Clayton M. Christensen, Professor of Business Administration at the Harvard Business School, is best known for his study of innovation in commercial enterprises. His book The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail won the Global Business Book Award for the best business book published in 1997. His work is renowned for his landmark theory of “disruptive technology” and its ability to disrupt successful business strategies to create competitive advantage.

Managers have historically struggled to successfully manage innovation. In this conversation, Professor Christensen discusses how supply chain innovation now ranks among the most compelling challengers they face. And, what they can do to prepare their organizations for the inevitable competitive consequences.

You use the term “disruptive technologies” in your work. Can you define this term and talk about how the concept can be applied to supply chain?

A disruption is an innovation that comes into a market that enables a whole new population of people who historically might not have had the skill to use or the money to buy a product to have access to the product. Examples of disruptions in the past would be a Canon photocopier or a Dell computer.

If somebody tries to dislodge an existing competitor by leaping into an established market with a better product, oddly enough they almost always fail. It’s a particular strategy for entering a market that makes it disruptive. For example, the early years of the personal computer, which itself was a disruptive innovation relative to mini- and mainframe computers (because they were so affordable and simple that people who weren’t engineers could now own and use a computer). The role supply chain played in that was really interesting, because the logic in the personal computer was a microprocessor. Intel made it. For the first four years or so of that industry’s history, Intel just sold the bare microprocessor. It took a lot of skill for the customers of Intel to take that processor and construct a personal computer around the processor. But then what Intel did was they decided not just to sell the bare processor, but also to begin to sell chip sets.

They incorporated inside of the chip set the solution to the complicated design problems that had required expertise on the part of their customers. Selling a chip set made it so foolproof and idiot-simple that a whole new population of engineers, people with just a third-rate degree, could now build a personal computer and start a company. By making it foolproof, Intel put into business hundreds of companies that could make and sell personal computers. It was competition amongst all of those guys that drove the pricing of the PC down and made the PC what it is.

Your research also explores asymmetries in motivation and skills. Can you talk about what that might mean in terms of how asymmetries sustain or damage a company?

One of the key issues that every company has to address when it’s trying to start a new business is, “How do I kill the competitor?” It’s very important to pick a fight with a competitor that the competitor is actually motivated to walk away from. If you try to enter a business with a better product than a strong competitor is now making, they’ll be motivated to fight you for that business. Whereas, if you enter the market with a product that the competitor’s customers can’t use, then the competitor will be motivated to walk away. For example, back in the 1970s and ’80s, Xerox was making high-speed photocopy machines. Xerox’s revenues were less than a billion dollars. Two huge, much larger and much stronger competitors, Kodak and IBM, got into that business to compete head-on against Xerox by making better high-speed photocopiers than Xerox was making. Even though IBM’s revenues were easily 20 times as high as Xerox and Kodak’s revenues were four times larger than Xerox, Xerox just killed them.

Both of them picked a fight that Xerox was motivated to win. What killed Xerox was Canon, and Canon came in with a simple photocopier that was dirt-cheap, foolproof and wasn’t very good; it couldn’t do high-speed copying, but it was so inexpensive and convenient that people could buy a little Canon photocopier for their office.

How can companies prepare for a potential disruptive threat from competition?

You can tell that you’re open for a disruptive innovation. There are two signals. One is that you improve a product, but customers are no longer willing to pay a premium price for a better product. A disruption almost always comes in at a low price point. If you’re providing more than a customer is able to use, then it opens up the possibility that somebody can come in with a cheaper product that’s good enough.

The second signal that you’re going to get disrupted is that a group of people who historically haven’t been able to own a product because they didn’t have the skill or the money to do so, now can. A good example of that right now is digital cameras in mobile telephone handsets. It’s so cheap now to get a digital camera in your phone that a whole new population of people has digital cameras. They’re not nearly as good as a high-quality Canon digital camera, but they’re a lot better than nothing. They will keep getting better until they create a new wave of growth that will kill the companies that make digital cameras today.

Does it make sense for the majority of companies to focus on the low end of the price range and keep developing products in that area?

Yes it does, because that’s where the growth always comes from.

How can companies avoid obsolescence?

The only way that you can avoid obsolescence is to keep looking at the low end and kill yourself. No company has been able to avoid getting disrupted for a prolonged period of time, but some companies have prolonged their health. IBM, for example, had a beautiful mainframe computer business in the ’60s and ’70s. IBM set up a totally autonomous business from its computer business down in Florida, and they gave it the charter to build the PC in order to kill the mainframe. When the mainframe finally got killed, IBM had a very powerful position in the new business.

Hewlett-Packard did the same when the inkjet printer emerged as a disruptive technology against the laserjet printer. HP created a new business in Vancouver, whereas the laser jet was in Boise. They gave the inkjet people the charter to kill the laser jet. In the process of doing that, both businesses grew. Now the inkjet is so good that the laser jet is losing, but, because they killed themselves, they stayed healthy for a lot longer.

What particular strategies can help companies promote that kind of innovation?

The new business has to be able to operate with a different business model, meaning a different overhead structure, and a different asset structure, so that you can make money at the low price point. If you impose the same business model and the same overhead structure, then it can’t be disruptive.

RFID and wireless technology are being integrated into supply chain management. Do you think this could lead to new industry leadership?

Well, it could, although my best sense is that it’s going to lead to billions of wasted dollars first. People are committing the same mistakes over and over again as they try to commercialize new technology. I’d like to give you a historical example followed by an example from today, and bring it back to RFID.

Next time you go to CompUSA, go to the voice recognition software shelf. There’ll be a box there called the IBM ViaVoice. Pick up the box and look at it. They’ve got a picture of the customer on the box. She’s an administrative assistant, and she’s sitting in front of her computer, but instead of typing she’s got a headset on and she’s speaking. You wonder why she has a smile on her face, because really the value proposition that IBM’s making to this woman is this: I understand you type 90 words a minute and that you’re 99 percent accurate. I understand that if you need to capitalize a letter you just instinctively press Shift and go on. I don’t want you to do any of that anymore. Instead, put this headset on. Now, teach yourself to speak in a slow, distinct and consistent manner. If you must capitalize, pause; speak the command, “capitalize.” We’re only 70 percent accurate today. We promise release X.9 will be better.

That’s not good news to this customer. IBM has spent over $600 million trying to make voice-recognition technology good enough that the customer who is the most skilled user of the prior generation of technology would opt to use the new rather than the old. That is a very difficult technical hurdle for IBM to surmount because the only way she’ll adopt the new instead of the old is if the new is better. It’s a long time before voice recognition unseats word processing.

Now, in the case of RFID, everybody points to Wal-Mart as the bellwether, and even Wal-Mart thinks they’re going to use RFID, but the only way that Wal-Mart will begin using RFID is if it’s better and more accurate than bar coding. Wal-Mart is the most sophisticated user of bar coding technology in the universe. For RFID to do better than that is a huge technical and cost hurdle. Of course, Wal-Mart would say they’re going to adopt RFID, but the reality is, they probably will be one of the last to adopt.

What is on the horizon in emerging markets, technology and supply chain?

When a customer in a developed market begins to outsource something that’s fairly low-value-added to an emerging market, there’s a tendency in the supply chain for the vendor in the emerging market to integrate forward until they hollow out their customer, and in many ways what they do is they commoditize their customers.

A good example would be computer maker Compaq. In the beginning they outsourced the simple circuit boards in their computers to a company based in Singapore called Flextronics. Flextronics did the circuit boards, but then they came back to Compaq and said as long as we’re doing the circuit boards, let us do the whole mother board, because it’s not really your core competency, and we can do it for 20 percent less. Compaq says, you could do it for 20 percent less. If we outsource that to you we could get all of these circuit manufacturing assets off our balance sheet. They make the transfer, and Compaq’s revenues are unaffected, but its cost actually improved by 20 percent. At Flextronics, their revenue and profitability improved smartly. Wall Street likes what Compaq and Flextronics did.

Then Flextronics says, as long as we’re doing the mother board, why don’t you just let us assemble the whole computer, because that’s not really your core competency, and we can do it for 20 percent less.

Compaq looks at that and says, we could get rid of all our manufacturing assets. They make that transfer. Compaq’s revenues are unchanged but its profitability improves, and Wall Street really likes this. At Flextronics, revenue and profitability improve as well. Wall Street likes this too. This goes on as Flextronics takes over the manufacture of the whole computer followed by the supply chain.

From Flextronics’ point of view, it’s getting into value-added services now. So not only does its revenue improve, but its gross margins improve. Finally, Flextronics says, as long as we’re managing the whole supply chain for you, why even bother designing the dumb computer? That’s not really your core competency, and we’re dealing with all the component vendors anyway. Compaq says, yeah, our core competency really is our brand. We can fire all of our engineers if you do that for us.

So little by little the supplier in the Third World starts to eat their way up inside of the customer, and every step forward they take progressively trivializes the remaining value that Compaq adds, until in the end they’re providing almost no value and the company vaporizes. As companies outsource IT services, to Wipro in India, for example, these companies are taking off one piece after another in the information supply chain. It’s a dilemma for companies in that if they don’t outsource they’ll find themselves with high costs. If they do, they’ll kill themselves. The best thing to do is to kill yourself or, better still, set up a totally separate organization to kill your competitors.

If a new technology disrupts the status quo in supply chain management, what role do you imagine the supply chain will play in the future enterprise?

In general, there’s a tendency for speed to market to begin to take over as a dominant trajectory once products become commoditized. When speed to market begins to matter more, then the supply chain actually becomes much more integrated. For example, in the apparel supply chain, a cost-optimized apparel supply chain has specialist companies doing each step in the value chain, but a speed-optimized supply chain such as the one operated by Zara, a Spanish apparel company in Europe, is totally integrated. They do everything because one company has to manage the whole supply chain in order to be fast. In the United States as well, there’s a global company called Nypro. It started out as just a supplier of injection-molded plastic components. They’ve now become a fully integrated provider of packaged products. They can get a product from concept to market in four months, whereas it takes their customers, people like Procter & Gamble and SC Johnson, two years. That level of integration is a very big deal for the future.

This interview was originally published as an article in ASCET. It is reprinted here with permission of Montgomery Research, Inc. For more information about Montgomery Research visit www.MRIResearch.com.