When Digital was thriving, people attributed its success to sound management practices–and when the company suddenly collapsed in the 1990s and was bought by Compaq Computer Corp., one of the new market leaders along with Dell, some of these same people attributed its collapse to poor management, Christensen said.
“How can smart people suddenly get so stupid?” he asked. His answer: It wasn’t management’s fault; it was disruptive innovation. “It’s actually the principles of good business management that assure each company’s ultimate demise,” he said.
The early PCs weren’t very good, Christensen explained, which is typical of the first wave of products to take advantage of any innovation. And as all good companies do, Digital listened to its customers, who were saying this very thing. As a result, Digital decided it wasn’t worth changing its business model.
In effect, the company’s managers had to choose between making good products with a high profit margin, using a well-established business model; or scrapping that model–an extremely risky move–and making flawed products with a much smaller profit margin. Of course, sound business management practices said they should choose the first option…and the rest, as they say, is history.
A few companies have broken this model and continued to thrive after a disruptive innovation has occurred, but they’ve done so only by setting up a completely independent business unit, Christensen said–in effect, giving it a charter to compete against (and kill off) the parent company.
As the only mainframe company to survive into the PC era, IBM made the transition by creating a separate business unit for making and selling PCs, he explained.
Taking this idea one step further, Christensen noted: “A corporation can evolve, but the individual business units within it cannot.” That raises an important question for those who seek to reform education: According to this theory, a school system, too, can evolve–but can the individual schools within it?
Expensive failure always results when disruptive innovation is framed in technical rather than business-model terms, Christensen said.
For example, take the transistor, which ultimately replaced the vacuum tube in radios and TV sets.
In trying to make early transistors good enough to work with these older models, Christensen said, the market leaders in vacuum-tube radios (such as RCA) spent the modern equivalent of billions of dollars in research and development. In the meantime, Sony came along and transformed the marketplace with its invention of the pocket radio.
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