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Why Clayton Christensen Worries About Apple

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Clayton Christensen had a fascinating conversation with Horace Dediu recently on The Critical Path. Christensen talked about his new book, How Will You Measure Your Life?, co-authored with James Allworth and Karen Dillon.  In his new book, Christensen takes the theories of innovation and uses those theories as a set of lenses to examine ourselves. Do the principles that we have discovered about innovation give us any guidance to make decisions in our personal lives that will help us happier and more productive lives?

The conversation also explored Christensen’s comment in a previous interview that he is “worried about Apple” [AAPL]. Dediu asked him to be more specific. Christensen’s initial response was, “I worry about everything. My wife says I’m the Jewish mother of business. I’m always worried about everything regardless of how well it’s going.” He does however have  two specific worries about Apple and one hope of salvation.

Apple has yet to confront self-disruption:

Christensen’s first concern is that Apple has yet to confront serious self-disruption.

“First, by analogy, if you go back to the 1950s when Akio Morita, the founder of Sony [SNE] was launching this sequence of portable players, portable radio, portable television, portable video recording, they knocked the ball out of the park, time and time again. Each one of those was disruptive relative to the traditional leader in each of those fields. So they were disruptive relative to the leader, but these were not disruptive to Sony itself. When they went from a portable radio, to television to video and so on, each one because of the margins that they offered was very attractive internally to go after these things. When Sony finally ran into an innovation that was disruptive not only to the market but also to Sony itself, then they stumbled. The first time that that happened was when downloadable music became viable through Napster and others. Because Sony had a really big CD business, this was disruptive to Sony itself, and they lost the opportunity and gave it to Apple and the iPod.

“I worry that Apple is in the same situation, in that the sequence of extraordinary products has been disruptive relative to the traditional competitors in the marketplace, but relative to Apple’s business model, they have not been disruptive to Apple. So they haven’t seen this problem before. I worry that maybe they have not learned to recognize what’s been happening, because they haven’t seen this kind of problem before.“

In reply, Dediu argued that the evidence is mixed. It became evident in the industry that phones would become music players and Apple did the right thing in folding that functionality into its phone business, thus disrupting the iPod. They had to abandon any control over the music download business and it hasn’t hurt them yet. There are many competitors that are offering music downloads and streaming, but the iTunes music store is still by far the most popular. They are running it at a break-even model. So they are not emphasizing that business as their core, but rather as an enhancement to the experience of using their phones. That’s one example of a self-disruptive process.

A second is the iPad. The iPad is cannibalizing the Mac as well as attacking competitor PCs. Tim Cook has said “We do so see some impact on our Mac business but we are ok with that because we believe that this is the future.” They are managing this in a way that contrasts with HP [HPQ] or Dell [DELL] which have found it very difficult to move into mobility and have not succeeded, even with Microsoft [MSFT] as a partner. So there is some evidence that Apple does have a self-disruptive instinct.

Christensen however questioned whether the iPad is really disruptive of the Mac, because if the margins are attractive to both the iPad and the Mac, then they can manage it as a sustaining innovation. Dediu agreed that the margins on the iPad are higher than the Mac business, which are in the 20 percent range while iPads are in the 30 percent range. In the last quarter, overall gross margins reached 47 percent which is a new record and unheard of for a company that sells hardware.

Modularity always defeats integration

Christensen’s second concern is that although integrated approaches in technology can be quite successful for a period, in the end modular approaches to technology always defeat integrated approaches. Christensen said:

“The transition from proprietary architecture to open modular architecture just happens over and over again. It happened in the personal computer. Although it didn’t kill Apple’s computer business, it relegated Apple to the status of a minor player. The iPod is a proprietary integrated product, although that is becoming quite modular. You can download your music from Amazon as easily as you can from iTunes. You also see modularity organized around the Android operating system that is growing much faster than the iPhone. So I worry that modularity will do its work on Apple.”

Dediu agreed that the Android represents the most clear and present danger to the iPhone business. Theory would suggest that modularity will come: it’s a matter of when, not whether. It is likely to happen when the smartphone is “good enough”. At that point, Apple will no longer be able to compete on an integrated basis because no one is going to pay for the improvement. At that point, it will make sense to compete on a new basis: openness, modularity, conformability to operator or developer concerns. This is what Android is doing. So Amazon is using Android to compete with Apple.

The question is: when will the product be "good enough"? There are already some indicators of it being “good enough”. We can’t get better resolution screens because our eyes can’t detect the difference. We can’t get improvements in size because they won’t fit in our pockets. We don’t see improvements in memory because we can’t consume what’s on the device before the battery runs out. Nevertheless technology like Siri turns the product into an assistant rather than a utility knife, and moving it more into an intelligent helping agent. That is software-based and cloud-based improvement. So there is a question whether Apple can continue to succeed with its integrated approach.

Apple’s possible salvation

Christensen’s hope of salvation for Apple is not so much that they can defeat the innovator’s dilemma or the threat of modularity but rather that they can defer it indefinitely:

"The salvation for Apple may be that they can find a sequence of exciting new products whose proprietary architecture is demanded by the marketplace, and they can keep going from one product to another so that they will not have to confront this dilemma."

Dediu commented that whether Apple can continue its trajectory of continued innovation will depend on whether Apple has been able to institutionalize the capability represented in the person of Steve Jobs who is no longer there. Has Apple learned the “Jobs-ian” approach to innovation?

Has Apple institutionalized learning?

Dediu commented that children learn when they are ready to learn. This is in contradiction to what education assumes in the way it is structured and run today. Learning is difficult to force on someone, whether they are children or not. Do businesses learn when they need to learn or when they are ready to learn? Most businesses are not set up for learning. When they do learn, they often forget what they have learned. It isn’t something that becomes institutionalized. Do businesses learn when they should learn or do they learn by accident?

Christensen agreed:

"Children are ready to learn when they are ready to learn not necessarily when their parents are ready to teach them.  I talk to our kids now that they are grown up and I ask them about the experiences that had growing up that really had a powerful influence on the way they view the purpose of life. The experiences that really shaped their values—my wife and I have no memory of those experiences! When I ask them about the times when I sat them down on the couch and taught them the truths of eternity, the kids have no memory of those experiences!

"Coming to Apple, you could learn very different things from the success of the iPhone. One question might be: I wonder how much the stock price is going to go up when we make this announcement and beat the analysts’ expectations?

"Someone might also ask: we have been knocking the ball out of the park with this last sequence of innovations. What is it about the situation that we are in that has enabled us to be so successful? And is there another situation that might arise in the future where doing it the way we are doing it might not result in success?

"In the former case, the employees may simply not be ready to learn. In the latter case, the employees are eager to learn about their experience."

So the jury is still out. Time will tell. If Apple lapses back into traditional management and runs the company based maximizing shareholder value, it will be unable to maintain a sequence of bold new innovations and it will succumb to the innovator’s dilemma.

If on the other hand, Apple sticks to its goal of delighting customers and sees making money as the result of its activities, and continues to pursue radical management, and learns from experience, then it has a chance to achieve lasting prosperity through continuous innovation.

Listen to the full conversation on The Critical Path.

And read also:

Clayton Christensen: How Pursuit of Profits Kills Innovation and The US Economy

Clayton Christensen And The Innovators’ Smackdown

Peggy Noonan on Steve Jobs and why big companies die

The dumbest idea in the world: maximizing shareholder value

The five big surprises of radical management

________________________

Steve Denning’s most recent book is: The Leader’s Guide to Radical Management (Jossey-Bass, 2010).

Follow Steve Denning on Twitter @stevedenning

Want to learn how to make the entire organization Agile? Check out the innovative three-day workshop in Washington DC on May 21-23, 2012