Worm Capital Q&A With Clayton Christensen On Disruptive Innovation—and His Most Recent Book: “The Prosperity Paradox”
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Clayton Christensen, for many, is a man with no need for introduction: He is the author of nearly a dozen books about innovation, an entrepreneur himself, and the Kim B. Clark Professor of Business Administration at Harvard Business School.
In my view, he is also perhaps the world’s foremost pioneer of innovation theory—a diligent student of business and technology who has spent a career unpacking the mechanics of disruptive innovation for thousands of eager readers around the globe.
In fact, I was one such reader back when I read his best-selling 1997 book, The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail. It would not be an exaggeration to say that this book, at least in part, helped inspire me to found Worm Capital, and to design a portfolio centered on the next generation of disruptive technologies. As I’ve often said, several years ago I recognized that technological disruption could profoundly change our world. So I built a strategy from the ground up to invest in disruption.
All of which to say: It's quite exciting for me that I had the opportunity to read a copy of Professor Christensen's latest book, The Prosperity Paradox: How Innovation Can Lift Nations Out of Poverty, and to ask him a few questions about his research.
The book, co-written with Efosa Ojomo and Karen Dillon, offers incisive commentary on why economic development aid efforts abroad can often fail. But it also prescribes possible solutions. As its book jacket notes: “The Prosperity Paradox is more than a business book; it is a call to action for anyone who wants a fresh take for making the world a better and more prosperous place.”
Below, we asked Professor Christensen 10 questions about his book—and his thoughts about the future.
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Worm Capital: In Chapter 2, you write that, “When a country’s prosperity is not improving, in spite of what might seem to be a lot of activity within its borders, the country might not have a growth problem. Instead, we believe it might have an innovation problem.” I thought that was a particularly insightful observation and would be curious to hear you talk a little more about that—how do investors make the distinction between the two – growth vs innovation?
Clayton Christensen: A company can engage in various activities, all of which could be considered innovative. But the key is that not all types of innovation have the same effect on a company—or a country. Sustaining innovation, for example, is the process of making good products better for your best customers. These are important for any company, but at some point you become incapable of serving a much larger set of customers who don’t consume your products. Market-creating innovations crack open opportunities, and are inherently growth-focused because you’re creating new customers, new business models, pulling in new resources and so forth. Market-creating innovations are an engine for economic growth, both for companies and countries.
WC: Also in Chapter 2, you note the distinctions between sustaining, disruptive, efficiency, and market creating innovations. Do you feel that too many CEOs today are too focused on sustaining innovations (and general short-termism) while not focusing nearly enough on market creating and disruptive innovations?
CC: Yes, most businesses evolve to the point where sustaining and efficiency innovations occupy all of a manager’s portfolio. This is entirely predictable. Once a firm finds a profitable business model that serves a well understood customer base, they are motivated to improve on that process by making even better products (sustaining innovation) or making products more cheaply (efficiency innovation). However, these innovations are often short-term focused and are supported by the organization’s resource allocation process. It’s a lot easier to make a new version of the iPhone than to make an entirely new product that serves a new market. Robust and sustainable growth is a choice, and it requires a long-term mindset to devote proper resources to it.
WC: In Chapter 4, you elucidate the difference between push and pull strategies, and note that, “Our research suggests that pull strategies, over time, are far more effective at triggering sustainable prosperity.” (Page 79). I thought that was fascinating, and wondering if you could provide an example or two of some of that research that led you and your team to that make that observation? Further, was this a counter-intuitive discovery for you?
CC: This was a counter-intuitive realization for us. In large part it was reinforced by my co-author’s experience starting an NGO. After building (pushing) several wells to respond to the lack of water in several communities in Nigeria, he later learned that the wells broke down. This was a small project relative to larger development efforts, but a very consistent result as we later discovered. In the case of wells, hundreds of millions of dollars’ worth of broken wells can be found all over poor communities in the world. Through this case, and several others involving building schools or hospitals that don’t quite work, we learned that pushing resources in general isn’t accompanied with a system that keeps the resources in tact over the long-term. But a vibrant market, which requires resources and infrastructure to survive, will continually pull them in. 4.
WC: I really enjoyed the section in Chapter 6 where you discuss targeting nonconsumption as a means of creating markets – in particular the Japanese motorcycle economy – and how that ultimately leads to new job growth, both locally and globally, as new manufacturing and sales channels are created. Do you see opportunity for similar market-creating innovations here in the United States or elsewhere to spring up around nonconsumption? If so, are they any examples come to mind?
CC: If you put on the lenses of nonconsumption, opportunity just screams at you. Just look at the booming electric vehicle market in China. Hundreds of thousands of small, low-speed EVs are sold to Chinese citizens who otherwise don’t have access to mainstream vehicles. In the US the largest pockets of nonconsumption can be found in education and healthcare. We’re seeing the rise of online universities and boot-camps that cater to many working adults because they historically have not been able to access formal college education. The key is to focus on what people are not consuming – and why – as opposed to the conventional wisdom which causes us to focus on what people are consuming.
WC: Many people—ranging from portfolio managers of multi-billion-dollar funds to retail investors— recognize that the pace of change is accelerating in certain sectors. Broadly, how do you advise people to participate in these disruptions, as opposed to be get swallowed by them? Are there any examples that come to mind from The Prosperity Paradox?
CC: We introduced the topic of Jobs to be Done in this book because we’ve found it to be the most powerful theory when addressing this question. Regardless of the pace of technological change, and regardless of sector, individuals consume products and services that help them make progress in their lives. As long as managers are relentlessly focused on understanding and identifying Jobs to be Done, particularly those of “nonconsumers,” they can capture immense opportunity.
WC: In Chapter 8, “Corruption is not the problem; it’s the solution,” you say that trying to combat corruption in impoverished nations is sort of like a game of whack-a-mole, and you suggest maybe the best way to fight it would be to focus “on enabling the creation of new markets that help citizens solve their everyday problems...” (page 227). Just to play devil’s advocate: do you believe that efficient markets (even new ones developed from new innovations) can actually exist in countries with systematic corruption and devious government actors?
CC: Yes. They have historically, and they can today. But it’s important to remember that innovation is a process, not an event. As markets are continually created, in many cases just beyond the reach of current regulation or government control, corruption becomes mitigated in order to maximize returns for all stakeholders involved. We learned that many of today’s prosperous countries didn’t start out clean and corrupt-free, and innovation played a significant role in getting them to where they are today. We believe that poor and corrupt countries are not very different in this regard. If we emphasize investments in market- creating innovations in these regions, the new markets created will give way for less and less corruption over time.
WC: As a follow up to that question – what, then, becomes the role of government in impoverished nations where market-based innovations are creating new jobs and growth opportunities?
CC: There are a multitude of levers a government can pull to facilitate market-creating activities within its borders – whether that be simplifying business creation, de-regulating investment activity and so forth. The key is understanding just how powerful innovation activity can be to jump-starting an economy. Most important, though, is a focus on facilitating progress for companies that create affordable and accessible products. These are the companies that will pull in local resources and local labor, and create jobs.
WC: In the final chapter, you conclude that “To those who have been working in development and government...your work is more important now than ever.” (273) Why is that? And on the flipside, what do you foresee the future looking like if “pull”-type market-based innovations are not introduced?
CC: Their work is more important now than ever because of the rise in populism in both prosperous and poor countries alike. In addition, there is a population boom happening in the poorest continent in the world, Africa. If we don’t fundamentally change the dominant development strategy from pushing the “right solutions” to fostering market-creating innovations that can pull in the relevant resources and solutions these nations need, poverty will indeed increase, migration from Africa to Europe will skyrocket, and millions more people in the world will struggle. If we really want to create liftoff and help regions emerge into real prosperity, rather than just being in a state of “non-poverty,” we have to rethink our approach. Market-creating innovation has shown itself to generate powerful, sustained growth.
WC: Many investors, including us, care deeply about so-called “ESG” issues at corporations: Environmental, social, and governance factor. However, for true “prosperity” as you define it in the book, is this enough? In other words, how should long-term investors look inward and grade themselves in how they commit capital to sustainable business models while still generating positive returns for investors/shareholders?
CC: It's always a matter of framing. We can help the environment in sustaining or disruptive ways. We can improve social mobility in sustaining or disruptive ways. While progress can be gained in either fashion, both for the cause and for an investor’s returns, we continue to see that disruptive, market-creating investments can generate more sustainable growth in the long- term. Creating a new market for products and services to which millions of people have historically not had access continues to be the best way to create returns for investors and to improve the condition of fellow citizens. We profile several of these innovators in our book, from Henry Ford of Ford Motor Company to Mo Ibrahim of Celtel.
WC: After reading the book, I thought I’d pose a very broad, open-ended question. Given the current state of affairs in America and abroad – rising inequality, a growing divide in politics, etc. – are you optimistic about the future? And are there any concepts or ideas that you discovered while researching the Prosperity Paradox that America’s entrepreneurs and investors should be thinking about over the next several years?
CC: I am optimistic about the future, but I can’t pretend I don’t see the challenges we are facing. America fights for growth primarily because our markets have become so mature. The financialization of corporations has resulted in a short-termism, and the disconnect between community and company, that will be hard to overcome. Also, in our otherwise abundant country entrepreneurs struggle to target real nonconsumption. I continue to believe that the mechanisms that have helped economies grow all around the world have just as much applicability domestically. With proper focus I’m very hopeful we can find very exciting opportunities for growth moving forward.
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