I admit that I’m mystified by Jill Lepore’s article in the New Yorker attacking Clayton Christensen and his theory of disruptive innovation. Not only does it have a meanness that isn’t warranted, but it leaves the reader with an unanswered question: if Clay's theories are not helpful (and I still believe they are), how do we explain the cascading disruptions that are playing out in markets and industries around the world?
Some of the commentators may be right: perhaps this article is better read as the most recent manifestation of the cultural conflict between the humanities-driven East and the technology-driven West. The irony here is that the conflict is specifically between two professors at Harvard University – one based on the east coast of the Charles River and the other based on the west coast of the Charles River.
Clay Christensen has offered a rebuttal of sorts in an interview here. He does a good job of responding to some of the specific factual issues in his case studies highlighted by Jill Lepore and emphasizes that he continues to evolve his theory of disruptive innovation based on new research. But perhaps his best question is why she didn’t simply call him up or walk down the street to visit him before writing the attack to see if he might be able to clarify his position and his fact base.
I want to step back and use this controversy to underscore some key points that have been largely ignored in the recent discussion.
The systemic rise of disruption
First, while Jill Lepore might have issues with Clay’s specific theory and some of his case studies, she seems unwilling to acknowledge one basic fact of life: disruption is occurring with increasing frequency in the business world. Whether it is good or bad, it is happening and becoming increasingly widespread.
For the purpose of this posting, let me define disruption simply as the sudden demise of leaders or incumbents in particular markets or arenas. This demise is typically brought about by one or more players adopting a different approach to a market or arena that represents a significant challenge to the established position of existing participants. Disruptions turn the assets of incumbents into potentially life-threatening liabilities.
We all know the iconic cases of disruption casualties, including such large and well-known leaders as Kodak, Borders, Digital Equipment Corporation. But those are just the tip of the iceberg. There’s mounting evidence that disruption is spreading.
One of the issues with a case study approach is that it obscures the more fundamental and systemic trends and patterns that are playing out around us. When we pull back from individual stories and scan the world around us, it becomes clear that something very profound is happening - and it's largely escaped notice.
One of the metrics in our Shift Index looks at what economists call topple rate – the rate at which leaders fall out of their leadership position. In this case, we focused on the rate at which public US companies in the top quartile of return on assets performance fall out of this leadership position. Between 1965 and 2012, the topple rate increased by 40%.
OK, but the skeptic might reply that this is only about financial performance. Another more significant measure of fall from leadership position is provided by my old colleague and mentor, Dick Foster, who looked at the average lifespan of companies on the S&P 500. In 1937, at the height of the Great Depression and certainly a time of great turmoil, a company on the S&P 500 had an average lifespan of 75 years. By 2011, that lifespan had dropped to 18 years – a decline in lifespan of almost 75%. At the same time that humans are significantly increasing their lifespan, large companies have been heading rapidly in the opposite direction.
So, the bottom line is that leaders are toppling with much greater frequency. Sure, some of that toppling may be the result of incompetence or mistakes made by senior management but, to explain away these trends, one would have to believe that management is becoming significantly more incompetent over time.
It's also clear that some of the toppling is the result of the natural process of market competition. As Joseph Schumpeter famously observed, markets are a powerful engine for "creative destruction" - they invite competitors with a better idea or a better approach to come in and challenge incumbents. It happens all the time. But the key question on the table from this more systemic view of disruption is: why is it increasing so dramatically over a long period of decades?
This is where I found Jill Lepore’s essay most wanting. It’s easy to criticize an existing theory, but even assuming that this one doesn’t work (which I don’t), what’s the alternative? What’s going on? Jill Lepore certainly doesn’t venture an alternative theory and she clearly believes that the phenomenon of disruption is far too over-hyped. Without rushing to the defense of the disruption evangelists, I would suggest that she should have done more to at least acknowledge there is a disturbing trend here that needs to be explained. One gets the distinct impression that she believes that disruption is not all that significant
Forces at work in the Big Shift
So, what’s going on here? Based on the work that we’ve done on the Big Shift, let me suggest that the trend towards increasing disruption is a result of the convergence of two powerful forces that are playing out on a global scale. First, we have the advent of digital technology as a disruptive force.
Yes, we've had major technology disruptions in the past – think of the steam engine, electricity and the telephone. But there’s one key difference that helps to explain a sustained and increasing pattern of disruption today.
In all those prior technology disruptions, we saw a dramatic burst of innovation in the core technology followed by a rapid stabilization with only modest incremental improvements in price/performance afterwards. Then one saw a burst of innovation at the infrastructure level in terms of thinking about how to most effectively deliver that technology to the broader economy and society – think for example of the insight that electricity could be more effectively generated in centralized facilities rather than on the premise of the user. But once again, that was followed by rapid stabilization in terms of infrastructure deployment, giving firms an opportunity to think through how to most effectively harness this technology in their business.
Digital technology is different – in fact, it’s unprecedented in human history. It’s the first technology that has demonstrated sustained exponential improvement in price/performance over an extended period of time and continuing into the foreseeable future (based on interviews with scientists and technologists pushing the boundaries of this technology).
So, there’s no stabilization in the core technology components of computing, storage and bandwidth. As a result, there’s no stabilization in infrastructure – cloud computing is simply the most recent manifestation of this infrastructure and it certainly won't be the last. And therefore there’s no stabilization in terms of how companies can use this technology to create and capture value.
But there’s more. This exponentially improving digital technology is spilling over into adjacent technologies, catalyzing similar waves of disruption in diverse arenas like 3D printing of physical objects, biosynthesis of living tissue, robotics and automobiles, just to name a few. The advent of exponentially improving technologies in an expanding array of markets and industries only increases the potential for disruption. We’ve explored this expansion of exponential technologies in a working paper here.
And this is just one of the forces at work. There’s a second force at work as well – a long-term shift in public policy on a global basis towards freer movement of people, goods, money and ideas across geographic and industry boundaries. Certainly this has unfolded at a different pace in different geographies and industries, but if one steps back and looks at the period from World War II to today, the trend is clear and significant.
Now, I will grant that this second force is a wild card. There’s nothing to guarantee that this force will continue to play out in the direction of further economic liberalization. In fact, there’s a growing risk that there will be a significant public policy backlash. Incumbent players, whether they are taxi cab drivers in New York or global multinational companies facing disruptive attackers, will mobilize in an effort to use regulation and taxation to erect barriers and protect their positions from attack. While I acknowledge this risk, I'm an optimist and I believe that ultimately such protectionist efforts will be undermined by increasingly powerful consumers and by global technology infrastructures that will make public policy barriers difficult to enforce.
But, for the moment, these two forces – exponentially improving technology and economic liberalization – are combining to create environments that are increasingly vulnerable to disruption. In economic terms, they are doing two things. First, they are systematically and substantially reducing barriers to entry and barriers to movement on a global scale. Second, exponentially improving technology is offering untapped capabilities that can be a catalyst to fundamentally re-think business models and institutional arrangements.
Bottom line, they are catalyzing more opportunity for players to adopt new approaches that can be highly disruptive on three levels:
- The approaches render obsolete a significant part of the existing assets/installed base of incumbents
- The approaches cannot be effectively addressed without significantly cannibalizing existing revenue/profit streams of incumbents
- The approaches are driven by a fundamentally different set of assumptions regarding the drivers of value creation/capture relative to the assumptions that have driven the success of the current incumbents – they challenge the mindsets/mental models of the incumbents
And, because they are reducing barriers to entry and movement, they are increasing both the motivation and ability of players to pursue these disruptive approaches.
So, at a macro level, I'd suggest that these forces help to explain why we are experiencing more frequent and widespread disruptions on a global scale. (And, by the way, while my focus here has been on companies, I believe that all institutions are becoming increasingly vulnerable to disruption as a result of these forces).
Some open questions
This perspective of course leaves a lot of open questions. For example, can we predict where and when specific disruptions will play out? I for one don't believe that such predictions are possible but I suspect that we can better understand specific patterns of disruption that are likely to play out and, as a result, better anticipate which markets or industries might be most vulnerable to certain patterns of disruption. In fact, the Center for the Edge is about to embark on a research initiative in this area and I invite any of you who find this interesting to connect and contribute.
Another question is what incumbent players can do to more effectively respond to these disruptive approaches (short of resorting to regulation and other public policy measures). This is a topic for a much longer post. While I certainly don’t pretend to have all the answers to this, I believe that one key requirement for incumbent players is to find ways to expand the horizons of their leadership team beyond the next quarter or next year and to challenge on a sustained basis the key assumptions, often unstated, that they bring to the table regarding what is required for business success. And, perhaps most basic of all, they need to acknowledge the growing force of disruption and resist the temptation to dismiss or deny that it exists.