Photo: By betsyweber on Flickr
Harvard Business School professor Clay Christensen is best known for introducing the theory of disruptive innovation, which Steve Jobs and other visionaries have used to map out successful strategies for their businesses.We spoke with Christensen a few weeks ago about his new book, “How Will You Measure Your Life,” which looks at how we can apply successful case studies — for example, how Netflix disrupted the video retail industry — to our own lives.
“We’re forced to look into the future, which has no data available about it,” Christensen recently told LinkedIn employees. “This means that we either pursue a path that is a crap-shoot or are forced to look into theories of causality: What causes what and why.”
Many companies operate on the 'principal agent,' or 'incentive theory.' It's based on research by economists Michael Jensen and William Meckling, who determined that people work as hard as you pay them. For example, it's why shareholder values are aligned with executive compensation.
But incentives are not the same as motivation. Incentives are based on 'hygiene factors,' including status and job security. Motivating factors include a broader sense of purpose.
If you choose a job based on motivating factors, you are much more likely to be rewarded with hygiene factors, because you will do your job well -- you're intrinsically motivated.
Hygiene factors only go so far, and operating on a principal agent theory will eventually lead to burnout.
The best strategy is a balance between having a deliberate one, and a flexible, or emergent strategy.
Honda accidentally took over America with the Super Cub. The company's strategy was to sell big motorcycles, but Honda employees had more fun riding the small motorcycles around Los Angeles. A Sears buyer happened to come across the motorcycles, and the rest is history. Honda was successful because it had a flexible strategy: it was willing to change its business plan and its priorities.
In life, we need to have a deliberate strategy, but also have enough resources and flexibility to change course, and make way for an even better, emergent strategy.
In the 1990s, after Steve Jobs had been forced out of Apple, the company lost sight of its strategy of delivering the best products in the world. There was a disconnect between what Apple managers thought people wanted versus what the market really wanted. They were putting resources into the wrong things.
When Steve Jobs returned in 1997, he 'immediately set to work fixing the underlying resource allocation problem' -- which meant that 'anything not aligned with creating the best products in the world got scrapped.'
We determine our own values, and ultimately our fate, by where we pour our energy and resources.
This is the theory that made Christensen famous. It's the idea that smaller, weaker, but more innovative competitors break into markets and eventually disrupt and completely overtake their competitors.
In life, we cannot wait to have all the data before we make a decision. That's the value of proven theories like disruptive innovation. We can model our lives off of examples of what has happened in the past (outside of our own experience), and by weighing cause-and-effect.
With pressure from shareholders and Wall Street, many companies put short-term priorities over long-term payouts.
It's tempting to do the same with our own lives, by prioritizing things with immediate rewards over those that may take years to come to fruition. We're given personal resources of time, energy, talent and wealth to grow our own 'businesses' in our personal lives, and our strategies consist of hundreds of everyday decisions.
Christensen writes that 'many of us are wired with a high need for achievement, and your career is going to be the most immediate way to pursue that.'
But neglecting personal relationships along the way can have detrimental, irreversible effects.
Professor Amar Bhide wrote in his 'Origin and Evolution of New Business' that 93 per cent of all successful companies have had to abandon their original strategies. They were able to transform their strategies because they had the money and resources available to make the change.
Motorola made a risky $6 billion investment into Iridium, which ultimately failed, selling it at a fire-sale price of $25 million. It was a bad capital investment -- and the greater the investment, the harder it is to reverse.
Good capital is investing in things that are more likely to offer a positive return, or at least allow you to have leftover resources in order to pivot.
In our personal lives, it's easy to get fixated on short-term returns. But if you don't invest in important things like friendships and family early on, it'll be too late by the time you realise you really need them.
In business, companies can make huge mistakes by delaying scaling up, or responding to a disruptive competitor. Just look at the failed strategies of big box retailers like Blockbuster and Best Buy.
Society tries to convince us that we can time our investments -- by first putting energy into a career, and then focusing on marriage, and then kids later on. But it often doesn't turn out that way. 'If you defer investing your time and energy until you see that you need to, chances are it will already be too late,' writes Christensen.
Marginal thinking is essentially short-term thinking. It's the mistake big-box retailers, and other 'dinosaur' businesses, have made.
'No company deliberately sets out to let itself be overtaken by its competitors. Rather, they are seemingly innocuous decisions that were made years before that led them down that path,' writes Christensen.
And at the end of the day, you end up paying full price anyway.
Instead of ignoring disruptive entrants, the once-dominant players should have put money into upgrading system, retooling business models, and responding competitors before it's too late.
In our own lives, 'thinking on a marginal basis can be very, very dangerous' -- and it can lead us to make huge mistakes over time. Marginal thinking is at the root of insider trading scandals.
IKEA became one of the most successful retailers in the world by catering to exactly what customers want, versus what they think consumers need.
'Most retailers are organised around a customer segment, or a type of product. The customer base can then be divided up into target demographics,' writes Christensen. 'IKEA has taken a totally different approach.'
We're often tempted to conform what is expected of us. But instead, we should take an approach that uniquely fits our lives.
Before making a major decision, it's important to test assumptions. That's the value of market research.
Companies make big mistakes all the time when they don't adequately assess a market before breaking in. For example, Best Buy didn't realise that Europeans did not want a big box retailer; they prefer smaller stores.
And Disney also made a big mistake in Europe. The Paris theme park was a disaster because it only had 15 rides, versus 45 in the other parks around the world. The planners had misjudged how many visitors they'd get, and how long the visitors would want to stay.
In life, we need to plan ahead, and make projections before making big decisions -- but they are only helpful if they're based on plausible assumptions. Always think, 'has this proven to be true?'
In business, the 'invisible hand' is what drives enterprises and markets. It's economist Adam Smith's theory that once systems are in place, in a free society, the people will guide the best path to prosperity.
In the same way, MIT's Edgar Schein, who is one of the world's leading scholars on organizational culture, says that rules and guidelines don't simply determine an office culture. There needs to be strong action and messages from leaders that sets the tone for the rest of the company. Pixar is an example of a company that cultivates creativity like few others can.
We can't simply live our lives by rules. There needs to be conviction and action behind those rules.
The problem with marginal thinking is that you believe incremental decisions won't add up. But they do.
'Most of us have convinced ourselves that we are able to break our own personal rules 'just this once,'' writes Christensen. 'In our minds, we can justify these small choices. None of those things, when they first happen, feels like a life-changing decision. The marginal costs are almost always low.'
You've got to look beyond the numbers: 'The only way to avoid the consequences of uncomfortable moral concessions in your life is to never start making them in the first place.'
Every statement of purpose has three parts: likeness, commitment, and metrics.
Likeness is what a company will actually look like. Commitment and metrics are the means to get there.
'Purpose must be deliberately conceived and chosen, and then pursued,' writes Christensen.
The best way to test any theory is to look for anomalies, or for something the theory cannot explain.
In science and the world of business, these anomalies have the power to completely overturn the way we think and the way the market works.
Use theories to inform your life, but reason to know if you could be an outlier.
NOW WATCH: Ideas videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.