good afternoon

so welcome to the clarendon management

lecture i am thrilled

to in to welcome clayton christensen to

oxford

when i was named dean a few years ago

clayton came up to me

within a day or so and said that he had

a fabulous experience at oxford and he

was hoping that he could come back

someday

and i am delighted that today is that

day we're the first of a visit here at

site business school and the ability to

talk to all of you about his theories of

management

now i don't really need to introduce

clayton very much because that's why

you're all here you know enough about

him but

he's not a slouch let's put it that way

um

so summa laude from brigham young

then went on to this place actually

a rhodes scholar here at oxford queens

then went to another interesting place

harvard business school he was a

an mba student there and graduated with

high distinction

and then he took the kind of a low end

job of working at the white house

along the way then went back and got his

default or his doctorate excuse me i'm

u.s terms doctor dba at harvard uh

worked for bcg

started up a couple of firms um wrote

nine

nine books something like that um

including one that's been noted as one

of the six best business books

of forever

in addition to all that he does

remarkable work in his community

and his church and i can tell you as a

colleague of his he's a remarkable

colleague as well

so triple threat you know scholar

academic educator

gentlemen everything i am thrilled to

introduce clayton christensen welcome

[Applause]

well i'm just honored that you take the

time to come

seeing so many of you here causes me to

believe that it was just a boring day at

oxford

and this is all you could find that

would be partially interesting

but i um it's been a great opportunity

for me to think through the

today tomorrow and wednesday and what i

might offer that is

new uh and yet wouldn't waste your time

so um what i want to

lay out today in one way or another is

what i think

might be the beginnings of a new theory

of growth whose roots

are at a micro economic level

not the perspective of

what an economist might view from the

top down

and what i'm hoping is that the model

might be useful enough that it could

help us explain why some of our

economies

have stagnated and then also

understand what can enable a

nation in poverty to become prosperous

so um i don't know if these will work or

not

but uh if they're of interest to you

and some of you are interested in

similar things

i would love to have a chance to talk

this over through you

um so what i'm going to do

for those of you who haven't suffered

through

a restitution repetition of what the

theory of disruption is i'd like to just

dive lay this out for you

and then we'll come back to that for the

rest of the time

together where this came from

was as peter mentioned i founded several

firms but one of them has become quite

successful

and i did that before i became an

academic

and i brought with me a set of questions

as i reflected on my own experience a

primary one was what causes successful

companies to lose their growth

and ultimately fail this is the model

that emerged

and what i'm going to do is describe the

model in the context of a case

about the steel industry

so for those of you who have not yet

made a lot of steel

in your lives there are two ways to make

it

most of the world's steel historically

has been made in massive

integrated steel companies it would take

about

10 billion dollars to build an

integrated steel company today

the other way to do it is in what we

call a mini

mill mini mills melt scrap in electric

furnaces

and we could put easily eight electric

furnaces in this room because you can

make

steel of any given quality in one of

these mini mills

they don't have to scale up the

downstream processing steps and that's

why they call these things

mini mills the most important dimension

of a mini mill

is that in fact you can make steel of

any quality
for 20 lower cost in a mini mill then

you can make it in an

integrated mill so just think about this

for a minute

imagine that you were the ceo of an

integrated steel company somewhere in

the world

you're making commodities

here is a technology mini mills that

would reduce the full cost of making

steel

by 20 percent don't you think you'd

adopt this

new technology it's broadly available

and yet not a single integrated steel

company anywhere in the world

has yet successfully built and operated

one of these mini mills

and this is my sense for why something

that makes consummate sense

is actually impossible for smart people

to do

so the steel market like every market

is comprised by

tiers at the bottom of the market is

concrete reinforcing bar or rebar

almost all of us could make rebar if we

wanted to

at the high end of the market is sheet

steel that's used to make

appliances and cars it's actually very

hard to make that stuff

and at the beginning of this story the

integrated steel companies made the full

range of these products

mini mills became technologically viable

in the

late 1960s because they were melting

scrap

in these electric furnaces the quality

that they could produce

was uniformly bad in fact the only

market that would

buy what the mini mills made was the

concrete reinforcing bar market because

there are almost no specs for rebar

anyway and then munch

once you buried it inside of cement you

couldn't verify if it had met spec or

not

and so rebar was a perfect market for

crummy products

as the mini mills minnie mills attacked

the rebar market the reaction of the

integrated mills over there

was they were just relieved to get out

of the rebar business

it truly was in american english a

dog-eat-dog commodity their gross

margins were only 7 percent

it just had made no sense to defend the

crummy 12

7 margin business when in the tier above

them

the integrated steel companies could

generate

12 gross margins so an interesting thing

happened

is the integra as the mini mills were

expanding their capacity to make

rebar and then the integrated steel

companies got out

as they got out of rebar and added up

the remaining numbers

their profitability improved by getting

out

minnie mills because they had a 20 cost

advantage

they rolled tons of money by getting in

so they're quite happy one with another

but that disappeared in 1979 that was

the year when the mini mills

finally succeeded in driving the last

high cost integrated player

out of rebar you look at what happened

to the price of rebar in 1979

the price of rebar collapsed by 20

it just turns out that there's a subtle

fact about strategy that nobody had

thought about before

and that is a low-cost strategy only

works as long as you have a high-cost

competitor in your market

and as soon as they had fled up market

then it was just

low-cost mini mill fighting against

low-cost mini mill in a commodity

business

very quickly competition drove prices of

rebar down to the point

where nobody could make money so what

are

these poor minnie mills going to do well

they try to become

efficient making rebar but that's just a

recipe for survival

and then one of them looked up market

and announced oh my gosh

if we could just make bigger and better

steel we'd make money again

because the margins there are nearly

double

and so they stretch their ability from

rebar into making

thicker bar and rod and angle iron is

they attacked that tier the remark

of the market the reaction to the

integrated mills was they were just

relieved to get

out of that business because it was such

a dog-eat-dog commodity

and why would they ever want to defend a

crummy 12 percent margin business

when they could make 18 in structural

steel

so the very same thing happened is the

integrated steel companies

lopped off the lowest profit part of the

product line

and added the remaining numbers their

profitability

improved by getting out and the mini

mills by getting in

had a 20 cost advantage again

and everything was hunky dory on both

sides

until 1984 that was the year when the

mini mills finally succeeded

and drove the hat the last high cost

integrated player out of angle iron

bar and rod if you look at what happened

to the price of those products in 1984

their prices collapsed by 20 percent

and the reward to the mini mills for

their victory

is they couldn't make any money so what

are these poor suckers going to do

one of them looked up and said my gosh

if we could just

even bigger and better steel we'd make

money again

and as they attacked the smallest end of

the structural steam

business the reaction to the integrated

mills was

man were they happy to get out of that

business because it was such a doggy dog

commodity and

why would they have i told this story

before

why would anybody ever want to defend a

crummy 18 percent business

when their margins in sheets deal were

so

dramatically better so the very same

thing happened

as the integrated mills lopped off the

lowest profit part of their product line

and added the remaining numbers up their

profitability improved by getting out

and the mini mills as they had a 20

cost advantage their profitability

improved by getting

in to the the piece that the integrated

mills got out of

and things were just fine with this

arrangement until 1996

that was the year when the mini mills

finally succeeded in driving the last

high-cost
integrated player out of structural

steel

what happened to those products in that

year

prices collapsed by 20 percent and so

what's

poor nucor and the mini mills going to

do they've got to get into sheet

as they hit the commodity ends the

reaction in integrated mills was

boy they were happy to get out of that

commodity stuff

because their margins are so much better

in specialty steels

and so here we are today the mini mills

account for about 65 of north america's

steel production all but one of the

integrated steel companies has gone

bankrupt

now you notice i was able to tell the

whole story without using the words

stupid manager once because there's no

stupidity involved on either side of the

equation

every time the integrated steel

companies got out of what was less

profitable their profitability improved

and every time these guys went at one

stage at market their profitability

improved and the causal mechanism behind

this phenomena that we call

the innovator's dilemma is the pursuit

of profit

so if you are a little boy and you want

to kill a big

giant what does it tell you you ought to

do

well if you think you can build the beat

the giant by making

better products that you could sell for

better profits

to the giants best customers they'll get

you

but if you define a business or an

approach
where you come in at the bottom of them

then in pursuit of profit the giant is

motivated to flee

rather rather than fight you and if we

had

several days we could go through

industry by industry

of how this has happened before and is

going on today just as a

simple example looking at the way you

guys

the clothing that you have you may not

have heard of this company called

toyota as you guys drive

lexuses and things but toyota didn't

come into

our markets with lexuses in fact they

came in with rusty little sub compacts

in the 1960s called

coronas and they made it

finally so cheap to buy a car that the

rebar of humanity people we call

college students today can own a car

and then toyota went from a corona to

tercel

corolla camry avalon forerunner sequoia

and then alexis and general motors and

ford

who are making big cars for big people

in the equivalent
of integrated steel companies they could

see toyota coming up after them through

the 60s 70s 80s and 90s

and every once in a while general motors

would say you know we ought to go get

those

buggers and so they'd design a

subcompact to their own that they called

a chevy

chevy a shabbat yeah or a pinto

and it made no sense to defend the least

profitable end of their business

when the americans could make even

bigger cars for even bigger people

and toyota just came underneath them

and essentially killed detroit who's

killing toyota they don't feel as if

they're being killed incidentally

kia and hyundai the koreans have stolen

the bottom of the market from toyota

not because toyota's asleep at the

switch

but why would they ever want to defend

the crummy

the lowest profit part of their product

line when they have the privilege

of competing in luxury cars against

mercedes and then right after korea

chevy from china

cheray yeah

is doing the next i had a stroke a

couple of years ago and sometimes i just

can't think of their words

instantaneously so thanks for helping me

out

anyway so this is the model of

disruption and it explains

not everything but a lot of what goes on

in our world now

what i'd like to do is given that

context that people

in the pursuit of profit need to go up

i want to describe three types of

innovations
and then try to knit them together

in a way that at least has helped me

explain

why our economies are stagnant

now in america you see this because i

live there

every day in our economy

since world war ii we have had nine

recessions

in the first sex this first six of those

nine

from the time where on our economy hit

bottom

until when they had rebounded to achieve

the prior economic

peak on average of six months

just like clockwork but we had a

recession

in 1991 92-ish

where it took our economy 15 months

to achieve the prior peak and then in

2001 and 2 we had another recession

it took us 39 months to hit the prior

peak

and now we've been working at getting

out for

67 months and we still haven't hit the

prior peak

and so there's something fundamentally

wrong
with our economy and i will assert the

very same problem

is at work with yours and and

in japan's as well so

the first type of disruption or of

of innovation that's salient to this

i'll call disruptive innovation

and it looks at it from a different

perspective than the one i described

before

i'll describe here uh three concentric

circles and they're meant to represent

populations of people

where in the center these are the

customers in an industry who have the

most money

and skill and then these larger popular

circles represent larger populations of

people who have less money and less

skill

now almost always in an industry it

begins

at the center because the first

manifestations of new technology are

indeed

complicated and expensive so

in the case of computing this first

manifestation was what we call the

mainframe computer it filled a whole

room it cost about two billion two

million dollars to own it

and operate it and it took years of

training to operate it

and so only the largest universities and

the largest

corporations could have one and

therefore

it was a limited size of the market only

the wealthy

could have access the personal computer

was a disruptive technology

and i call it disruptive because it

transforms what was a complicated

expensive product

into something that is so affordable and

simple

that even a poor fool like clayton

christensen could own a computer

and if you remember those early personal

computers

were very limited at the beginning and

when we had a complicated problem we had

to take it to the center where

people who operated the mainframe

helped us but my gosh that personal

computer just got

better and better and better and better

and so that more and more you can do

more and more things on that personal

computer
and you just didn't need the mainframe

nearly as much

until ultimately that just disappeared

and that personal computer

was pretty much all that we needed

notice the economics were so different

these guys two million dollars gross

margins of 1.2 million dollars per

machine

the personal computer they cost two

thousand dollars not two million dollars

and that meant that the gross margins

were only seven dollars

seven hundred dollars per machine as a

result
the people that made the mainframe

computers just like the integrated steel

companies

made better and better and better

mainframe computers

they didn't go after this low end

product

because it just made no sense to go

after that

when the margins up here were so

attractive

then the next one the substance was the

smartphone

the cost is 200 rather than 2 000

and gross margins per unit are 80

dollars

so the very same thing is at work at the

beginning

you could just use the simplest problems

with that

that with that machine and so we had to

do the complicated ones on our

personal computer but oh my gosh

this technology just gets better and

better and better

so that more and more we can do our

problems on this little device

and ultimately we're just not needing

the personal computer nearly as much

as it was historically the case and true

to form

the people who make these products the

personal computers like

dell hewlett packard lenovo asus tech

they're not making these products

because it makes very little sense

to make something that doesn't make

sense

so this is the first uh type of

technology

i'll call it disruptive innovation and

what they

these innovations do is they make they

transform

complicated products into simple

products

that are much more affordable

now i'm going to put those there here

the the impact that disruptive

innovations have

is that they create jobs because so many

more people can

own and use these computers they're

more people are buying them that means

you have to hire people to make them and

distribute them and sell them and

service them

if you could go back into our history or

yours

i'm quite certain that the data will

show that nearly a hundred percent

of all of the net jobs that have created

in our economies

in the last hundred years were created

by disruptive

innovations again by making affordable

and accessible

now they use capital when you're growing

you just need to put assets

on the balance sheet in order to finance

that growth

so that's the first type the second type

we call sustaining innovations and

sustaining innovations

on the prior slide we're making better

mainframe computers or better personal

computers

their purpose is to make good products

better

and these are very important for our

economy because they kept the

mar the market efficient and productive

but on average they don't create

jobs and the reason is when we buy

a new product we don't buy the old

product

when toyota successfully sells a prius

the hybrid car

they don't sell a camry and so by their

very nature
sustaining innovations which make good

products

better don't create a lot of new jobs

in the economy and because of their very

nature

of their replacement in character

they don't use a lot of capital either

so

important but that was the role that

they played

and then the third type of efficient of

innovation

we're calling an efficiency innovation

efficiency innovations allow you to sit

sell the same products to the same

customers

but cheaper and so walmart

is an efficiency innovation they allow

you to produce the same products to the

same customers about 15 percent

lower cost now when walmart

builds a a store in a community they

have to hire people

to work in their store but if you look

at the region

almost always the number of people in

retailing

is reduced because they're so much more

efficient in getting it

from here to there now what if i go back

to

the mainframe mini computer discussion

when the integrated steel companies were

going up market

they were investing in sustaining

innovations very aggressively

to make better products that they could

sell for better profits to their best

customers

the mini mill was an efficiency

innovation

they require they could make a ton of

steel

with many fewer people than was required

um in an integrated steel company and so

the impact of efficiency innovations has

is that they eliminate jobs but

importantly they free

capital and what i mean by that

is for example before toyota came

into north america it took the

american car companies about 60 days to

to assemble a car and as it went through

this

turtle pace

there had to be a lot of work in process

inventory in that factory

and that required a lot of capital to

keep that on the balance sheet

when toyota figured out what the toyota

production system was about

they reduced the cost or the time

required to assemble a car

from 60 days to two days

and because they did it so quickly you

just didn't have to have

all of that working in process inventory

on your balance sheet

and so all of that capital that had been

imprisoned on the balance sheet was

freed up

to you be used for other things and so

you

you could use that capital then to

invest
in new disruptive innovations and so

it's almost like this works

as a perpetual motion machine

as long as efficiency innovations

are creating enough capital that we can

launch disruptive innovations and as as

long as

disruptive innovations create more jobs

than efficiency innovations

eliminate it just keeps going

and i would believe my sense is that

over the last

150 years in north america

our machine worked in this way

but then i mentioned to you something

has gone wrong

and this is my sense for what that in

fact has gone wrong

and that is that rather than working at

it as a circle

it's laid out in a straight line and the

problem with a straight line is it has a

beginning and an end

what that where that came from was a

couple of concepts the first one

was a marvelous economist named george

gilder who just had this axiom

that i described so whenever you're

making a product you have

inputs if some of those

inputs are abundant and cheap

you don't have to account for them you

can waste it if you want to

so sand for example is abundant and

cheap and you can waste it if you need

it

but other inputs might be costly

and scarce and if that's the case

then you've got to be careful and you

have to really husband the use

of that product and only deploy it

in applications where it will be

leveraged

in a maximal way and you have to measure

how efficiently you're using this

scarce resource now so that's kind of

the paradigm

that that gilder gave to us

now what has happened is that within our

midst

there is a new seminary that has emerged

in our midst

and i call it a seminary of new finance

and this is actually a beautiful

cathedral in reykjavik

and i call it a seminary because the the

s the the students in the seminary

believe in the doctrines that are being

taught in this seminary

as deeply as people who are religious

people like i am

believe in the the doctrines of our

churches

uh the people who teach in this

seminary are uh business professors

oddly

and and uh partners in equity firms and

and so on and

this this uh seminary emerged

through the 1940s 50s and 60s

in an era where capital was scarce

and very costly and that meant

that if you're going to be good you've

got to be very careful and deploy

capital only in those applications where

it's going to generate

the highest return and you've got to be

careful and measure

carefully this deployment of capital

so that over time you only deploy it

where

it is most productively deployed

in order to do this the theologians

had to give us ways to measure goodness

or profitability now prior

before this managers have always needed

to measure

profitability in some way or another but

before these guys came on this

this this scene they measured

profitability with crude measures like

tons of cash and now

these theologians gave us sophisticated

ways of measuring

things and interestingly they are all

ratios

and the great thing about measuring

things by ratios

is it gives options to managers

so each ratio has a numerator and a

denominator

and i can go after both of those in

different ways to get the number

up so so for example

return on net assets is a ratio

and sure i could make more profit and

put it to

in the numerator of the ratio but what

the heck i could just

outsource stuff and get assets off the

balance sheet

to reduce the denominator in the ratio

either way the measure of profitability

goes up and so thank goodness these

theologians gave us

commandments and

interesting they they are all ratios

so i talked about rhona which is a

common ratio

eva and roce are similar

ratios this is an interesting one

internal rate of return it's a ratio

where you've got profit in the numerator

if you want to take that root

the denominator in essentially is time

and if i want to get internal rate of

return to go up

then all i have to do is invest only in

things that pay off in the short term

and so uh they get gave us these

sophisticated wet measures

of measuring this uh scarce and

costly input that we call capital

so what impact has this had on our

economies
so we got this going and then out of

efficiency innovations comes capital

and i have to decide what should i do

with this capital

well darn it if i use that capital to

invest in disruptive innovations

the problem with disruptive innovations

is it pays off in five to ten years

and it uses capital so i have to put

capital

onto the balance sheet what that means

is if we go after this internal rate of

return

goes off the cliff and return on

net assets goes off the cliff

on the other hand guys what if we just

took this capital

and spend it again into another round of

efficiency

capital the great thing about this

is it tur payne's pays off in one to two

years

and it creates more capital and if we

have more capital

then we have more options to invest

and so this comes out and then as an

analyst

because i studied this stuff in this

seminary

i look at this and say darn it the

problem with disruptive innovation

is it pays off in five to ten years and

it's going to use

capital darn it on the other hand if we

just

run it right back into efficiency

innovations

it's going to pay off in a year or two

and it's going to give us

even more capital that we can invest

and then i go through the logic and

realize what makes sense

is to keep investing in efficiency

innovations

and more and more and occasionally

a little bit of capital goes up into

disruption

but in america in the last 20

years the number of disruptive

innovations that our economy has

produced

is about a third the number of

disruptive innovations that emerged in

our economy in the 50s 60s

and 70s and

and so we are creating taking a lot more

jobs essentially out

relative to the number that we're

creating with disruptive innovation

and that's what's wrong with our economy

and if you ever want to know

what the future is for britain or

america just look at japan

because in japan through the 1950s

60s and 70s remember how

japan was just a juggernaut

was growing at unprecedented rates

well what was happening was that they

were doing

disruption over and over again

and so i'll talk about some of these in

a minute

but they made motorcycles affordable

that even grandmothers could have a

motorcycle
toyota did it for

students sony made

a television and a radio so affordable

that

any person could have it canon

made copying so affordable that we could

have a

printer in every office and these

innovations that immediate were

emanated from toyota allowed

billions of people around the world to

own things and use them that previously

were

impossible for them to have access to it

and so their economy was growing at six

to ten percent per year

and if you could walk you had a job

their unemployment rate during this

those three decades

was less than two percent and then in

the 1980s

they began to hire people who were

graduates of the seminary

just like we did in america and as they

assessed

the the return on capital

that came from that versus this they

just stopped

and in since 1990

japan's economy has generated only one

disruptive innovation that's the

nintendo wii

but it's the only one and so what

they're doing

is as what we're doing is just

investing over and over again to create

more and more capital and the result is

we are awash in capital

we truly are awash in capital

and the cost of capital is zero

it literally is zero there's a company

we still

create a few of these in america there's

one in

the silicon valley called square

they just finished their most recent

private round

the cost of that equity is negative

the investors paid square to take their

money

and the head of our federal reserve

bernanke spends every day standing on

the beach

with the fire hose open full bore

and he's trying to fill the ocean with

capital

and i think that the bank of england is

essentially trying to do the same thing

but our world has changed

when cost of capital or when the cost

of a commodity is cheap

and it is abundant you don't need to

take account for it anymore

and so if we had some time we've got

some ideas for how to solve this problem

but

i want to go over that to finish the

other elements of the theory

but i just want to have you think about

this

that if in fact the cost of capital is

zero

then the trying to measure

and optimize the cost of capital

when capital capital is zero is

irrelevant

and we teach in finance that we should

calculate net present value

what value is that if the cost of

capital

is zero and what uh

um george gilder would say

is we're at a time at a time when

we could actually just waste capital

and what is scarce are investments

in making our good people to become more

capable

people and probably 10 years down the

road we will

come to discover that that's the kind of

thing that we need to

husband because they are so scarce and

so costly

anyway so that's one piece of the system

now i had a former student

who returned to japan

took a position in their industry of

international trade and industry

and this poor man was sentenced to

develop a plan for the resurrection of

japan's economy

and you know this is a big puzzle

because through the

60s 70s and much of the 80s japan's

economy was growing like gangbusters

and then start 1990 it just flat flat

uh flatlined and he said uh

he worked on the problem for about two

years and he called me one day

and he said clay there's no hope for

japan

and i'm a very optimistic guy as you can

tell and

and i said look i'm certain there's

something japan can do why don't you

just come back to harvard and we'll

spend a day and

solve japan's problem

and uh what he pointed out after he

talked with me for about an hour he

convinced me that there

indeed was no hope for japan and he

pointed out

as just i've described to you that japan

disrupted america and they disrupted

america

faster they than they disrupted uh

western europe because

you guys have all kinds of ways to keep

people out

ours are are are easier to get into

but those companies started at the

bottom in the industries that i've

described

and by 1990 they were making the best

products in their categories in the

world

the problem with hitting the high end of

the market

is there's no place to go and the

margins are beautiful

but the volume there is limited

and what happened to japan as they

stopped investing in disruption

is that korea taiwan singapore and hong

kong

started with simple products and by

making them affordable and simple

in a whole new section of the national

the
global economies enabled more people to

have access to more interesting things

and as they started to grow these guys

leveled off

and america got even in worse

shape now those guys are clearly

close to the top and then china comes

next

they start with simple things now

they're growing like gangbusters but you

can already

feel that it's becoming mature and then

india comes next and we laid all this

out we started to want to understand

why this happens why is it that

disruption

itself seems to be an engine

of prosperity but also

raised the question why did these waves

of disruption all come from china or

from

asia and why hasn't mexico disrupted

america

in fact why hasn't any nation

in latin america or the middle east

or africa become

gone from poverty to prosperity

in such a short time as these guys have

why haven't they been they've been able

to disrupt the rest of us

and it's a puzzle i'm not sure that i

know the answers but let me just

describe

a little bit of what we see so toyota

do you know where they started this is

their first product

at three three wheeled

delivery truck that they could use in

the

uh congested pathways

in urban cities as japan's economy was

trying to get out of

world war ii and they started

with domestic capital this wasn't

outside capital that came in but they

mustered enough capital to get going

the customers were japanese drivers

and the distribution this system were

japanese

as well that's how they started in other

words

through disruption made it possible for

a larger population of people

now to have a car in some way or another

whereas historically they didn't have

access to it

and then the next step was they started

to

to fuel disruption in america by making

it so affordable and accessible

now that college students can do it and

this is the first one that they

introduced in 1962

it cost less than two thousand dollars

and by creating this in america they had

to have more

more customers more distributors and so

on

and then after they did that then their

focus

became much more focused on sustaining

innovations

that's the first uh or

an early camry and then the last one is

alexis
which i've never ridden in

in korea kia

started out here domestically

domestic customers domestic capital

domestic distribution

uh so affordable that almost anybody

could have one

this is the first

passenger car again for domestic

market entirely and this one that came

in

86 was the first one that they sold in

the world markets

and now this is what they sell today but

again
the the first step was with the domestic

customers

and domestic capital um this is how

tia kia got into the bus business i was

a missionary for the mormon church in

korea

in the early 70s when it was the

the poorest nation in asia

and this was a this was a bus

you just sat in the back and hopefully

they

you got off when they hit a pothole

and this is what they do now

think about where where honda came from

their first product again was what they

called a cub

essentially a motor bicycle with a motor

domestic customers domestic capital

domestic dealers and then they came

just as toyota did to do disruption

in america and uh

new customers new dealers but in our

nation

and you notice these are different kind

of motorcycles

than normally we have thought about and

they

they had a marvelous advertising

campaign called
you meet the nicest people on a honda

because you didn't meet a lot nice and a

lot of nice people on harleys

but then after they created this new

market then they also

started to focus on sustaining

innovation

and just like toyota when it hit this

this

transition growth started to stop

because they're focusing not on the

things that create

this kind of growth here so i don't know

if you get a sense of what's going on

that in every case they have to create

within themselves

innovations that help them allow more

people to have access

things that previously wasn't possible

and then they go up from there this is

how it happened

in taiwan this is an

interaction i'll describe quickly

between a company called

asus tech and their customer dell

at the beginning of this story asus tech

which is a taiwanese

uh tar card uh circuit bar

guard company came to us

dell with an interesting value

proposition

you know we've been doing a good job

with these come to think of it that

motherboard

making circuit boards isn't your core

competence dell it's ours and if you let

us do it we could do it for 20

lower cost and dell's analysts looked at

it and realized geez they could

and if we had them do the motherboard

not only could the cost drop by 20

but we could get all of the the

circuit board manufacturing assets off

the balance sheet because it's very

capital intensive
so they shoveled that over dell's

profitability

was improved and their revenues were

unaffected

a assistec revenues and profits both

improved

then they came back a little bit later

with an interesting value proposition

you know the motherboard is really the

guts of the machine

come to think of it dell you don't need

to assemble all of the rest of the junk

because assembly isn't your core

competence it's ours

and if you let us do it we do it for 20

lower cost

and dell's analysts looked at it and

realized gosh they could

and if we gave them assembly we could

get all of the other manufacturing

assets off the balance sheet

and we still get 20 lower costs so they

shoveled that over

dell's revenues were unaffected but

profitability improved

and assistex revenues and profitability

improved by getting in to what dell got

out of

and then dell was visited by assistec

people a couple of years later with an

interesting value proposition

that is you know having to deal with

all these components suppliers and

working out all the logistics headaches

and shipping the stupid computers to

your dumb customers

logistics isn't your core competence

dell it's ours and if you let us do it

we could do it for twenty percent lower

cost

and dell's analysts looked at it and

realized geez they could

and if we gave them the supply chain not

only could it

could they do it by 20 lower cost but we

could get all the

current assets off the balance sheet and

so they shoveled that over

dell's revenues were unaffected but

their profitability now really improved

especially return on net assets because

they got no assets

and the sustex revenues improved by

getting into what

dell got out of him have i told you this

story before

saw the very same thing happened and

uh and now asus tech is the third

largest manufacturer of computers in the

world
and dell just puts their name on stuff

that these guys

make and you notice i was able to help

tell the whole story without using the

words stupid managers

once because there's no stupidity

involved

these guys get their profitability by

getting out

these guys get their profitability by

getting in

and it's the pursuit of profit that

caused this to happen

but this is the mechanism by which uh

taiwan's
economy became prosperous as they did

this

over and over and over again primarily

in consumer electronics in one way or

another

i'm on a board called tcs

in india we started just do doing

a simple coding and then step by step

added more and more and more

to the i.t processes of our customers

and so really it's not clear who's got

what brand

and parts of india have just become

extraordinarily prosperous

very quickly by this method of

disruption

last one and then for open for comments

there's a company in india called godrej

that is their kind of their equivalent

of whirlpool

and the vast majority of the population

in india can't afford

refrigeration and to just try to

make a a

fridge cheaper is as a problem because

there's still a lot of

complication and moving parts and so

these guys

actually read the theory of disruption

and decided that there was another way

to make a fridge

and that is they use an effect called

the peltier effect and essentially

you get a wire of bismuth

and connect it to a wire of copper

and if you send the electrons through

one direction

it immediate

it makes it hot if you send it in the

other other direction

it absorbs heat and so they bit these

these plastic little boxes that are

insulated

and in the lid they have these wires

that use the peltier

effect and they send it in this

direction

and it can generate it can reduce the

cost

inside the box to about four degrees

celsius

not cold enough to make ice

but cold enough to support whatever you

need

in the home and they can sell it for

about 25

or i'm sorry 35 a piece

and what's happening just in this

industry

is that many more people can now own and

use a refrigerator

and because there's so many people who

are buying them

they have to hire a lot of people to

make them

and then you have to have retailers to

sell them

these are just the result of that and

then you have to have

new ways of distributing these products

actually their post office

sell these things now because the

they're getting disrupted in the post

offices as we are here

and that then enables more people to

start new businesses this is somebody

who now can sell

out of his shop cold things

that previously weren't possible before

and that means that more people can do

more things

and so

against all odds 20 years ago

india has become really pocket by pocket

and now in much more pervasive ways a

prosperous nation

through disruption now let me come back

to

mexico unfortunately what's happening in

mexico and i don't know all the answers

is that in america we use our capital

build factories in mexico

on a sustaining basis these products

make our car companies make better prof

profits in the way they're structured to

make profits

we do the same thing in in clothing

or mute beauty products

or we'll use it for efficiency

innovations

to make products at lower cost to then

be brought back into america

but none of those creates disruptive

products

and what they need to do in fact is use

domestic capital with domestic customers

and domestic distribution to create new

businesses in mexico and uh

and i've got some thoughts about why

that doesn't happen

but i do think that somehow in the midst

of all of that is

kind of a a model and that is

there have been lots of explanations

about why

poverty persists and what actions might

or might not

be levered to solve that problem

and there's a lot of logic in a lot of

these the law of law

the rule of law investment in

infrastructure that i

that the world bank will do for us uh

foreign

direct investment ngo and aid

but every one of those as an explanation

just doesn't is correlative but not

causal

i think and there are

counter there are an anomalies to these

explanations

and somehow i just have a sense that

disruption

might be an element of a theory of

of uh prosperity that hasn't yet

been explored in the way that it should

so one of the reasons i asked the dean

to

give me a desk to work at for a bit

is um those of you who have interest

in this and and tools to mat

to mathematically model what we're

looking at i'd be really interested

and any of the rest of you who can see

anomalies from the theory would be very

helpful

but anyway this is what i wanted to

share with you today is that i think

that there

are re microeconomic
of our macroeconomic prosperity or

or stagnation and

it's something that you would only see

if you're watching how companies

actually

do their work as opposed to analyzing it

from

the level of government policies

questions or comments or criticisms or

cannonballs you want to throw at me for

the next few minutes

[Applause]