BATTLES WITH CANCER and an ischemic stroke resulting in expressive aphasia (a neurological disorder that leads to difficulty in speech) has not slowed Clayton Christensen at all. Thirteen years after the publication of the work that introduced the theory of disruptive innovation to the world, Christensen has followed up with books that apply these theories to health care, and education at the grade-school level. He is also a professor at Harvard Business School, serves as a member of the board for several companies, including FranklinCovey, W.R. Hambrecht, and Tata Consultancy Services, and is an advisor to the government of Singapore. He combines his flair for management theory with a profound devotion to religion and community. We met him at the Taj Mahal Palace and Towers Hotel, Mumbai, where he spoke of the growth of his theories, the state of innovation in India, and potentially putting venture capitalists out of business, as well as what his diseases have taught him.

You talk about how Sony and the Korean companies disrupted mature economies. Can Indians do that in the next five to 10 years?
I believe it will happen and, in the end, India will have a bigger impact than China. The Chinese are on a cliff in terms of the size of their population, so, shortly, the cost of making things in China will cause their economy to sputter. In India, there’s been an extraordinary wave [of disruptive innovation], and then, the next one, I believe will happen.

You have more great engineers and managers than anywhere in the world spending so much of their time and effort dealing with bureaucracy. So the great thing about the IT revolution is as if God made this conduit down to Bangalore and you can get in and get out without having to deal with the corruption and the bureaucracy.

It’s harder for physical infrastructure and physical products to get out because of the effort [required]. But every time India deregulates something, you take out a node of corruption. Potentially, you know, the bottom 60% of your population are just the perfect customers for disruption in every way. It’s the best place for disrupting education, health care...

You said that the first wave has already happened. What did you mean?
Some physical products are getting out.

What would you say they are?
I imagine that automobiles can have an international presence because you have a very large market here for the Nano, and products like that. Look at the presence you have in the Middle East, Africa, parts of Southern Asia, and then moving up into Eastern Europe and so on.

You’re just in a better position to do that [disrupt] than anyone. With sophisticated consumer products, the Godrej Group is already trying to disrupt the Koreans. Being able to service the low-income portion of India’s population is a great place to start and you have access to all those nations.

Innovation in India is usually at established companies such as Godrej and the Tatas. Why don’t smaller companies innovate?
I don’t have the answer. My hope in America is that my work can put venture capitalists out of business. In other words, what we teach larger corporations, who dominate the sustaining [innovation] trajectory, is that they can actually create disruptive businesses as well if they just think about it. A corporation can evolve if it can create innovative business units.

So much of what we’ve taught at business schools causes American corporations not to even think about the possibility that we could create new business models. In India, you routinely do things that American managements would say are impossible to do. We would say it’s impossible to succeed at luxury cars and the Nano without, at a minimum, separate business units.

So would you say that Tata Motors is doing disruptive things rather than sustaining innovation?
It really is. One of my rules is that the only way you can improve a theory is if you find anomalies that your theory can’t explain. Then you have to figure out what you’ve missed. My research can’t explain the Tatas.

Tata Motors or the group?
The group. Here we are in the most luxurious hotel possibly in the world [The Taj Mahal Palace and Towers, Mumbai], at least that I’ve ever been in, and down at the bottom of the market is Ginger [a chain of budget hotels also run by the Tatas]. There isn’t anybody in America to whom the possibility would even occur. There is a flexibility in the way they [Tatas] manage things that I need to understand.

Is Tata the only example of this in India or are there others as well?
Mahindra and Mahindra are quite remarkable in that same way. But the Tatas are in a realm of their own. With the Tatas, it’s an instinct. For the others, it’s more of a process than an instinct.

Is there an environment which generates disruptive innovators?
I thought about this a lot because Mexico should have disrupted America years ago. I’m afraid capitalists in America have viewed Mexico as a tool. And so capital goes to Mexico ... they are not disrupted in any way. I would call it sustaining innovation. Then the wealthy Mexicans take their capital and invest it in hedge funds in the U.S. There just isn’t an instinct to try to go after the world. That trait is uniquely Asian.

Do religion and culture have something to do with it?
It’s a great question. I have said that religion is a foundation for capitalism. I wrote that capitalism works if people instinctively follow unenforceable laws. Imagine you’re the CEO of a substantial company, and you have to certify [in the context of the Sarbanes Oxley regulation] that among the thousands of employees, no one has done anything wrong.

There are only two ways to do it: Either those people have to instinctively follow unenforceable laws, or you have to become like the communists, with somebody watching what everyone does. America is unwilling to oversee every person’s activities, and religion [which is all about adhering to unenforceable laws] is declining. There has to be some mechanism to hold people accountable for what they do, otherwise the economy will collapse. What’s wonderful about India is that the culture is rooted in religion. I think it causes people to voluntarily follow rules.

People talk about India’s techies and how bright they are, but how come India has not come out with a world-beating tech product yet?
I hate to say this, but there hasn’t been enough time. I think America disrupted Europe. For a long time the best products came from Europe. America just did mainstream stuff. When Japan disrupted America, we became truly unique. And then Japan did the same thing. When they were catching up through disruption, you couldn’t say that their products were unique. So I would just wait a little more. And already, in IT and in software, India is where some of the best comes from.

If I’m the head of a large corporation, how do I spot disruptive innovation elsewhere which could potentially trip me?
Always look at the bottom of the market. Is there a group of people who have started to use something totally different from what we make? For example, in America, who are the people who don’t buy Oracle’s suites? Where are their ERP [enterprise resource planning] capabilities coming from? It’s salesforce.com. You should look at little companies and say, I’m looking at tomorrow. Instead, their [large corporations’] inclination is to look at even better products than they’ve ever made, and they say that’s tomorrow. They’re looking in the wrong direction. [Christensen has argued that disruptive innovation isn’t about improving a product, but rather creating something that’s totally unexpected].

Do large customer bases inhibit disruptive innovation in some organisations?
It’s because, almost always, the disruptors got the technology from the big corporations. They’re able to innovate in technology and in products, but because they can’t innovate in business models, they can’t utilise the technology they’ve developed. I am doing my best to teach the corporate giants that they can innovate in business models, but it’s a challenge.

What has been the market’s response to such forces? It doesn’t tend to reward disruptive innovators very easily.
Well, they don’t. We have learnt a lot about this. The causal mechanism that causes your stock price to rise faster in the market is to surprise the investor repeatedly. For instance, when [steel maker] Nucor started making rebar [reinforcing bar], the analysts framed the market opportunity by product. [Christensen has often used the story of how mini-mills disrupted the US integrated steel industry.] We know how big this is, how fast it’s growing, what the margins are. And when Nucor surprised them by going up to angles, the analysts said, these guys are getting bigger and faster than we thought. And the share price will pop up to discount the newly foreseen growth trajectory.

Then Nucor announced that they’re into structural beams, and analysts said it’s bigger than we thought, it’s faster than we thought, but still this is their framework. They cannot understand this. And then Nucor does it again with sheet steel. So if you look at the price of Nucor for about 18 years, while they were moving up the market, they grew at a compounded annual rate of 27%. For a steel company in America! But after they got into the sheet steel market, there were no surprises. The price of their shares went completely flat.

In religious terms, it’s the heaven issue. Have we ever thought about what do we do, once we have come to heaven? Heaven for steel companies is to go up there and make sheet steel. And now your share price is flat.

So How do disruptive companies bounce back from this?
We did a retrospective study of companies that we knew were disruptive. We had about 70 companies, and in the 10 years after the IPO, their compounded annual growth rate was 46%. What’s interesting is that the multiple started out in year one at about 34x on average, and 10 years later it was still about 26x. From the beginning to the end, it appeared too expensive, and most investors, using the wrong theory, said that they couldn’t invest.

So, in 2002, we set up a small fund to invest in only disruptive companies. Over eight years, the compounded annual return is about 29%. That’s actually pretty good. So it actually is disruption, because the causal mechanism is surprising investors on the upside that there is no growth. The analysts think of the markets not in a dynamic way, they can only see it their way.

People trying to do product innovation find it very difficult to get funding in India. One would expect that people would be hungry for products that reach out to the new consuming class.
I had a fellow come to visit me saying, ‘I’m disruptive to the venture capital industry’. He said, ‘In the past you had to have permanent capital, equity, and temporary capital or liability or debt.’ But now the providers of equity want it out of the company the minute it’s in the company. What makes it worse is that the money can’t go in if they [investors] can’t see how to get it out. And there are a lot of good companies that you would never be able to take public.

So this guy figured out a different security. He is the general partner and he’s just like a venture capitalist. He’s got limited partners. When the money goes in, like a licence for intellectual property—you actually take a licence for the use of his capital.

On the balance sheet, it is in the category of debt, but it’s not repaid on a calendar basis or a percent interest. Rather, a royalty based on revenue is paid after revenues begin. The bigger they get, the more royalty is paid, until the sum of what has been paid to the partners is five times the original. That’s what venture capitalists want to get. You pay off from pretax money. Once you’ve paid them off, you erase them from the balance sheet. Another good thing about it is you don’t have to worry about pricing the company, since you’re not giving a share of equity.

Would you consider this a classic disruption?
I don’t know if I would describe it as disruptive, but that’s the question: Can a traditional venture capitalist do this kind of thing? I see them unable to do it.

Are there any Indian companies that you would evaluate from your fund’s point of view?
Well, in America we are not able to buy TCS shares but Infosys was a major player for six or seven years, and Tata Motors has been in the portfolio for quite a few years.

Is the Jasmine Revolution disruptive?
I don’t know if I’d call it disruptive, but I worry that in those nations somebody is going to come in and say democracy will solve all problems. They are just not in a situation where democracy will work.

Do you think the disruption thesis can be extrapolated from an industry level to that of a country? Can a country be disruptive?
Oh, absolutely. Japan disrupted America. Korea, Taiwan, and Singapore disrupted Japan. Now China and India are disrupting those guys, and you can see already that the IT companies are outsourcing to Vietnam and the Philippines.

What’s changed in the 13 years since your book came out? If you were to write that book again would you use the same framework and come to the same conclusions? As more people understand it and use it, it’s become almost like a law: This is just the way the world works. That’s been gratifying. But as Oliver Wendell Holmes [doctor, scientist and author] once said, and I can’t quote him exactly, but what he had said was if you try to write something that is simple before you go through complexity, it’s worth nothing. But on the other side of complexity, simplicity is worth everything. If you go to Einstein, he had this marvellous thing called E=mc2, but that didn’t pop out of his mind. If you go back through his early papers, they were convoluted, complicated, and contradictory.

But he had to go through all of the complexity in order to distil that out. I think, in my own research, I’ve gone through all the complexity, and then I write my books. Then I go back and do it again. And there is a simplicity that I haven’t had an instinct for.

So there is a lot of confusion and misinterpretation of my work, which I had not foreseen. The word ‘disruption’, for example, has so many different connotations in the English language that people tend to morph the theory to try and fit what they want to believe, as opposed to changing their strategy to fit the theory.

Finally, how has battling the illness changed you as a person and how you see the world?
I feel I’m a better man because of it, in a couple of ways. I visualise that I am at the base of a huge funnel made of thousands of scientists, engineers, and businesspeople who have dedicated their lives to the science that allows me to be alive today. And I feel like it’s just me right at the bottom, and all of that energy is focussed on me. I don’t know if others who have had my diseases feel the same the way, but they should. We are personally the beneficiaries of a huge amount of energy. And in the same way, from a religious point of view, I’ve my family and friends who are praying for me. So that’s the first thing, that I’m very grateful.

The second one is that, as these came upon me, especially the stroke, I started to think more and more about my problems. I really tried to live my life so that I focussed on helping other people. This was the first time that I had focussed on my own problems. And the more I focussed on my own problems, the more unhappy I was.

For the first time in my life I came face to face with depression and then I realised that God didn’t say, ‘People who have problems—it’s ok if you focus on yourself. You people with no problems, help others.’ God never said that. He said, ‘I don’t care what your problems are, I want you to spend your life trying to help other people.’ As I started again to try to figure out other people I can help, the happiness and joy returned to my life. And I am grateful that I learned that.

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