Tuesday, June 17, 2014

The New Yorker disses Clayton Christensen

The New Yorker has a article criticizing Clayton Christensen and his theory of disruptive innovation. It's snarkily written and the author has an axe to grind: in some parts, it's less a critique of Christensen than a moral indictment of Silicon Valley, with the author writing that "innovation is the idea of progress jammed into a criticism-proof jack-in-the-box."

Nonetheless, the article makes some interesting points. Its most damning claim is that the case studies Christensen uses in his first book, The Innovator's Dilemma, distort business history so that it fits his theory. One of Christensen's big ideas is that established companies have various institutional biases that prevent them from capitalizing on disruptive innovations, but the article says that isn't so:

Seagate didn’t start shipping 3.5-inch drives until 1988, and by then, Christensen argues, it was too late... In fact, Seagate Technology was not felled by disruption. Between 1989 and 1990, its sales doubled, reaching $2.4 billion, “more than all of its U.S. competitors combined,” according to an industry report...

In his account of the mechanical-excavator industry, Christensen argues that established companies that built cable-operated excavators were slow to recognize the importance of the hydraulic excavator, which was developed in the late nineteen-forties. “Almost the entire population of mechanical shovel manufacturers was wiped out by a disruptive technology—hydraulics—that the leaders’ customers and their economic structure had caused them initially to ignore,” he argues. Christensen counts thirty established companies in the nineteen-fifties and says that, by the nineteen-seventies, only four had survived the entrance into the industry of thirteen disruptive newcomers, including Caterpillar, O. & K., Demag, and Hitachi. But, in fact, many of Christensen’s “new entrants” had been making cable-operated shovels for years. O. & K., founded in 1876, had been making them since 1908; Demag had been building excavators since 1925, when it bought a company that built steam shovels; Hitachi, founded in 1910, sold cable-operated shovels before the Second World War. Manufacturers that were genuinely new to excavation equipment tended to sell a lot of hydraulic excavators, if they had a strong distribution network, and then not do so well. And some established companies disrupted by hydraulics didn’t do half as badly as Christensen suggests.

I read The Innovator's Dilemma a few years ago and thought it was very interesting, but I took its accuracy for granted. Now I have no idea. Some people have criticized Christensen for applying his theory to various markets where it doesn't fit-- medicine, education, consumer products-- but this is the first wholesale rejection that I've read.

In my review of The Everything Store, I said that Barnes and Noble's failed entry into online retailing sounded like an illustration of Christensen's theories. But maybe the reasons for B&N's failure were more complex, and the book only portrays it as an inability to harness disruptive innovation because that's what the dominant theory predicts.

The article has made me question a lot of assumptions. It will be interesting to see what kind of responses it gets.

7 comments:

  1. One of the big conflicts that I’ve observed in life is that between story tellers and people who are truly interested in understanding reality.

    Those interested in stories inevitably distort reality to fit into stories. I deliberately didn’t read Christensen as I was worried about this (though I don’t know whether my concern was justified).

    You may enjoy “Only the Paranoid Survive” by Andy Grove. It focuses on a similar concern regarding incumbents and strategic inflection points—and how incumbents tend to miss them.

    As I understand it Grove, former boss of Intel, was something of a mentor to Steve Jobs. So between Jobs and Grove’s own experience keep in mind how complicated the world is when reading this book. “Only the Paranoid” was written around 2000 and has many case studies, including some on how Apple is a failure. This may seem quaint now, but the world has a high dose of randomness and complexity. This is something story tellers tend to forget.

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    1. Thanks for the recommendation- the book sounds interesting. You probably know this, but Grove is actually a big fan of Christensen's ideas and credits them with helping Intel fend off AMD/Cyrix.

      In a way, I think that storytelling is a necessary evil. Economics and business strategy can't be reduced to iron-clad scientific laws, so their practitioners have to use inferior methods like case studies, analogies, etc. to make sense of things. It's very flawed and prone to bias as you mention, but I'm not sure there's a better way.

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  2. Certainly stories are necessary evils in many cases.

    My more subtle point is to think about the underlying generator. This ties in with many things in life, probably the most popularized in finance is that of survivorship bias… but I think in so many things in life you need to think about the generator—i.e. if someone presents you with a sample or a collection of stories, how did that set of information come to you?

    My sense is that if the generator (in this case the person) is really interested in the underlying reality, he or she will give you a much richer representation of reality, than someone who deep down really just likes telling stories and/or reaffirming their biases / credentials. Naturally, attribute substitution, confirmation bias and a whole host of other psychological issues come into play here. But the key thing is to focus on the generator.

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    1. "But the key thing is to focus on the generator."

      The problem is that Christensen comes across as a truth-seeker in The Innovator's Dilemma. (If I'd known that he'd written a bunch more books, turning disruption into a Theory of Everything, I would have been more skeptical.) It gives the impression of being a lot more realistic and analytical than the typical business book.

      My takeaway is that it's hard to judge something without have a lot of relevant knowledge. Christensen's account of the excavator industry seemed very plausible, but The New Yorker brings it into question. I really don't know enough to say which is right.

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  3. Christensen responds:
    http://www.businessweek.com/articles/2014-06-20/clayton-christensen-responds-to-new-yorker-takedown-of-disruptive-innovation

    He's mad at Lepore (I don't really blame him) but doesn't say anything about her criticism re: the excavator industry and the disk-drive industry, which I thought was the most damaging part of the article.

    His comment about steel unions not being "significant explanatory factor" because labor is only 5-7% of steel production costs rings hollow.

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  4. As for Christensen, I don’t really know. This stuff is a lot like poker where you are trying to evaluate the other players. My sense with him has been that he is a business professor who has been making a disproportionate amount of his income from top selling books. He seems like a good guy but the profile always struck me as one far more conductive towards pushing a pet interest and/or something that sells. I am generally very skeptical of much of the business press for this reason. That was enough for me to look elsewhere.

    To mangle a Buffetism, I tend to believe:

    ‘when you take a good person and immerse them in a system with bad incentives, it is usually the reputation of the system that stays intact.’

    Rightly or wrongly, Grove always struck me as someone who has a deep inside knowledge of what he is talking about, is already plenty famous and rich, and had that rare attribute of critical introspection.

    Again, I don’t really have a view on Christensen – I have long been skeptical but neutral.

    That said, I thought the Lepore article had an overwhelming amount of flaws. The most basic, relates to writing an article that is delving into financial returns and investments, yet she is clearly not financially sophisticated. At many points the article talked about things like sales growth, net income, and even an exit sales price, and it did these things over fairly long time horizons. Yet not once did the article ever contemplate how much capital was consumed by these business and/or ROIC during this time. It’s a bit like writing about how much more interest someone earned in a savings account this year relative to last year, while neglecting to mention whether that the person quintupled his or her principal contribution at the beginning of the year. (The analogy seems a lot more salient when the fed funds rate is around 5% vs. near zero, though.)

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    1. "That said, I thought the Lepore article had an overwhelming amount of flaws."

      It's definitely a hatchet job, but I think it makes a few good (or at least valid-sounding) criticisms despite the flaws.

      "The Innovator's Dilemma" never mentions ROIC or capital intensity, so I'm not surprised that the article doesn't mention them either. My sense is that business books are written more for managers than investors, so the focus is always "which company won?" rather than "which company's shareholders won?"

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