Prosperity Paradox | Clayton Christensen and Efosa Ojomo | BYU Strategy Professional Conference 2018

obviously all know professor Christiansen from yesterday so without further introduction you know clay but he gave me the opportunity introduced his co-author fossa Omo who together have I've written a fantastic book that'll be published in a few months which we'll hear about in just a few moments I met a fella three years ago as he was finishing up at Harvard Business School he and I both started working together with clay and a fossa began this notion of how can Clay's research on innovation in growth help us understand development in prosperity and fossa was born in Nigeria and has had a long-standing passion for this work and as with many of you is including myself you get to work with clay you see the world a little bit differently and you want to approach a problem in unique way and when a fossa started his research I know that play said well the fuss was gonna go to Nigeria to do some field work and do some research and clay said to fossa if you really want to see how real people live go find the Mormon missionaries in Nigeria just follow them around for a few days and then you'll know what the real world is all about and he did that and a typical year with clay as a researcher or as a research associate you might produce an article but if also published two cases Harvard Business Review article and another publication and development and so we figured out he's a pretty smart guy and and decided that clay decided he wanted to continue to work and that work is continued and results in the book you'll hear about today so without further ado thank you clay and if I so and I look forward to hearing your talks cliff is my chief of staff and if you need to do anything in your life it doesn't really matter what it is just ask cliff he does it all so thank you you know most of us have a habit when we're looking at other Americans that this isn't a nation of prosperity but turns out that that's not true if you go back into the 1850s America was in desperately poor country by any measure America was more impoverished than the bangladesh's today that America became prosperous when I was a missionary in Korea it was viewed by everybody as the most impoverished of the nations of Asia and I was sent there as a missionary and it was it just poverty was everywhere and now as you know Korea has become quite prosperous and so we decided that there Hestia has been a process by which several nations in and there and the world became prosperous it's not just that they were where they warmed in the Philippines 30 years ago they were a very impoverished nation and they're still impoverished so this has to be something going on a process by which this does or doesn't happen and what we've been trying to do is write this book I thought for those of you who have been able to live your life without studying disruption let me tell quickly why this is important in this context what we can accustom ourselves to do is to describe every industry by a set of concentric circles and the innermost circles represent industries whose people are in our popular are are wealthy and and understand and and skilled and then as you go to the larger circles they represent larger populations of people who have progressively less money and left less skill until you come to the periphery where people like you and I have lived most of our lives without much of even almost all industries begin in the center where the people are prosperous and skilled and the reason is that the first products in most industries are complicated and costly and and that's the logical market for the first products but innovations that make them affordable and accessible so that larger populations of people are able to have access to them our innovations that we call disruption and the white disruption works is we put on the vertical axis the vertical the performance of a product over time in every market there's two trajectories of improvement one trajectory measures the trajectory that by which customers are able to use products and the other trajectory describes how innovating companies have provided improvement products and almost always the trajectory of technological progress outstrips the ability of customers to use the progress and so those of you who would have a bit of gray hair if you go back to the 1950s we had to stop our fingers and let the Intel Toni six chip catch up to us about every 15 seconds because our our fingers couldn't keep pace that the fastest microprocessor couldn't keep pace with our fingers but as intel produced better and better more capable products the the ability of the processor got to the point where they had overshot what most people can use in a similar way today on the left hand side of the diagram most people look at online learning as something that's not nearly as good as the skilled professors that that most of us have aspired to be but if you look outside the door 10 years from where we were today well I think that online learning is interacting direct intercepted the ability of teachers to to teach and it's really quite scary to think that teaching that which at one point was it was just our own and a very near future will overshoot what we as teachers are able to do we call these piece innovations sustaining innovations but they make good products better but there's another type of innovation that we call disruptive innovation and a disruptive innovation allows the company to do more with less and by making it affordable and accessible a large large much larger population of customers are able to use and improve on those products and we call that theory disruption because instead of improving the trajectory it disrupts it by making products that are more affordable and accessible but not as good and that's the theory of disruption it it makes things that are affordable and accessible to become more accessible to a larger population of people one of the companies that are have been successful that our disruption is that they make it affordable and accessible and the people at the high end of the market who make big machines for big people have a very hard time going down market because the profitability just isn't as attractive and that's the the essence of disruption things that are available and attractive to large corporate clients have a very hard time going down market we're seeing disruption going on in an interesting place today and that is with Tesla car because disruption has an opinion about how well Tesla is gonna do we in in our work at our school we decided that for reasons that don't quite yet understand God has never created data for mankind to use the data that is available is available only at the past and it's very hard for people who are like you and I people who want to look into the future we have a very hard time doing it but the problem is God didn't create data about the future and so we had to have some other mechanism by which we didn't and we decided that the only way to see into the future is if we have theory and a theory is a statement of causality a statement of what causes what and why and the nice thing about a theory like disruption is allows you to look into the future without data and that's what we're looking at here so when our students come to class I ask the students to prepare two things for the class discussion one is there's a theory that we want to under to discuss like the theory of disruption and then we want you to put that theory on like a set of lenses and read this case and when you as you read the case I don't want to have your opinion about what's going on in the case I want to know does the theory have an opinion about what's going on let me say it one more time we don't we ask our students not to come to class prepared to to talk to each other about who's right and who's wrong on the the issues in the case but rather we want to discuss does the theory have an opinion about what's been happening and why and want people ought to do and why and so in the case of the Tesla is a car I actually don't have an opinion about whether this nation this company is gonna prosper or not but it turns out that the theory has an opinion about it and the theory says the Tesla going at the high end of the market is going to find up there that maybe they they are in fact better at making better cars than anybody else but there are gonna be other companies up there that don't want to give that up companies like Tesla at BMW Mercedes Audi and Tesla can come in and try but what the theory can predict is that they will be energized the incumbents not to give that up but if you go to the bottom of the market there are other there are other companies down there so the next time of year in Beijing go outside of the hotel room and go to the right or left about 50 feet and there you're gonna see an electric car and it doesn't look like a Tesla it's made out of plastic and go over and touch it and it it feels different but it's an electric car and you might want to take your Park compartment companion with you in this car but you can't because it's not wide enough but it's designed for a car that can go in small in narrow highways where you just put a little bit of stuff in to deliver it to it to a local retailer and then they have to go off and for that application it's really a remarkable machine they sell nearly a half a million dollars a year of electric cars a few of them are sold in America but the vast majority of this market are in China and so the theory says that the people that are gonna win this game are companies who are not in Silicon Valley but rather they're people at the bottom of the market in China who are selling it for a product that historic for which the other option was no car at all and it's growing very fast so we'll see the neat thing about it for me as a professor is I don't need to have an opinion I just said that say what's gonna happen or what the theory says it's gonna happen and this hasn't just happened in working its way through electric cars but it's happened around the world over and over again so can you take us through yeah this is a good man thank you and he's smart thanks clay I yeah taking clays class and working with him over the past few years has really changed my life changed the way I see the world and has given me a lot of hope which is why we wrote this book more on that later but connecting to what clay said the theory of disruption has taught us that there are different types of innovation and his research focused on why big companies fail and how upstarts can come in and up and or disrupt big players but we took that concept and we applied it to the economy and we were trying to answer this question where does growth come from what else prosperity come from does it come when the high-end folks target people with more wealth more skill more money or does it come when businesses organizations and business models target the people at the outer concentric circles and we try to understand that and that gave us a new language for understanding that there's not just one type of innovation there three types and for the language of our book the first type I'd love to talk about today it's called market creating innovations and these are innovations that make products simple and affordable so that many more people in society can have access to them in our language in Prior thing books we've called this disruption right and now we're talking at market creating innovations but the same process making it affordable and accessible so that a larger population of people yes have access to the products yes and remarkable things happen when you develop innovations for these this class of people in our language we call them non consumers right so these are all the people that are not consuming the existing products on the market they are the engines of growth for society as we've as we've studied them now they create jobs and they create jobs because when you make a product that targets many more people that haven't historically had access you don't just need people to make the product you need people to sell them distribute them market them advertise and so on and so forth ok so that's the first type of innovation think about computing 50 60 years ago very expensive only big organizations could afford them today how many people in this room do not have a computer in their pockets exactly and so simple and affordable so that we all could could get access a similar thing happened with cars and we look at cars today as something that you know you just you get while you're in college or after college but about a hundred years ago they were a toy for the rich and only rich people had access to cars but Henry Ford took the price of cars from about ten thousand dollars to roughly three thousand dollars at the time which is about sorry roughly three hundred dollars which is about three four thousand dollars in today's in today's dollars and many more people had accessed two cars when we were college-age we just loved the Toyota Corolla because the largest the the main population of customers who had very little were high schools I've compiled school students like you and I so thank goodness for Toyota yeah I was on the first cars I had and I had an old one so I overheated all the time and needless to say I'm I'm glad I have a better car now the second type of innovation clay has talked about sustaining innovations these are also very important for economic for economies they keep economies vibrant but they make good products better right now with regards to the impact on sort of growth and creating prosperity they create very little net growth and very few jobs so think about it this way if you bought a 2010 or 2018 Toyota Camry it means you probably are not gonna buy 2017 or 2019 camera from the standpoint of Toyota they don't need to build a completely new manufacturing plant if they wanted to upgrade their models they don't need to have new dealerships new sales channels distribution and so on and and so from the standpoint of how it impacts the economy creates little net growth but they're important because they keep the company vibrant and they keep the economy vibrant as well okay and a third type of innovation equally important but has a different impact on the economy our efficiency innovations now these are innovations that make good products cheaper they make them more efficiently and the purpose of this type of innovation is to release cash flows for companies so this is when you you know outsource your manufacturing from one region to another to take advantage of either taxes or lower wages this is when you use a new technology to improve the efficiency with which you make certain products but you're still selling those products to the existing customers one of the markets that allow consulting firms to become pro so prosperous our efficiency innovations you as a client can bring in Deloitte say we'll give you a ton of money and we need you to increase our free cash flow from this to that and that those kinds of projects our efficiency innovations and as you're saying they don't create growth they eliminate growth so that when you look at this population of three types of innovation they each have a purpose yeah and we have to meet remember which is targeted at one absolutely and so then I mean no innovation here is bad but we have to understand the purpose as clay has said all right so I'll give you an example I'm sure many of you here had had a you know maybe a difficult time picking what am I gonna wear today right because we have a plethora of different clothing options that wasn't the case for Americans 150 years ago most of us at the time would had one pair of clothing we would wear it all day all night and wash it maybe once a week once every few weeks an Isaac finger who's an entrepreneur and inventor figured out how to make the sewing machine simple and affordable at the time it took women where for the ones who sold a lot to took the woman about a day to get sew a shirt after the Singer sewing machine came on the scene that time was shrunk to about an hour and all of a sudden singer had a problem on his hands because many people wanted this sewing machine and so he had to figure out where he was gonna find people to make them to sell them distribute them service them teach people how to make them and for every job he created in terms of making the sewing machine about between five to eight jobs were created in the economy because now that you've made a lot more sewing machines we've got many more people who are going into fashion design you've got many more people who are now servicing the machines teaching people how to use them selling them and so on and so forth and so that was one of the biggest engines of growth in the United States in the mid-1800s but this didn't just happened in the US also happened in other countries one of them is Korea which is where I left half of my heart when I got my calling there by any measure it was a desperately poor country and there was a company there called Kia I don't know if any of heard of these guys and at the beginning they started at the very bottom of the market with simple products that had just three wheels but that was one less wheel to brain they sent me home in 1974 and I I just fell in love with the idea of coming at the bottom of the market and I studied this every course that I could at BYU I then went to BYU to Oxford and studied development from the perspective of the low end of the market I I studied that in Oxford as deeply as I could then I went to the Harvard Business School so that I could study it there and my hope was to get a job at the World Bank and spend my life helping people in impoverished nations to prosper and then when I graduated from HBS the World Bank wasn't hiring Americans that year and so I had to work for BCG instead but I've I've continued to puzzle myself about this why does the low end have this pattern and it turns out that that's the way it works in industry after industry and so in the case of Tesla they started at the bottom they've gone to the top the buses were also made by Tesla that you can see on the left-hand side it had three wheels also but you could go anywhere in Korea and you met you sat next to a lot of interesting people when you're on the bus in Pusan but in both cases Tesla and they have become better and stronger to do more and more and so Korea became prosperous but they weren't always prosperous when you are in Korea the worst thing you could ever imagine doing to you is to have to be there in July and August when it is just sultry hot humid you spend your life telling people that they should believe our gospel and people just rejected you day after day they need to go home at the end of the day just sweating buckets and our stink president our mission president had figured out how much the minimum language clothing the missionaries had to keep on in order to for them to stay within the guidelines and so we come home at the end of the day to take all the clothing off put ourselves on the bare floor and pray to God that he would give us a breeze and you can see there what the breeze what would the air-conditioner wasn't Korea was a fan and then one day I'm a member coming out of the door and they were they were building a new building not very big up the road so I just went out running down to ask these guys what they're about and the guy said oh we have a new industry or a new product have you ever seen it and he he put this product out and it was a fan and it went like this and I remember thinking finally God has answered my prayer and this company is known as Samsung and they had to hire a few people but they started in Busan with the simple product so I'm from Nigeria and often times when I meet people they say in Nigeria you guys have a lot of oil it's a lot of potential but you know still languishing and in poverty well it turns out that when you begin to look at that industry the resource extraction industry through the lens of the three types of innovation you learn something new I learned something new the job of an oil company is not to go into a country and create as many jobs as it can and create sales distribution advertising marketing and so on their job is to invest as aggressively as they can in efficiency innovations because they're creating a commodity product that whose price is set on the world markets and they want to do it as efficiently as possible they want to do it with as little expenditure as possible so their job is really to eliminate eliminate jobs the purpose is to eliminate jobs and so you begin to find that part of the reason we don't get a lot of growth jobs and prosperity from many countries that are focused on resource extraction is because the type of innovation that that industry promotes is primarily efficiency innovations and that's not the job one of the biggest insights we learned as we were doing this research is the idea of pushing solutions versus pulling solutions I'll explain what that means the story that I told them to be sure that you don't go and imagine that what you see in Lagos comes from the perspective of the sixteenth floor of the Hilton that's right as you gotta find where those where are those missionaries and let me watch how they live how they live their lives that is true they showed me parts of my country I've never seen but it was a great it was a really good experience about ten years ago I got a group of friends to start an organization called poverty soaps here now the reason we did that was I went into villages in 2008 and I saw poverty firsthand I saw this picture was from that trip so people didn't have access to water these women had walked miles to the banks of this river to wash clothes and I felt it was sort of my duty I was in the US and I was prosperous it was my duty to provide them with water so I got a group of friends together and we raised money and we built a well push the well onto the community a few months later I got a call that the well was broken I was back in the US and I wasn't sure really how to fix it and then as we started doing this research we realized that a lot of solutions to development follow this approach we see a lack of water and we say let's provide wells the lack of education okay the answers got to be schools so we provide schools lack of health care we build big hospitals and try to find where doctors are lack of infrastructure and roads and bridges and so on and even a lack of honesty and so what is corruption right in in many poor countries we try to teach them institutions and laws and so on and we're pushing spending billions of dollars pushing pushing pushing these solutions but they often are not sustainable they don't create the kind of prosperity that we hope a different way to think about it right is the concept of pulling now on the screen you see a 20 cent pack of noodles there's sort of like ramen noodles which I'm sure many of you ate while you were at BYU or in college but this is our version in Nigeria that's a 20 cent pack of noodles and 30 years ago two brothers decided to go to Nigeria and create a new market for noodles at the time many Nigerians thought there were being fed worms because we didn't but he made noodles it wasn't a staple food but over time they have made this product simple affordable and accessible to millions of Nigerians and just look at all the things it is pulled into the economy it has created thousands of jobs enabled tens of thousands of other jobs it has brought in close to half a billion dollars in investment in the country run 13 factories they fund electricity they create electricity for their factories water treatment sewage and so on and that began to give us the idea that pushing solutions is not the best way to get prosperity instead if we create products that are simple and affordable target a mass but mass of people in society as we create those markets they're going to pull in many of the things that our reaction just sort of tells us to push it didn't just happen in Nigeria so we profile a lot of different innovations in the book one of which is a chain of diabetes clinics in Mexico so many of you may not know but Mexico has a huge diabetes problem but it's also really expensive to treat the disease and the average Mexican can't afford the treatment cost about $1,000 and to go to different different clinics and the guy who started clinic ass Dale azúcar was actually a former student of clays that's the whole story he do so is a very capable man came to Mexico for a month today and Harvard didn't let him in and it just didn't feel right this is a very capable guy and so I talked to the head of our Admissions and he she wouldn't budge and it made me mad and so I decided I'll offer my course at MIT instead which I did and this guy went to be SSC through that the back door yeah and he took the course there and he learned the different theories in the class and he said he had an idea before he took the course to go back to Mexico create a non-profit ask for donations so that he could fund diabetes treatment for many people who are suffering from the disease his mom also suffered from diabetes after he took the course he said I'm gonna change my idea instead of starting a non-profit and figuring out how to fund diabetes care for many of my fellow citizens I'm going to create a business model that makes it simple and affordable so that many people many more people can have access to diabetes treatment and now he has created the largest chain of diabetes treatment in Mexico it's growing gangbusters and they're treating tens of thousands of Mexicans every year he has reduced the cost of diabetes treatment from a little over a thousand dollars where a patient would have to go to different hospitals and clinics meet with different specialists to roughly 250 and he is created an integrated solution where you go into one clinic and you meet with all the specialists you need to meet with he's creating hundreds of jobs but what's interesting is he's now inspiring copycat so all the people who said this would never work what are you doing it's not gonna happen I'm now copying his business model and that's one of the most impactful things that happens when you target non-consumption create a new market and have a business model that's successful it's I always wondered why white is Mexico struggle to prosper and they're doing much better than they have done historically but nonetheless you wonder why did this happen and the model of disruption has really helped us because what it helped us see is that companies in America that look at Mexico as a as an opportunity for efficiency innovations can put their money into Mexico and suck it up for everything that they have and then if there is a cheaper place to make it in Vietnam the money just picks up the self up that goes around goes down there I do and create efficiency innovations there but very few of these investments were to create local permanent jobs where the people who are in the ground designed the products by Mexicans manufactured them by Mexicans efficient did distribute them by Mexicans and those kinds of innovations are permanent they're permanent whereas the Mexicans that come in is in as efficiency innovations can be very temporary in character and so it's been interesting to see where this might be one of the most inspiring things to look at is is there non-consumption if also mentioned this is a concept remember I we offer the three circles and what you have to do to see opportunities in growth in this way of thinking is to look at the outer circles and ask yourself is there a place in Nigeria or Peru where there is non consumption meaning people need to compute but they don't have a computer or they need a car to get this from here to there but there's no car and we call that non-consumption if you just go up with your calculator and a check you you you you calculate how much consumption there is but when you see consumption it's rare that we'll turn ourselves around from the other perspective which is where is the non consumption you know in many instances the size of the non consumption market is actually a lot bigger than the market for consumption and thinking about it in that way is really important well you guys have been patient with this one question or two and then you need to give us off the stage yes you have a question yeah we have and the answer is that when you run into really complicated problems like you've articulated this the most important straightforward answer is to quit your job and become a professor at the Harvard Medical News because all we have to do is talk we don't have to do anything but there's a there's of the theories in our toolkit can help us with that and three of them are in particular important and there's a book about this called competing against luck that would be helpful for you so the first one is you need to find is they're not non-consumption because if there's non-consumption it's hard for the Mexico for that government to stand in the way of non consumption then there needs to be interdependencies because almost always when an innovation fails it's not that that stick it's step in the process failed but something right next to it in the stack failed because you never thought about it before and so it appears as if the government is standing in its way in reality it is you know we should have thought about this or that or that and so finding opportunities where if it is non consumption and where there are not too many interdependencies then that's a great question thank you yes is this gonna be in a useful question a useful question okay will judge so it's not inaccurate but it's incomplete right after the Asian Tigers so Korea Taiwan Singapore Hong Kong were emerging as big powerhouses economists said look at how they've grown they looked at the macro numbers and said it's an export-led growth and so that became the dominant economic theory that that was pushed to other countries industrialized create exports and you're going to grow before that it was import substitution policies and then they tried that in Latin America didn't quite work it's like ok it's now export led growth and they've been trying that and it's not working the critical piece that they're missing is it's not just about attracting capital building factories creating efficiency innovations but it's about creating local markets creating the distribution sales marketing and so on that actually leads to growth but that also leads to learning it leads to organizations in countries no longer exporting just t-shirts or mosquito coils and so on but they're now exporting more sophisticated products and services and so if I just saw and with it if you look at Singapore Singapore's is as an interesting country because it's small and when you look at the numbers it's all export all right it's they've they've grown largely through exports but when you start to look at what they were exporting 5060 years ago they were exporting t-shirts toys mosquito coils but today you have biotech companies that have the headquarters they're BMW Novartis and so on and so that just export lead efficiency base growth it's not inaccurate but it's incomplete aren't I say it's incomplete but most importantly it's its correlation not cause allottee and that's what we're trying to a serie is useful if people find opportunities to just to find anomalies to the theory and we have to fight that as we develop this new theory of disruption is it we have to find correlation and supplant it with causality yeah well you guys thanks for your help to be here we still are working at Harvard I think this book comes out in January and in contrast to some of the other books whose primary purpose was to Follies make you fall asleep when you read it at night I think this is gonna be a good book so god bless you you [Applause] you

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Length: 49min 12sec (2952 seconds)

Published: Wed Feb 13 2019