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CSUITE STRTEGIES

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 disruptiveinnovation to the world, Christensenhas 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 formanagement 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.

/FORTUNE INDIAJune 2011

THE AUTHOR OFTHE INNOVATORS DILEMMA, CLAYTON CHRISTENSEN,TALKS TO D.N. MUKERJEA AND SRIVATSA KRISHNA.

The DisruptiveInnovator

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In India, you routinely do things that Americanmanagements would say are impossible to do.Q..

CSUITE STRTEGIE

/FORTUNE INDIA June 2011 June 2011 FORTUNE INDIA/

sible 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

cant explain. Then you have to figure

out what youve missed. My research

cant explain the Tatas.

Tata Motors or the group?

The group. Here we are in the mostluxurious hotel possibly in the world

[The Taj Mahal Palace and Towers,

Mumbai], at least that Ive ever been

in, and down at the bottom of the

market is Ginger [a chain of budget

hotels also run by the Tatas]. There

isnt 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, its an instinct. For the

others, its more of a process than an

instinct.

Is there an environment which gen-

erates disruptive innovators?

I thought about this a lot becauseMexico should have disrupted

America years ago. Im 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 isnt an instinct to try to

go after the world. That trait is

uniquely Asian.

Do religion and culture have som

thing to do with it?

Its a great question. I have said tha

religion is a foundation for capital-

ism. I wrote that capitalism works

people instinctively follow unenfor

able laws. Imagine youre the CEO

substantial company, and you have

certify [in the context of the Sarba

Oxley regulation] that among the

thousands of employees, no one ha

done anything wrong.There are only two ways to do it:

Either those people have to instinc

tively follow unenforceable laws, or

you have to become like the comm

nists, with somebody watching wh

everyone does. America is unwillin

to oversee every persons activities,

and religion [which is all about adh

ing to unenforceable laws] is declin

ing. There has to be some mechani

to hold people accountable for wha

they do, otherwise the economy wicollapse. Whats wonderful about

India is that the culture is rooted in

religion. I think it causes people to

voluntarily follow rules.

People talk about Indias techies

and how bright they are, but how

come India has not come out wit

world-beating tech product yet?

I hate to say this, but there hasnt

been enough time. I think Americ

disrupted Europe. For a long timethe best products came from Euro

America just did mainstream stuff

When Japan disrupted America, w

became truly unique. And then Ja

did the same thing. When they wer

catching up through disruption, yo

couldnt say that their products we

unique. So I would just wait a little

more. And already, in IT and in sof

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 South-

ern Asia, and then moving up intoEastern Europe and so on.

Youre 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

Indias 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 dont

smaller companies innovate?

I dont have the answer. My hope

in America is that my work ca n put

venture capitalists out of business.

In other words, what we teach larger

corporations, who dominate the sus-

taining [innovation] trajectory, is that

they can actually create disruptive

businesses as well if they just think

about it. A corporation can evolve if itcan create innovative business units.

So much of what weve 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 impos-

sible to do. We would say its impos-

You talk about how Sony and the

Korean companies disrupted

mature economies. Can Indians dothat in the next five to 10 years?

A:I believe it will happen

and, in the end, India will

have a bigger impact than

China. The Chinese are on a cliff inerms of the size of their population,

so, shortly, the cost of making things

n China will c ause their economy

o sputter. In India, theres been an

extraordinary wave [of disruptive

nnovation], and then, the next one, I

believe will happen.

You have more great engineers

and managers than anywhere in

he world spending so much of

heir time and effort dealing with

bureaucracy. So the great thing about

he IT revolution is as if God made

his conduit down to Bangalore and

you can get in and get out without

having to deal with the corruption

and the bureaucracy.

Its harder for physical

nfrastructure and physical products

o 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 yourpopulation are just the perfect

customers for disruption in everyway. Its 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.

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Christens en believes flexible thinking has helped Indian conglomerates to grow.

/FORTUNE INDIA March 2011 March 2011 FORTUNE INDIA/

into the sheet steel market, there were

no surprises. The price of t heir shareswent completely flat.

In religious terms, its 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 com-

panies that we knew were disruptive.

We had about 70 companies, and

in the 10 years after the IPO, theircompounded annual growth rate

was 46%. Whats 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

couldnt invest.

So, in 2002, we set up a small f und

to invest in only disruptive compa-

nies. Over eight years, the compound-

ed annual return is about 29%. Thats

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 in-

novation find it very difficult to get

funding in India. One would expectthat people would be hungry for

products that reach out to the new

consuming class.

I had a fellow come to visit me saying,

Im 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 its

the company. What makes it worse

that the money cant go in if they [in

vestors] cant see how to get it out. A

there are a lot of good companies th

you would never be able to take pub

So this guy figured out a different

security. He is the general partner a

hes just like a venture capitalist. He

got limited partners. When the mon

goes in, like a licence for intellectua

propertyyou actually take a licenc

for the use of his capital.

On the balance sheet, it is in the

category of debt, but its not repaid o

a calendar basis or a percent interesRather, a royalty based on revenue i

paid after revenues begin. The bigg

they get, the more royalty is paid, u

the sum of what has been paid to th

partners is five times the original.

Thats what venture capitalists wan

to get. You pay off from pret ax mone

Once youve paid them off, you erase

them from the balance sheet. Anoth

good thing about it is you dont have

to worry about pricing t he company

since youre not giving a share of equ

Would you consider this a

classic disruption?

I dont know if I would describe it a

disruptive, but thats the question:

Can a traditional venture capitalis

this kind of thing? I see t hem unab

to do it.

Are there any Indian companies

that you would evaluate from yo

funds point of view?Well, in America we are not able to

buy TCS shares but Infosys was a m

jor player for six or seven years, an

Tata Motors has been in t he portfo

for quite a few years.

Is the Jasmine Revolution

disruptive?

I dont know if Id call it disruptive,

even better products than theyve ever

made, and they say thats tomorrow.

Theyre looking in the wrong direc-

tion. [Christensen has argued that

disruptive innovation isnt about im-

proving a product, but rather creating

something thats totally unexpected].

Do large customer bases

inhibit disruptive innovation insome organisations?

Its because, almost always, the dis-

ruptors got the technology from the

big corporations. Theyre able to in-

novate in technology and in products,

but because they cant innovate in

business models, they cant utilise the

technology theyve developed. I am

doing my best to teach the corporate

fast its 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 theyre

into structural beams, and analysts

said its bigger than we thought, itsfaster 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 com-

pany in America! But after they got

ware, India is where some of the best

comes from.

If Im the head of a large corpo-

ration, how do I spot disruptive

nnovation 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 totallydifferent from what we make? For ex-

ample, in America, who are the people

who dont buy Oracles suites? Where

are their ERP [enterprise resource

planning] capabilities coming from?

ts salesforce.com. You should look at

ittle companies and say, Im looking

at tomorrow. Instead, their [large

corporations] inclination is t o look at

giants that they can innovate in busi-

ness models, but its a challenge.

What has been the markets re-

sponse to such forces? It doesnt

tend to reward disruptive innova-

tors very easily.

Well, they dont. We have learnt a lot

about this. The causal mechanism

that causes your stock price to risefaster 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 oppor-

tunity by product. [Christensen has

often used the story of how mini-mills

disrupted the US integrated steel in-

dustry.] We know how big this is, how

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