The Pursuit of Profit May Lead to Failure


Clayton Christensen is Harvard Business School professor and world-renowned innovation guru. He is interested to find out what causes successful companies to lose their growth and ultimately failed. What he said is related to the economy and jobs.

Disruptive Innovation

Clayton Christensen on disruptive innovation – Clarendon Lectures 10th June 2013

In his talk at the Said Business School, University of Oxford, he spoke of the following in the US market because the once dominant company decided to give up the market that is the least profitable.
• The gradual take-over by mini mills of the market once dominated by integrated mills.
• The gradual take-over by personal computers of the market once dominated by main frame computers.
• The gradual take-over by Toyota of the market once dominated by General Motors and Ford.

The once dominant company made the mistake of giving up the market segments that contributes little in profitability rather than investing in capital to improve profitability and competitiveness.

The companies that managed themselves out of the market turned to making good products better so that they can sell at better profits to their best customers. He called this sustaining innovation. This type of innovation does not create jobs as the old product gets laid off when the better product comes along.

The companies that took over the market did so by first entering the least profitable segments of the market through making the products simple, affordable and in the case of consumer products, they made the once non accessible products available to the masses. It is a lower price business strategy. He called this disruptive innovation. This created jobs. The issue with disruptive innovation is that it requires capital and the investment pays off only in 5 years.

The third type of innovation is called efficiency innovation. It allows the company to sell the same product to the same customer cheaper than before through increased efficiency. This reduces the capital required in the business by reducing the work in progress kept in inventory. This type of innovation releases capital and the investment pays off in 2 years. It also removed jobs. The capital released from efficient innovation can go to create more disruptive innovation.

Complacency Is Not What You Think It Is

Clay Christensen: How Will You Measure Your Life?

In his talk, he spoke of the decline of Lucent Technologies and Nortel Networks; which were overtaken by Cisco Systems.

He pointed out that successful companies failed because they invest in things that provide the most immediate and tangible forms of achievement rather than invest for the unforeseeable long term. The mistake that led to failure came from the life strategy of trying to be even more successful by building upon previous success. This is known as the drive to achieve, such closed a sales, shipped a product, finished a presentation, got promoted and got paid. This is because the pay-out are realized in the short term.

He also said that it is a common practice that head of companies make use of financial ratios to measure success. The financial ratio (IRR) used to measure on returns from innovation is returns on net assets. He was quick to point out that we do this because our mind is finite.

In the IRR, the returns from investing in innovation go to the numerator, and a drop in costs through outsourcing goes to the denominator. The characteristic of ratio is that you can increase the numerator or decrease the denominator to improve how the ratio looked. The weakness of using a financial ratio is that you can improve the numerator by investing in short term projects. Hence, we have to be wary of how we measure success.

In our personal life, we measure success by how much money we left behind when we are no longer living and by how high we climbed in the false illusion of hierarchies we have in our head. However, this is not what matters in life. What matters more in life is that in whatever situations that God put us in, He is going to assess us on how we use our given talents to help other people around us to be better people.

Concluding Remarks

It is interesting to note that entrepreneurs who survived and thrived after the start stage:
• Are not in for the money.
• Focus on the customer needs first.
• See revenues as outcome of serving their customers well.
• Keeps improving on their business model.
• Continuously improve on how things are done.

It is also interesting to note that some large companies fall by the side overtime because they became too focus on the financial numbers.

It also explained why entrepreneurs who carried out disruptive innovation created jobs and uplifted the economy.