Clay Christensen, the Harvard Business School professor and best-selling author of “The Innovator’s Dilemma,” didn’t beat around the bush in a recent conversation about the challenges that confront executives responsible for innovation at established organizations. Less than a minute into our interview with Christensen, he said:
“My sense is almost all of them will prove to be wasting time for the company, and they will fail.”
That’s a scary pronouncement from the man who developed the theory of disruptive innovation, and who has been dubbed the world’s most influential management thinker. And when we asked him if he’d accept a Chief Innovation Officer job at a large, established company that had been around for several decades, his reply: “Never in a million years.” (Christensen is also a co-founder of the consulting firm Innosight.)
But underneath the pessimism is pragmatism. Christensen points to three foundational problems facing innovation leaders and CEOs who want to promote innovation:
- 1. A misunderstanding of what constitutes a disruptive innovation versus a sustaining innovation, and just how difficult it is to do anything disruptive within an established organization.
- 2. Relying on metrics like return on net assets and internal rate of return, which encourage the pursuit of projects with near-term payoffs, rather than long-term investments necessary to create new products, services, markets, and customer bases.
- 3. CEOs and innovation executives don’t understand the “corporate laws of physics” in enough detail: why a certain kind of product can be developed by one business unit but not another, what motivates the sales force, etc. They believe that by creating a Chief Innovation Officer role, or by “celebrating” innovation, they can will it to happen more regularly.
We explored those issues and more during a mid-December conversation in Christensen’s office at Harvard Business School. Highlights and audio are below.
The Fate of Innovation Executives at Large Companies
My sense is almost all of them will prove to be wasting time for the company, and they will fail. The reason why is that the vast majority of people know of the existence of a phenomenon called disruption, but they actually do not truly understand it on any level. So they use the word to justify whatever it was they wanted to do in the first place.
There are a few companies that take the time to understand the theories, and the results are just remarkable, like [data storage firm] EMC Corp. buying Data General and VMware. What I don’t understand is, if you have a theory that truly has shown to be predictive — why people think they’re so smart that they don’t have to take the time to learn it. That’s the puzzle in my mind.
The Importance of the Salesforce
What the sales force can and cannot do has a huge impact on what the corporation can and cannot do. When EMC bought Data General [in 1999], they bought a billion dollars of revenue, a sales force, channels to the market. [Both companies make data storage systems.] The question was, do we integrate or not integrate? The salesforce of EMC was just determined that there would not be two salesforces. EMC fired the salespeople for Data General, and they gave the EMC salespeople the responsibility for selling [EMC] systems that sold for $1 million to $3 million, and [Data General’s Clariion systems, which] sold for $50,000. If you’re the sales guy, what are you going to spend their time on? Within six months, a billion dollars of revenue evaporated to zero. They still had the product, but no customers. They came back in six months. What they were going to do next was give the sales force a financial incentive to push the low end. My gosh, the incentive worked, and the sales force went after the low end — became very successful — but the sales of the core business fell off the cliff. You simply can’t ask the salesforce to do things that are inconsistent. They needed to find a salesforce that would be excited to sell a $50,000 machine. They [talked to] Dell, [whose] salesforce would love to sell [the less expensive Clariion systems]. They put Dell’s name on it, and it exploded. That business grew to account for 70 percent of [EMC’s] storage systems.
Measuring the Wrong Things
The other thing is how do you measure profitability as a company. In finance, they’re taught that internal rate of return (IRR) is absolutely a critical metric by which you measure how efficiently you are using capital. There’s another one called return on net assets (RONA). Both of these measures are fractions. In a fraction, there’s a numerator and a denominator. The numerator is profit. So if I want to get higher IRR or RONA, I can make more profit. That comes from innovation. But if that’s hard, then I can get that measure up by reducing the denominator. I can outsource everything and get assets off the balance sheet, and RONA goes up. Getting assets off the balance sheet is a lot easier [than innovation]. If you invest in things that pay off in the short term, IRR improves. If you, on the innovation side of the house, decide that you’re going to create a growth market or a growth product — if those things pay off in five years, the pursuit of IRR kills you. How you measure success completely dictates what you can invest in. If [CEOs and innovation leaders] don’t change that, then any kind of [innovation executive] — they have no hope. They truly have no hope.
The CEO Doesn’t Have a Magic Wand
If the CEO understands all of the processes and vectors and forces and constraints and measurements [in his company] perfectly, he can do remarkable things. But the majority view of the CEO is that they don’t have time to learn all of those things. “I sit on top of the company, and if I will something to be so, it is so.” That’s the problem. If you understand how the resource allocation process works, and how the salespeople are compensated, and where are we in the transition from closed to open [technology platforms], and all of these things — oh my gosh — you truly can be successful at innovation over and over again.
Why I Wouldn’t Take a Job as CINO
So many of the decisions that need to be made aren’t within the realm of a chief innovation officer.
The job of a CEO or a business unit head is to source, assemble, and ship numbers. A couple of years ago, they negotiated with the corporate finance people what these numbers are going to be. So if I [as a chief innovation officer] have a new innovation that has great potential, and I’m trying to find out what business unit can take this innovation and run with it, if that business unit doesn’t help the operating company deliver the numbers, then they can’t run with it, despite what its potential might be.
Would I take the job of [being] head of a business unit? I might. But again, if I understand all the rules of the universe perfectly, and there are factors that I don’t have under my control, then I wouldn’t do it.
Trying to Measure the Innovation Pipeline
Innovation is not innovation. There is one type of innovation we call sustaining innovations. They make good products better. If you don’t do them, your competition will knock you out. But by definition, sustaining innovations don’t create jobs or growth. If I convince you to buy our new product, you don’t buy our old product. It’s disruptive innovations that make complicated, expensive products into products that are affordable and accessible. They create growth. [If your innovation metric simply looks at how many innovations are in the pipeline, or are introduced each year], what are managers going to do? The way you’ve defined it, they’ll invest in sustaining innovations. But [those] don’t create growth.
Understanding the Corporate Laws of Physics
The CEO and the people at that level need to spend their time understanding the laws of physics. If they do, then all of the things you hope for, they can achieve. But if you think you don’t need to understand the laws of physics, and you just say, ‘We’ll have an innovation executive,’ at some point, you blow up and you fail.