Business failure and the neglect of low-end skills

Here in Rochester, N.Y., we have as many theories about the bankruptcy of Eastman Kodak Co. as there are about the decline and fall of the Roman Empire.

What accounts for the failure of companies such as Kodak, U.S. Steel, or General Motors Corp. that, at their zenith, seemed invincible?  I found one good answer in a New Yorker article, profiling a business analyst named Clayton Christensen, which I read a couple of months ago and have been thinking about ever since.

Clayton Christensen

The New Yorker writer called Christensen “the most influential business thinker on earth.”  I’d never heard of him until I read the article, but after reading it, I would like to believe he is influential.

Christensen, who’s on the faculty of Harvard Business School, started to look into the question of business failure 20 years ago.  The reason once-dominant businesses failed wasn’t because their managers were complacent and stupid, he thought; most of them were pretty bright, and in any case were cut from the same mold as when their companies were doing well.  The reason wasn’t because dominant companies failed to keep up with the technology, he concluded; it was the big established companies that led the way in new technology.  An example (mine, not his) is the Xerox Palo Alto Research Center which created the basic technologies of the personal computer, but helped Xerox not one bit.

No, Christensen found, once-dominant companies were defeated by upstart competitors who offer inferior but cheaper technology.  The upstarts gained a foothold in the low end of the marketplace and gradually moved up until they also dominated the high end.  The transistor radio is an example.  The original transistor radios had terrible reception.  Nobody but teenagers would prefer them to the big RCA or Zenith console models.  But over time they became good enough to compete with the old vacuum tube models, and RCA and Zenith were too far behind on the transistor technology to catch up.

Why were companies such as RCA and Zenith caught off-guard?  It was because of a prevailing business philosophy, taught in all the business schools, which I heard a lot when I reported on business in the 1980s and 1990s, that a corporation should concentrate on those lines of business that generated the highest profit margins, and let the rest go.  Transistors weren’t profitable enough to interest RCA and Zenith, so they didn’t bother to compete in a market that didn’t seem worth bothering about.

Christensen traced similar patterns in the steel, disk drives and automobiles.  Rebar steel is his favorite example.  Rebar is steel used to reinforce concrete.  Steel mini-mills, which made steel from scrap, sold their steel as rebar because their original product was of such low quality.  The big integrated steel mills, which made sheet steel for use in automobiles and appliances, were willing to let this low-quality, low-profit segment of the market go.  But starting around 1979 or so, the mini-mills started improving their product and moving upmarket.  The integrated steel mills concentrated on higher-quality, higher-priced and higher-profit segment of the market.  Until one day the cheap product had been improved to the point where it could appeal to the big companies’ customers.

A similar dynamic explained how cheap compact cars came to dominate the U.S. auto market, and cheaper disk drives displaced higher-quality disk drives.  I suspect that when and if the electric car industry becomes profitable, it will be a result of the electric golf cart industry gradually moving up market.

The article doesn’t mention Kodak or Xerox, but similar stories could be told of them.  In the 1970s, Kodak decided that its profit margins came from manufacture of film, not cameras, so management decided to stop manufacturing cameras.  Their philosophy was:  Sell razor blades, not razors.  The problem with that was that makers of cameras controlled the film format.  Kodak by giving up this low-profit business gave up control of the film market.  In the same way Xerox neglected the market for cheap desktop copiers, preferring to concentrate on the xerographic printers.

I don’t think there is any one thing that is the key to business success.  If there was, everyone would come to understand it, everyone would do it and their efforts would cancel out, and some other thing or combination of things would become the key.  But I think Christensen has a lot to teach, and not just about business management.

Christensen studied health care costs, and concluded that part of the problem is that the health care industry concentrates on the high end and neglects the low end.  Hospitals spent money to have the best of equipment and the most highly-trained specialists, whose cost is covered by insurance, but neglect low-cost clinics that could handle many routine medical problems.  As medical science advances, he thinks, more and more problems can be handled routinely, with nurse practitioners playing a bigger role, with the high technology and specialist knowledge on call as needed.

In his personal life, Christensen concentrates on the basics rather than on what gives the biggest immediate payoff.  He is a devout Mormon.  He promised God he would not work on Sundays, and he promised his wife and family that he would spend Saturdays with them, and always be home in time for supper and to spend evenings with his five children.  Keeping this commitment sometimes required him to start work at 3 a.m.  He was a Scout leader for 25 years and his children’s basketball coach, but he participated with his children in low-end activities—painting, plastering, Sheetrocking and home canning—that most parents in his income bracket would outsource.  His philosophy was that practical skills and good work habits would stand them in better stead in the long run than the supposedly higher-return cultural activities.  His philosophy and example provides much food for thought.

Click on Clayton Christensen – Home for Clayton Christensen’s home page.

Click on Clayton Christensen’s Disruptive Innovations for a link to the New Yorker article.   If you’re a subscriber, you can read the whole article; if not, you only get an executive summary.  If you want to read the whole article and don’t want to subscribe, go to the periodical room of a public library and ask for the May 14 issue.

Click on How Will You Measure Your Life? for an excerpt from Clayton Christensen’s latest book.

Click on Clayton Christensen: the Survivor for a Forbes interview with Christensen and his family members about his personal philosophy, struggles with life-threatening illness and ideas about health care.

[P.S. 7/18/12]  Christensen is the author of three books, The Innovator’s Dilemma, The Innovator’s Prescription (which is about health care) and the new How Will You Measure Your Life?   I haven’t read any of them, but I probably should.

Tags: Clayton Christensen, How Giants Fail, Low-End Products, Low-End Skills, The Innovater's Dilemma