Be careful what you wish for

I’m hitting the real meat of The Innovator’s Prescription by Clayton Christensen and came across an example of disruption that I think poses an interesting challenge for leaders in general. It occurs in his larger consideration of the future of the pharmaceutical industry on pages 261 – 309, and concerns supply chain disruption.

Christensen believes that the trend among big pharmas to outsource R&D, clinical trials, manufacturing, and marketing is a mistake–it essentially amounts to emptying an organization of its value-adding activities and handing them over to smaller firms who will eventually come to the fore as market leaders.

As usual, I’ll leave weighing in on this kind of stuff to the experts. But what I do want to discuss is Christensen’s story of the relationship between Dell and ASUSTeK, because I think it’s emblematic of challenges many leaders across a rage of markets face.

You can read the full account on pages 263 – 266, but the gist of it goes something like this. ASUSTeK began by making the simplest of circuit boards within Dell computers. After some time, they offered to make the motherboards for 20% less than Dell could. After all, circuit manufacturing wasn’t Dell’s core competency anyway, so why not push it off to ASUSTeK, lower the costs of manufacturing, and get their circuit manufacturing assets off the balance sheet? Christensen continues:

So [Dell] transferred the making of the motherboards to ASUSTeK. Dell’s revenues were unaffected, but its profits improved significantly. ASUSTeK’s revenues improved, and its profits improved–because it was utilizing its assets more efficiently. In other words, it felt good for Dell to get out of motherboards, and good for ASUSTeK to get into motherboards. (p. 264)

But ASUSTeK didn’t stop there. They continued to approach Dell with winning value propositions to take over assembly, SCM, and design as well, and Dell took them up on every one, securing more and more profit with each transfer of value-chain activities from Dell to ASUSTeK. And that’s not all, “[a]s we write this book, ASUSTeK is in the process of coming back one more time,” Christensen tells us.

But this time they aren’t coming back to Dell, but to the giant electronic retailers like Best Buy. And they’re saying, “You know, we design and manufacture some of the best computers in the world. Why should you have to bother stocking those Compaq, Hewlett-Packard, and Dell brands on your shelves? We’ll give you your brand, our brand–any brand–at 20 percent lower cost…Bingo. One company is gone, another has taken its place. (p. 265)

“There’s no stupidity in this story,” Christensen assures us. Dell’s leadership did exactly what any business school professor or management consultant would tell them to: focus on your most profitable activities to improve profitability, and get out of those activities that are less profitable. The pursuit of profitability: for Christensen, this is the main driver of disruption and the main reason why the path of disruption is so predictable.

[T]he pursuit of profit causes the industry’s incumbent leaders essentially to flee from the entrant attackers–when the attackers enter into the least profitable tier of the market, or the lowest value portion of the supply chain…To the disruptee, these are the least profitable of the remaining activities; to the disruptor, these are the most profitable of their activities. (p. 266)

What I find interesting in all this is to consider what’s required from leaders at both companies. Throughout the disruption, Dell’s leaders were likely perceived as successful–after all, they were increasing profits quarter over quarter. But would there have been any way for them to recognize the long-term implications of the path they were on, to see the unappealing endgame of chasing short-term profits in their partnership with ASUSTeK? Would anyone have cared, given the short-term mentality of shareholders and the profitability of the strategy each quarter? And would there have been any way for an executive to buck this trend to engage in the kind of self-disruption that would have sustained Dell’s long-term dominance?

It’s easy to pick on Dell in this story, of course, but what about ASUSTeK? Clearly they made very strategic moves to disrupt Dell, but now that they’re stepping onto the big stage and becoming an incumbent, will they be able to sustain their success, or will they end up playing the Dell to a newer ASUSTeK? What should ASUSTeK leadership be doing now to avoid this and secure their position?

And what about all of us? As leaders or future leaders, how can we prepare to be successful in the midst of this kind of disruption? What will our approach to leading incumbents or upstarts be? Is there any way to take a different path than the one Christensen describes, or is that just the way things are in the world of market disruption?

I know many of you out there have lived this before, so let’s get the conversation started…

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