The Millennium was only a few days old when Wal-Mart, made an historic announcement that signalled the strength of a new trend for a new era. The world's biggest retailer is spinning off its online shopping, creating a stand-alone company that will have independent management. Sited in Silicon Valley, far away from the giant's commercial and spiritual centre in Bentonville, Arkansas, the operation has been mandated to seek its own global destiny.
All the above is balm to the heart of Clayton M.Christensen, the Harvard professor whose brilliant academic work, The Innovator's Dilemma, has emerged as an unlikely hot gospel for effective millennial management. Christensen's exploration of several industries led him to conclude that large-scale 'disruptive' innovations in large businesses are bound to fail. He doesn't like to prescribe solutions: but the book made it abundantly clear that only a solution akin to Wal-Mart's is likely to work - and nothing Christensen has seen since publication in 1997 has caused him to change his mind.
E-commerce has actually lent wings to his ideas. As one commentator observed, Wal-Mart had seemed 'hopelessly confused about the internet'. In that confusion, Wal-Mart was not (and is not) alone. Not only in retailing, but in banking and other financial services, publishing, telecoms and many other businesses, managers have looked into the e-maelstrom and hesitated to plunge, or have dipped unhappily into the water, unsure how or when to move. Christensen doesn't criticise them for this confusion. As he says, it reflects their strengths, not their weaknesses.
Good management looks after its existing clientele superbly, upgrades its products and processes constantly to give customers a bigger and better bang per buck, invests its capital where it earns the fattest returns, and goes after markets offering the largest sales. Christensen's paradox is that this very excellence makes the excellent giant almost incapable of matching brash new competitors who have no customers and offer different 'disruptive' products and processes that are less profitable and have tiny or non-existent markets.
Even worse, the established management, sitting on the fat cash flows of the established business, is bound to give the old and rich priority, and to resist the costly, contrarian demands of the new and unproved. That's why Wal-Mart has not only gone West, but brought in a minority partner, venture capitalists Accel Partners, which will assist in recruitment and execution. Execution, in the Death Row sense, may be the right word, since much of Wal-Mart's e-business will not be additional: many of the existing 100 million weekly customers will transfer their business from the stores.
One estimate is that a mere 15% loss of turnover would drive many stores into loss. If that prospect frightens you, inactivity is no solution. There's no guarantee that others will not attack your stores with their own e-companies. Cannibalisation, or eating your own business, is a better option than being eaten by somebody else. In fact, Jack Welch, the chairman of General Electric, has ordered his divisions to set up 'destroyyourbusiness.com' units. Their mandate is to find ways in which the existing business can be successfully attacked.
The dilemma in Christensen's title is excruciating for established companies. As he says, if they don't 'focus all their energy on upgrading their product line, and on being more and more competitive through existing customers, they'll fail'. But if they don't adopt the new technology, they'll also fail. The solution, he argues , is to set up a different company that has a different focus and then let it go after the disruptive technology'. The 'mainstream company' can keep doing what it does well. 'It's got to do that in order to survive', says Christensen, 'and you don't want it to lose that focus'.
A crucial point is that the threats are as great for excellent companies as they are for the mediocre and worse. Christensen openly admires Charles Schwab (the on-line stockbroking leader), Hewlett-Packard, his own Harvard Business School, and Intel, the lord of the microprocessors. But he adds in the same breath that all of them are threatened by disruptive technologies. Intel, for example, has developed (or over-developed) its chips until they are twice as powerful as most users actually need: and that has opened up a gap at the bottom end of the market.
According to Christensen, low-cost chips with inferior performance, like those made by AMD and Cyrix, are not the main threat. That comes from 'very low-cost ARM chips that are small, focused RISC microprocessors that sell for about $30'. This variety powers handheld computers like the PalmPilot, which, says Christensen, 'are really a disruptive threat to the people [overwhelmingly led by Intel] who make microprocessors for the mainstream market'.
Intel's response has been to buy a company in Massachusetts that makes ARM processors, and which is supposed to be managed as an independent organization. That independence had better be real, because it is crucial. Geographical separation is a great help (like that location of Wal-Mart's e-commerce in Silicon Valley). Would-be interferers have less leverage from afar. But the dead hand of the established business can still be exercised over a distance - as the progenitors of the IBM PC found to their (and the company's) cost.
The original crash programme was almost completely insulated from head office in Armonk, New York. The team, established down in Boca Raton, Florida, accomplished wonders to launch a superbly successful project in little more than a year. Their success was their undoing. Legions of IBM-ers descended from Armonk, independence was lost, and - worst of all - IBM failed to recognise that the PC was a deeply disruptive technology, and not a mere 'entry system' from which people would progress to buying real, bigger computers.
As the IBM example shows, the disruptive threat is not just confined to companies of low technology which must try to cope with the impact of the Internet. The highest of high-tech stars are in the firing line. Compaq, for example, has been struggling in the wake of Dell Computer's direct selling, which has made its Website one of the greatest e-successes. Caught in the web (rather than the Web) of its relationship with bricks-and-mortar dealers, Compaq has been unable to shape an equally effective relationship in the 'clicks-and-no-mortar' world.
That world is moving so fast that there is no time to argue the corporate conservatives out of their position. By the time they understand the threat, it may well be too late to mount an effective counter-attack. Even if that is done, running the two sides, the old and the new, in harness is no answer. According to Christensen, 'it's just impossible to do both'. But there's a snag with his solution - spinning off the disruptive technology on its own: the parent cuts itself off from the future.
It's hard to remember now, but Vodafone, which will be turned into Europe's largest company by merger with Mannesmann, was once part of Racal. Pre-merger, the child was worth some 100 times more than its erstwhile parent. It is emerging as a superpower in the Internet world, because of the certainty that mobile phones will be a prime source of Web access. Equally, if the Freeserve spin-off from Dixon's can be moved (one day) into profit, its market capitalisation (already hard on the parent's heels) will leap far ahead.
These examples, and many others (including Wal-Mart), show that, whether or not CEOs have read The Innovator's Dilemma, or are simply following the logic of the new technology, Christensen has become the prophet of substantial, often sweeping change. Moreover, those followers who have taken the plunge into the maelstrom appear to be going far enough - encouraged by the fabulous stock market valuations for spun-off e-stocks. Those values may well have gone too far. But there's been no evidence to date that Christensen's thesis has led plunging companies in the wrong direction.
As noted above, he has doubts over whether the disruptors - like Intel - are coping well when faced with their own disruptive threats. He is not being critical here. He has a high regard for Intel's management. What interested Christensen, looking at earlier disasters of disrupted giants, was 'why a group of good, smart managers would make a decision that turned out to be so dumb'. In those cases, whole-hearted adoption of the new technology made no sense in the perspective of the existing business. But is there so diametric a difference with the Internet?
In some cases, as with the banks, the answer is obviously yes. E-banking is not compatible with expensive banking parlours. In most businesses, however, the Internet offers huge economies and new facilities in traditional operations, plus unprecedented opportunities to extend their scope. It really is an offer you cannot refuse - unless, that is, you want to join the other disrupted dinosaurs on Christensen's scrap heap.
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