Clayton Christensen Wants to Transform Capitalism

Clayton Christensen Wants to Transform Capitalism

Photo: Joe Pugliese/August

Clayton Christensen Wants to Transform Capitalism

Photo: Joe Pugliese/August

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Tablet LinkThis insight—that managers might actually scuttle the ship by following the navigational chart laid down in business school—shifted the way people thought about innovation. Christensen's book soon became required reading in Silicon Valley, where it has been championed by the likes of Steve Jobs, George Gilder, and Andy Grove. Christensen has since applied his theories to industries ranging from health care to higher education, always attempting to teach people how to think about business rather than what to think. "I don't have an opinion," the Harvard Business School professor and devout Mormon often says, "but the theory has an opinion."


Jeff Howe: You've founded a company. You've worked at the White House. And now you teach at the most prestigious business school in the world. Are you disappointed that you didn't achieve your original ambition—to be a journalist?

Clay Christensen: The head of the journalism department at BYU told me to study a real field instead. I wound up in economics, thinking that would eventually take me to The Wall Street Journal.

Howe: But you became an executive.

Christensen: I helped start a ceramics company called CPS Technologies. We took it public in 1987 at $12 a share. Three months later there was this horrible cliff, Black Monday. Fidelity had bought 15 percent of our stock, and their algorithm caused them to dump it all onto the market that day. We dropped from $12 to $2. There's this great children's book called Alexander, Who Used to Be Rich Last Sunday, and that was us. I started to think, jeez, is this really what I want to do for the rest of my life? I think the CPS board was asking itself the same question. They fired me, and I'm so glad they did.

Howe: And you wound up studying at Harvard.

Christensen: It was already the third week in September. Classes had started. But one of the board members for CPS, Kim Clark—a future dean of Harvard Business School—called the head of the doctoral program and said, "I've got this guy. He's smart. Can you admit him?" That was on a Friday. So instead of going in to work on Monday, I showed up at Harvard as a PhD student.

Howe: And then your dissertation ended up on the best-seller list? Not bad.

Christensen: It became Innovator's Dilemma, yes. I brought one big question with me to Harvard. Why do smart companies fail? It was clear that CPS, which made advanced ceramics—silicon nitride—was going to make it. But there were big companies like GE that had spent more than $100 million trying to make ceramics into a business. They all stumbled and withdrew. I couldn't attribute it to stupidity; they're all smart people who knew so much more about business than I did. That's where the basic puzzle came from. How did these big, smart businesses fail and not CPS? I had my dissertation all laid out. I was going to study mechanical motor drives—the switches that turn an engine on and off. The industry had gone through upheaval as the mechanical switches were replaced by electronic ones. Then one of the faculty said to me, "Check out disk drives. I think the same phenomenon happened there too."

Howe: Disk drives: The fruit flies of the business world, I think you called them.

Christensen: Right. I didn't know anything except that disk drives were a thing inside a computer. But it turned out disk drives have really short lifespans. Every few years a new innovation turns the industry upside down. I kept seeing mentions of something called the Disk/Trend Report. It was published by some guy in Mountain View, California. It turned out that he had data on every disk drive company ever organized, whether it sold a product or not. He had the background on the people who started them, on the technologies themselves, sales by product line, everything. My kids helped me put it all into a spreadsheet. You could see how, in each generation, an established company would start focusing on bigger, more powerful disks for the top end of the market and then just get wiped out when the lower end of the market found a way to make smaller, cheaper disks, even though those had lower profit margins. It made my thesis. Smart companies fail because they do everything right. They cater to high-profit-margin customers and ignore the low end of the market, where disruptive innovations emerge from.



Howe: What did Grove say?


Howe: What did Intel wind up doing?




>A woman told Andy Grove, "You have to read this guy. He says Intel is going to get killed."

Howe: Why is higher education vulnerable?

Christensen: The availability of online learning. It will take root in its simplest applications, then just get better and better. You know, Harvard Business School doesn't teach accounting anymore, because there's a guy out of BYU whose online accounting course is so good. He is extraordinary, and our accounting faculty, on average, is average.

Howe: What happens to all our institutions of advanced learning?

Christensen: Some will survive. Most will evolve hybrid models, in which universities license some courses from an online provider like Coursera but then provide more-specialized courses in person. Hybrids are actually a principle regardless of industry. If you want to use a new technology in a mainstream existing market, it has to be a hybrid. It's like the electric car. If you want to have a viable electric car, you have to ask if there is a market where the customers want a car that won't go far or fast. The answer is, parents of teenagers would love to put their teens in a car that won't go far or fast. Little by little, the technology will emerge to take it on longer trips. But if you want to have this new technology employed on the California freeways right now, it has to be a hybrid like a Prius, where you take the best of the old with the best of the new.


Christensen: From my first year on the faculty, there was always so much more I wanted to impart to the students. I decided that rather than waste the last day of class summarizing the semester, I'd spend my time talking about what I'd learned in life that was useful. It was very much a monologue from me to them. We spend the whole semester learning theories, and you know that a theory is good if it's applicable at every level. And my point on this final day is that there are useful theories you can apply to your personal life as well. One year I was asked to deliver that lecture to the entire graduating class, and the book emerged from it.

Howe: So how should one measure one's life?

Christensen: By asking yourself a series of questions. How can I be successful and happy in my career? How can I be sure my family and close friends are a source of enduring happiness and joy to me rather than a source of unhappiness and heartache? How can I be sure I stay out of jail?—a shocking number of my business colleagues went off that rail. What do we have to do differently today if we want different outcomes in our lives? There is a theory about deliberate and emergent strategy. The deliberate strategy allows you to choose the kind of person you want to become. But at the same time you need emergent strategy, which allows you to embrace serendipity. Another important theory is about what motivates people. Many think of management as cutting deals and laying people off and hiring people and buying and selling companies. That's not management, that's dealmaking. Management is the opportunity to help people become better people. Practiced that way, it's a magnificent profession.

Howe: You're working on a new book now, right? The Capitalist's Dilemma. How is that related to the Innovator's Dilemma?

Christensen: I wrote a piece for The New York Times just before the election. I was wrestling with a paradox. If you look at the financial measures of prosperity in the economy, things seem to be going just great, especially company balance sheets. They haven't been so strong in decades.

Howe: High market caps all around.

Christensen: It looks like the economy is emerging from the recession in an exciting way, but we're not creating more jobs or income for the average person. And in all humility, I think I articulated a simple model that explains why. The bad actors are business school professors like me who have been teaching people what I call the Doctrine of New Finance. We've encouraged managers to measure profitability based on a return on net assets, or return on capital employed. That encourages companies to liberate their capital, so they invest in efficiency innovations, which means they can make more money with fewer resources. But what the economy ultimately needs are empowering innovations—like the Model T, the transistor radio. Empowering innovations require long-term investments, which tie up capital for years and years. So companies are using capital to create more capital, and consequently the world is awash in capital but the innovations we need to advance aren't there.

Howe: What's the solution?

Christensen: I don't know the solution, but I believe solutions exist. The government can't dictate, "Oh, that's an empowering innovation and that's not." But what government can do is create tax rates that transform what I call migratory capital into productive capital. Migratory capital flows to investments that will maximize the speed with which it can then be withdrawn, which plays to the doctrine of new finance. Productive capital wants to stay on the job and not go truant after 366 days.

Howe: Can we structure a tax code that encourages that?

Christensen: Absolutely. The idea would be to peg a tax rate to the length of time the capital is deployed. The longer the capital is invested, the lower rate it's taxed at, until it gradually approaches zero and maybe goes negative.

Howe: In the end do you feel you study business, or do you study the world through the lens of business?


Contributing editor Jeff Howe (j.howe@ is the author of Crowdsourcing and a professor at Northeastern University.