they're going down the cliff we see that now happening at banks they had a focus job to be done at the beginning but as they could see that those customers have other jobs to do maybe we ought to make more and more so that our customers can do more and more business with us and the result of that is they became very unfocused didn't do any of these jobs very well and thanks to you guys there are focused thin bank companies just blow up blossoming around us each one of them focused on a single jobs to be done and one of the reasons why this is so important for us is that we're investing to create growth we need to remember that keeping that focus is very important to success now this is the last one which is the law of conservation of modularity and I'll just do this in the context the banking but it applies to everything you invest in there are interfaces historically in a traditional bank they have the back end that has to happen every day without fail and then there are services that they're trying to offer to their customers and historically the interaction the interface between those has been interdependent meaning if I change one thing I have to change everything and it was very hard to get out of that relationship because of the interdependence but on the other hand where the interface was between banking services and the customer that was a modular interface cycle is a way to do it everybody knew that if you want to disengage with the bank you could go to another bank and insert yourself and because of this modularization of that interface it was easy for customers to go and so the banks complained that there's no stickiness with their customers but it's because this interface is standard that everybody had to adopt but I think what's happening from the prior slide is that there is opening a modular standard interface between a particular bank that we might call a web bank that does the backend stuff and then there are a whole bunch of focus companies around jobs to be done to do those things and the way these guys interface with their customers is very proprietary and interdependent so the interface I write books they every customer gives me five stores or three stores or whatever but we have an interdependent interface and where you the law of conservation of modularity means that where you make money is where there's an interdependent interface and so where you made money you don't make money than where you didn't make money you make money and this interaction I think is really quite an exciting thing for some of the things that you guys are investing in here so that's what I've been thinking about and I hope that I hope that some of these things might be useful for you well thanks so much the very point is right

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Keywords: Clayton Christensen, Harvard Business School, Silicon Valley, Startup Grind, The Innovator's Dilemma, clay christensen, andreessen horowitz, disruptive innovation, harvard business school, harvard, silicon valley, how to get into harvard, how to get into y combinator, yc, y combinator, innovation, creative destruction, innovator's solution, how will you measure your life, how to be happy, a16z, fundraising, corporate, how to, startup, business, technology, theory, lean startup

Id: Zn6-KksdOgE

Length: 20min 6sec (1206 seconds)

Published: Mon Feb 29 2016