The Great Disruption

Clayton Christensen, Thomas Craig, and Stuart Hart

From Foreign Affairs, March/April 2001

Article preview: first 500 of 5,199 words total.

Summary:  A key reason national economies rise and fall these days is their ability to nurture "disruptive technologies" -- innovations that lead to new classes of products that are cheaper, better, and more convenient than their predecessors. America's ability to exploit disruption has led to its recent boom, while Japan's failure to do so has led to stagnation. Other countries should heed the lesson.

Clayton Christensen is Professor of Business Administration at Harvard Business School and author of The Innovator's Dilemma. Thomas Craig is Director of the Monitor Group. Stuart Hart is Professor of Management at the Kenan-Flagler Business School of the University of North Carolina.

REVERSAL OF FORTUNE

The booming Japanese economy from the 1960s through the mid-1980s was one of the most thoroughly studied and admired phenomena of modern times. From steel to automobiles, consumer electronics to watches, Japanese companies easily overran the fortifications of their American and European competitors. Western scholars praised Tokyo's careful economic planning and the focus of Japan's keiretsu -- massive, interlocked networks of companies such as Mitsui, Mitsubishi, Matsushita, and Sumitomo -- on building long-term competitive advantages. Other analysts attributed Japan's economic momentum to its workers' selfless dedication to improving productivity and to the extraordinarily high savings rates of its consumers. Scholars cited the absence of similar factors in Europe and North America, meanwhile, to explain the stagnation afflicting those countries. In the United Kingdom, for example, the huge share of GNP taken up by government spending was seen as crippling economic growth because it crowded out private investment capital.

The fortunes of these economies, of course, have now reversed. America has experienced the longest unbroken economic expansion in its history, and the United Kingdom has achieved levels of prosperity that few could have imagined 30 years ago. Japan, in contrast, has been mired for a decade in stagnation that appears to have no end. What happened? The answer lies primarily at the managerial and microeconomic levels and in particular with a phenomenon best termed "disruptive technology."

Disruptive technologies create major new growth in the industries they penetrate -- even when they cause traditionally entrenched firms to fail -- by allowing less-skilled and less-aÛuent people to do things previously done only by expensive specialists in centralized, inconvenient locations. In effect, they offer consumers products and services that are cheaper, better, and more convenient than ever before. Disruption, a core microeconomic driver of macroeconomic growth, has played a fundamental role as the American economy has become more efficient and productive. Once the microeconomic roots of disruptive technology are understood, policymakers can learn how to transform relatively stagnant economies such as Japan's, Germany's, and India's. Understanding disruptive technology can also help forecast the dangers lurking for strong economies such as South Korea's.

TOO MUCH OF A GOOD THING

Japan's macroeconomic puzzle has a microeconomic parallel. Why did so many companies that were once considered the best run in the world stumble so quickly? Many of these leading companies faltered not because they were ineptly managed but precisely because they were well managed. In fact, their leaders followed some of management's most sacred rules, such as staying close to their customers and focusing investments on the most profitable new products and services. But their innovations fell victim to disruptive technologies.

Every market features two types of "performance trajectory" -- the rate at which the performance of a product or service improves over time. One trajectory measures the ability of customers to utilize the product improvements introduced by manufacturers. For example, even though carmakers keep developing new and better car engines every year, most drivers cannot take advantage of this improved performance ...

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