June 27, 2014

Clay Christensen

Clayton Christensen sees the American economy headed for trouble. Credit: Betsy Weber / Flickr Creative Commons

Guest:

Once, great American innovation came out of places like Bell Labs (where the laser, the transistor, and multiple computer languages were developed). But has that sort of creative risk-taking started to wane?

Clayton Christensen, Harvard Business School professor, and author of “The Capitalist’s Dilemma,” which appears in the Harvard Business Review, argues that it has. He says that the best and brightest are now working on ways to save fractions of pennies through efficiency instead of product development.

And the problem lies in the way that businesses and the financial markets measure success.

Historically, access to investment capital was restricted. So we set up ways to make sure money was preserved as much as possible. One metric that CEOs are judged by is, return on capital employed, an equation that divides profit by assets.

As a manager, Christensen says, “I could be more innovative and create more profit and put it in the numerator, but what the heck, if innovation is just too hard, I can outsource everything and get assets off the balance sheet.”

Essentially, either innovate or fire people.

And measuring success in these ways “has actually broken the system. More and more energy is invested in creating more and more free cash flow, instead of creating innovation.”

So what’s the solution?

First, real leadership is needed from businesses. “Because it’s a circular system, there’s very little that government policies can do to solve the problem. Instead, managers need to reframe the metrics,” says Christensen.

Christensen compares today’s financial situation to the Protestant Reformation, except that he believes we’re still waiting on a contemporary Martin Luther to steer the financial “church” away from the rocky cliffs.

Still curious?

Business, Harvard Business School, Clay Christensen

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