When giants fail

Article (extraits) de The New Yorker.

Pick a Brain │ For your help!
“When Giants Fail,” The New Yorker, May 14, 2012, p. 84

Abstract: The question Clayton Christensen, business teacher and writer, began with, twenty years ago, was: Why was success so difficult to sustain? How was it that big, rich companies, admired and emulated by everyone, could one year be at the peak of their power and, just a few years later, be struggling in the middle of the pack or just plain gone?

« You can tell from the way I speak I had a stroke about eighteen months ago. I’ve been learning how to speak English again, and you’ll see I still can’t come up with the right words sometimes. » The most influential business thinker on earth looked up and smiled apologetically. He stood with his hands in his pockets. His hair was neatly parted on the side. He was very tall. « I have a tendency to speak to the floor, » he said. « It’s because if I look at you, you distract me. »

Clayton Christensen liked to feel a connection with people he was trying to help, whether he was giving a talk in church or to a business group like this one, so it was too bad he had to look at the floor, but he would do his best. He was pretty sure he’d find the words, because he was going to tell a story he knew by heart. He had told it to thousands and thousands of people, ever since his first book, « The Innovator’s Dilemma, » came out, fifteen years ago. Yet somehow, and he was so grateful for this, still more people seemed to want him to tell it–seemed to think that the puzzle it posed, and the answer he’d come up with, would save them from ruin.

He pointed his clicker at the screen and the first slide appeared. « For those of you who haven’t made a lot of steel, historically there are two ways to make it, » he said. « Most of the world’s steel has been made by massive integrated steel companies. The other way to do it is to build a mini mill. In a mini mill, you melt scrap in electric furnaces, and you could easily fit four of them in this room. The most important thing about a mini mill is that you can make steel for twenty per cent lower cost than you can make it in an integrated mill. Now, imagine you’re the C.E.O. of a steel company somewhere. In a really good year, your net profit will be two to four per cent. Here is a technology that would reduce the cost of making steel by twenty per cent. Don’t you think you’d adopt it? And yet not a single integrated steel company, anywhere in the world, built a mini mill. Today, all but one of the integrated mills have gone bankrupt. So here is why something that makes consummate sense can be impossible for smart people to do. »

The question he’d begun with, twenty years ago, was: Why was success so difficult to sustain? How was it that big, rich companies, admired and emulated by everyone, could one year be at the peak of their power and, just a few years later, be struggling in the middle of the pack or just plain gone? He had initially assumed that technology moved on, and the older players couldn’t keep up. But when he began to look into it he found that this wasn’t so: as technologies grew more sophisticated, whether by small improvements or radical leaps, the established companies, with their well-funded R. & D. departments, nearly always led the way.

Some people thought it was a matter of bad leadership–stupid managers grown too cautious or complacent to change. But Christensen was a generous man; he didn’t like to call people stupid, and, besides, the very same managers who were being called stupid today had been called geniuses last week, when the company was doing well and they were doing exactly what they were doing now.

« In the steel industry, as in your industry, there are tiers in the market, » he said. « At the bottom of the market is concrete reinforcing bar »–rebar. « Anyone can make rebar, but steel used to make appliances and cars »–sheet steel, at the top of the market–« is really tough to make. In the beginning, the mini mills were making steel from scrap, so the quality was crummy. The only market that would buy what the mini mills made was the rebar market, because there are almost no specs for rebar, and once you’ve buried it in cement you can’t verify if it made them anyway, so it was just the perfect market for a crummy product.

« As the mini mills attacked the rebar market, the reaction from the integrated mills was, man, they were happy to get out of rebar, because it was truly a dog-eat-dog commodity, and why would they ever want to defend the least profitable part of their business when, if they focussed their assets on angle iron and thicker bar and rod, the margins »–twelve per cent–« were so much better? So, as the mini mills expanded their capacity to make rebar, the integrated mills shut those lines down, and, as they chopped off the lowest-margin part of the product lines, their gross-margin profitability improved. »

The first industry that Christensen studied was disk drives. He had started out in consulting, then co-founded an advanced-materials firm called C.P.S. Technologies, but then he decided to follow the academic track that led to his becoming a professor at Harvard Business School. Someone told him that disk drives were the fruit flies of technology: they were ideal subjects for studying evolution, because a generation in disk-drive technology was incredibly short. He saw that the companies that made fourteen-inch drives for mainframe computers had been driven out of business by companies that made eight-inch drives for mini computers, and then the companies that made the eight-inch drives were driven out of business by companies that made 5.25-inch drives for PCs. What was puzzling about this was that the eight-inch drives weren’t as good as the fourteen-inch drives–they had a lower capacity, and a higher cost per megabyte–and the 5.25-inch drives were inferior to the eight-inch drives. So why hadn’t the fourteen-inch-drive companies simply started producing eight-inch drives? It didn’t make sense.

Around the same time, Christensen happened to remember that in 1962, during the Cuban missile crisis, a neighbor had brought in a big, powerful steam shovel to build a bomb shelter in her back yard, and he thought, Gee, you don’t see those big excavators anymore–you only see hydraulic backhoes. I wonder if the same thing happened to the excavators as happened to fourteen-inch disk drives? Sure enough, he discovered that although the hydraulic backhoe was used only for tiny jobs when it was first introduced–it was so weak, and its reach so short, that the only thing it was better than was a man with a shovel–over the years it had got better and better until, at last, it put the big excavators out of business.

In industry after industry, Christensen discovered, the new technologies that had brought the big, established companies to their knees weren’t better or more advanced–they were actually worse. The new products were low-end, dumb, shoddy, and in almost every way inferior. The customers of the big, established companies had no interest in them–why should they? They already had something better. But the new products were usually cheaper and easier to use, and so people or companies who were not rich or sophisticated enough for the old ones started buying the new ones, and there were so many more of the regular people than there were of the rich, sophisticated people that the companies making the new products prospered.

Another example he remembered from his own life was the transistor radio that Sony marketed in the nineteen-fifties. It was a terrible radio, you could barely make out the music for the static, and it had no chance of competing against the nice big RCA or Zenith consoles that middle-class families had on tables in their living rooms. But the transistors succeeded wildly at the bottom of the market, with the rebar of humanity: teen-agers. For teen-agers at that time, the alternative was nothing, and the transistor was…

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Larissa MacFarquhar