Can Japan Overcome the Innovation Dilemma?

What should we learn from Steve Jobs and Sony’s Akio Morita?

By K. Ohno

Interview with Clayton Christensen Clayton M. Christensen is a professor at the Harvard Business School. He holds a BA with highest honors in economics at Brigham Young University, an MBA at the Harvard Business School, and a DBA at the Harvard Business School.

Three Types of Innovation

Ohno:  You have come up with some types of innovation like “sustaining innovation,” “disruptive innovation.” Japanese manufacturers, so far, have been encouraging innovation represented by “kaizen[1]” by Toyota for example. But lately it seems that especially Japanese electronics manufacturers are experiencing “innovator’s dilemma.” While Samsung is gaining momentum, they are fighting a losing battle. How do you see this recent situation of the Japanese manufacturers?

Prof. Christensen:       The innovator’s dilemma describes how, if you do everything right, as is taught at business schools, it will cause you to fail.  And so every one of those companies like Toyota, Sony or Panasonic started out at the bottom of the market in the 1950s and ‘60s.  Toyota came in with a rusty little subcompact car and Honda had a Cub that was like a motorized bicycle, not a motorcycle, so they all started at the bottom, and by 1990, they were making the best products in their categories in the world. 

But that’s the dilemma, because once you make such high performance products, to go down to the bottom of the market and do it again makes no sense.  And the difference between the Japanese structure and America’s is Japan disrupted America.  But when your disruption of America caused our manufacturing companies to go out of business, the people who they let go were able to get venture capital to create new ways of growth in new industries, and Japan doesn’t have that.  And therefore Japan did it once, and then it’s finished now.

Ohno:  So Japanese companies are quite at a loss right now, since their success pattern doesn’t work anymore.

Prof. Christensen:    Well, I wrote a piece that was published in the New York Times on the first Sunday in November last year. What it describes is Japan is most advanced in this problem, but America now faces it, and the Western European nations now face the same problem. I describe that there are three types of innovations, and the first one, I call them “empowering innovations,” or new market disruptions. These are innovations that transform complicated, expensive products into products that are so simple and affordable that many more people can own and use the products. 

The Model T in the history of the car industry was one of those.  The personal computer was one of those.  The smartphone is one of those and so on.  And this kind of innovation creates jobs because they enable a larger population of customers now to buy the products, and therefore you have to hire more people to manufacture them, and sell them, and distribute them, and service them and so on. 

Ohno:  What’s the second one?

Prof. Christensen:      

The second type of innovations I call “sustaining innovations.”  Sustaining innovations make good products better, but they do not create new jobs.  The reason is that by their very nature, a sustaining innovation replaces an old product with a new product, a product that wasn’t as good with one that is better. 

So Toyota has this marvelous hybrid car that in America we call the Prius, but every time Toyota sells a Prius, the customer doesn’t buy a Camry.  That’s the reason why sustaining innovations don’t create new industries or new jobs, because their very nature, they replace an old one with a better one.

And then the third type of innovation we call “efficiency innovations.”  They transform products that we’re already making and selling to customers into ones that are more affordable and more efficient.  The efficiency innovations eliminate jobs, but they create capital, which is quite important. 

Examples are minimills in steel and Geico in online insurance underwriting. Taken together in an industry, such innovations almost always reduce the net number of jobs, because they streamline processes. But they also preserve many of the remaining jobs — because without them entire companies and industries would disappear in competition against companies abroad that have innovated more efficiently.

Losing Empowering Innovations in Japan

Ohno: How should companies see the correlation among the three innovation types?

Prof. Christensen:

INDUSTRIES typically transition through these three types of innovations. By illustration, the early mainframe computers were so expensive and complicated that only big companies could own and use them. But personal computers were simple and affordable, empowering many more people.

Ideally, the three innovations operate in a recurring circle. Empowering innovations are essential for growth because they create new consumption. As long as empowering innovations create more jobs than efficiency innovations elimi-nate, and as long as the capital that efficiency innovations liberate is invested back into empowering innovations, we keep recessions at bay. The dials on these three innovations are sensitive. But when they are set correctly, the economy is a magnificent machine.

Ohno:  So you think the Japanese companies went through empowering innovations? 

Prof. Christensen:

You look at Japan’s history through the 1950s, ‘60s and ‘70s, you had just a juggernaut of growth, because the companies that were fueling Japan’s economic growth were all making empowering innovations.  So Honda, with their Cub, made it possible for grandmothers to have a motorcycle.  And Toyota, with their subcompact Corona sold in America, made it possible for teenagers and college students to have a car. 

Canon disrupted Xerox by making simple tabletop printers so that everybody could have a printer in their office.  Mitsui did it in the shipbuilding industry, and Sony and Panasonic did it to RCA in America.  And so these companies, by making these products so affordable and simple, billions of people around the world could now own and use things because of these companies’ empowering innovations. 

But starting in the 1980s, those companies weren’t developing any new empowering innovations, and they were focusing on sustaining innovations, making the good products even better.  And then, starting in 1990, most of Japan’s, the focus of its investments were in efficiency innovations. 

Ohno:  So there are no more empowering innovations in Japan?

Prof. Christensen:

Toyota’s “just in time[2]” production system is an efficiency innovation.  They don’t create jobs, but they create capital, which is quite important because prior to Toyota, it took American car companies about 60 days to make a car.  And during those 60 days, there was a lot of capital that was tied up in work in process inventory. 

Toyota’s process reduced the time to make a car from 60 days to 3 days, and so they took all of this inventory out of the system, which enabled or made free capital that was held hostage on the balance sheet.  Now it’s available.  But using this capital to create new growth markets that are empowering innovations doesn’t look very attractive to the Japanese companies, because they pay off 5 to 10 years down the line. It also means that if they take this capital and reinvest it in additional efficiency innovations, it creates more capital, and it eliminates jobs. 

I think since 1990 the only empowering innovation that has emerged from Japan has been the Nintendo Wii.  I think it’s the only one that I can see.  And so Japan finds itself awash in capital.  The cost of capital is zero.  But despite that, you can’t create new jobs.  From a profitability point of view, it is unattractive to create new markets that are empowering innovations, because you just can recycle them over and over again to create more capital.

Apple Will Step on the Same Path That Sony Has Taken

Ohno:  The middle, up, down decision-making process is said to be effective in Japanese companies instead of the top-down decision-making process, but the top-down process takes much less time.  In this more and more speedy time, do you think this middle, up, down process, typically Japanese process, can remain effective in Japanese companies?

Prof. Christensen:

I do, because I don’t think it matters whether it’s top-down or back and forth.  The challenge is that everybody involved needs to understand the theory behind what’s going on.  And if they have a common language and a common way to frame the problem, then even a Japanese company can disrupt itself and do what has to be done.  But if they don’t have a theory that they share in common, then if the CEO, from a top-down point of view, says this is what we will do, the organization won’t respond.  They need to have a common language and a common way to frame the problem.

Ohno:  In terms of leadership, what is your take on leadership that will generate innovation?  I’m under the impression that more authoritarian leaders are more successful these days, regardless of country, like Steve Jobs.

Prof. Christensen:

Well, it depends upon the culture of the organization.  And so the culture of the organization at Apple was consistent with Steve Jobs’ style.  But Steve Jobs was not trying to change the culture in any way.  What he did was come up with ideas that were consistent with Apple’s culture.  So it worked there. 

But if you go back in time, when Apple needed to change its culture, Steve Jobs couldn’t do it, and their board of directors fired him.  And so it doesn’t so much matter the style of the executive.  That is whether it is possible to build a common language and a common way to frame how the world works. If you do that, then a management team can even do something that is counter logical to what the normal culture would cause you to do.

Ohno:  What do you think it was in Steve Jobs that led Apple to this success?

Prof. Christensen:I think an important one, but the way he did it was exactly the way Morita did it in building Sony.  They both had exactly the same approach, which was neither one of them would allow people to do conventional market research.  They just walked around all day, every time they had a chance, just to watch what people were trying to get done in their lives.  And then Morita would say, how could we help them get this job done at a lower cost and with more convenience? 

And from 1955 until 1982, they just hit, in the language of baseball, they hit home run after home run after home run.  They rarely missed during that era.  And then Morita decided to disengage with Sony to become a member of the Diet there, and in 1982, Sony introduced their first MBA in marketing.  And the MBAs brought to Sony a logical, analytic view of how to come up with new products, and their ability to generate empowering innovations just collapsed, and they didn’t develop a single new disruptive or empowering innovation since 1982.

So that’s been what, 30 years.  But it’s because Morita tried to understand what people are trying to do, and he didn’t look at numbers.  Jobs did the very same thing at Apple.  That’s the big issue with Apple now, is as they bring in more quote, unquote, “professional” marketing, if they start to just look at the numbers rather than figuring out what’s the job the customer’s trying to do, Apple will go the same place where Sony is.

What Is the Core Today Will Be Peripheral in the Future

Ohno:  In your recent book, How Will You Measure Your Life?, the cases of Dell and Asus you wrote about are very impressive.  Dell outsourced the manufacturing to Asus in Taiwan, and then Asus learned to make its own products and has become a worldly-known computer maker. And you said in the book “never outsource the future.”  In this global age, what to outsource or what not to outsource, there’s the rub.  That’s the big question.  How do companies decide on that?

Prof. Christensen:

The answer is that if you outsource…  What is peripheral today will be the core in the future, and what is the core today will be peripheral in the future.  And therefore, outsourcing anything is actually very risky. 

Let’s talk about Apple for a minute.  If you ask the people at Apple at any point over the last 10 years about what is your core, what is the core of Apple that is the proprietary asset or capabilities that they just have to husband and protect, they would say it’s the design of their products, and you do that internally at all costs. 

But what happens is that over time, a proprietary, interdependent architecture gets disrupted by modular, open architectures, and so that’s what’s happened to the computers that Apple makes, is they were disrupted by Dell and ASUSTeK, which have an open architecture.  And when a product architecture becomes standardized, modular and open, it commoditizes the value of a proprietary architecture. 

You see this happening in smartphones right now, because as the Android operating system gains market share, it doesn’t matter that RIM and Apple have proprietary architectures.  When it becomes modular and open, the value of your proprietary architecture is driven to zero.  And so in the past, you thought that the value is in design.  It becomes commoditized by modularity. 

And what Apple has done is they have outsourced manufacturing, because at the beginning it appears like manufacturing is not important to them.  But as the product becomes more and more sophisticated, the technology required to manufacture these products becomes very, very sophisticated and hard to do. 

And so right now the core competence is to be able to manufacture the iPhone, not to design the iPhone.  And that’s why at one point what seems to be peripheral, it becomes core, and what today seems to be core becomes peripheral.  And so it’s very hard to say if I can outsource this without paying the consequences.

Ohno:  You need some kind of a crystal ball to see what the future holds?

Prof. Christensen:

Well, no.  I would say it’s very predictable that this will flip back and forth, and so you know that that’s going to happen, and therefore you can see into the future.  But what you can see is you need to not outsource all of the ability.

The Linkage Between Management Theories and One’s Life

Ohno:  One of the great lessons you gave in your book How Will You Measure Your Life? is that you can apply management theories to your life, or to live your life to your full satisfaction.  Around when did you begin to be aware of this?  After you were diagnosed with cancer?

Prof. Christensen:

No.  We started to think about this maybe 10 years ago, and so I spent the last class session with my students trying to examine our own lives through the theories in my course.  And so this just little by little began to be clear. 

And then I had, in three successive years, a horrible heart attack, and then cancer, and then a stroke.  As I would stand in front of my students with having these major things happen to me, I think the students started to think about it a lot more deeply.  So we talked about this, but I think most of the students just said, “Well, this doesn’t apply to me.”  But then when it started to happen to me, then I think the students thought they need to think about this.

Ohno:  So what motivated you to write this book?

Prof. Christensen:

So when I was diagnosed with cancer, it was at the end of a semester.  And when, on the last class, we talked about these things, I think for some reason it just really sunk into the hearts of the students in that class.  And those students then went to the dean’s office and said we need to have Christensen summarize what we talked about in our class and be the speaker at graduation so that all the other students could see it.  And so it was really the students who said we need to get Clay to give this as the graduation. 

And then the editor of the Harvard Business Review was in the audience when I gave that talk, and she came to me and asked if they could publish my talk as a Harvard Business School article, and so I said fine.  So she basically took the talk and made it a little nicer and published it in the Harvard Business Review.  Then it turned out that more requests for download have been received for that article than any other article in their history. 

Then the editor came to me and said we ought to make a book about this.  So she—her name Karen Dillon—and one of the students who was in that class named James Allworth, the two of them came and said let’s translate this into a book.  And essentially the book is…we go a little bit deeper on all of the issues that were summarized in the article.  So it wasn’t my idea at all.

Ohno:  But people are buying this kind of book, which gives us more fundamental and essential, more deeper ways of looking at your own life, rather than buying easy how-to books. How do you see this trend?  The people seem to be beleaguered, quite at a loss about their own life?

Prof. Christensen:

Yeah, that’s right.  And I think that people who write the easy books about this, their logic is this is the way I do it, I’m happy; if you do it this way you’ll be happy, too.  Or this leader, this is the way he manages, he’s successful; if you do it that way, you’ll be successful, too.  And that logic is just a flawed logic. 

And I think that for whatever reason, the theories in How Will You Measure Your Life? are deeply researched theories of causality.  And I think people are just screaming for something that actually has teeth, or is predictive, in that they can say if you want to be in this situation 10 years down the road, this is what you have to do today. 

Ohno:  One more question.  Any message for the Japanese beleaguered businessman?  They don’t know what to do now.

Prof. Christensen:

What I hope that I can bring to them is that there actually is a causal mechanism, there’s a theory that describes why Japan was so successful and then why Japan is in a stagnant swamp.  There’s a causal reason why.  And I think that I’ve developed a theory that explains this.  What they need to do now is they need to read the theory and then have the courage to act on the theory. But not just any action, but action that is based upon the theory.  And if they are so driven by data, meaning they need to be data-driven in their decision-making, the problem is that data is only available about the past.  So if they feel like they need to make their decisions based upon data, they will always act when the game is over.  When you’re looking into the future, there’s no data, and therefore you have to have a theory that states if this is happening today, this is what will happen in the future.  Then they can actually make action knowing that they will be successful.  But it has to be based upon theory.

Ohno:  And they should have confidence in themselves.

Prof. Christensen:

That’s right.

[1] Kaizen refers to philosophy or practices that focus upon continuous improvement of processes especially in manufacturing.

[2] Just in time is a production strategy that tries to improve a business return on investment by reducing in-process inventory and associated carrying costs.

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