Clay Christensen Speaks at Technology Alliance on Disruptive Innovations in Education, Health, VC

A roomful of 850 business leaders and policy makers got some serious food for thought at yesterday’s annual “State of Technology” Luncheon in Seattle, organized by the Technology Alliance. The guest of honor was Clayton Christensen, the Harvard Business School professor who coined the term “disruptive innovation” in a series of bestselling business books starting with The Innovator’s Dilemma. It was fascinating to hear Christensen’s ideas and research lessons applied to everything from the steel industry and mainframe computing to the contemporary concerns of healthcare and education.

Before diving into Christensen’s talk, I first need to cover a few Seattle-area concerns. Speaking of the steel industry, Seattle-based Modumetal, a nanotech and advanced materials startup, was named “2010 company of the year” by the Alliance of Angels at the lunch. Modumetal has been getting an increasing amount of attention as it wins contracts and forms partnerships to integrate its nanomaterials into more mainstream applications like cars, jet engines, buildings, and bridges. (There is some debate about whether Modumetal fits with Christensen’s “disruptive” model—it might hinge on how the company handles its partnerships with potential competitors.)

Technology Alliance chair Jeremy Jaech, the CEO of Verdiem (and the co-founder of Aldus and Visio), gave an impassioned talk on the impact of the tech sector on Washington state’s economy and employment stats. For example, there were more than 380,000 tech jobs in the state as of the first half of 2009, which account for 13 percent of all jobs in Washington. What’s more, he said, those tech jobs support a total of 1.2 million jobs in fields like construction, recreation, and service industries—a whopping 42 percent of all employees. Jaech urged state leaders to do more to support education and to “stop treating the technology industry like Mount Rainier”—noticing it on sunny days and taking it for granted the rest of the time.

Then it was time for the keynote. Christensen’s recent interests have been in how to manage innovation in education and healthcare more effectively, and he went into some depth on these topics. First, he gave an overview of his “disruption” theory, which says, in a nutshell, that across a wide range of industries, successful startups have won not by creating breakthrough innovations, but by going to market with “a product that was simple and affordable,” gaining market share at the low end of cost and performance, and then gradually working their way up-market, while decentralizing access to their products. Conversely, the big, centralized incumbents have trouble dealing with such new entrants, but will usually crush adversaries who come in trying to be better than them and selling to their mainstream customers.

One example is the familiar historical progression in computing from mainframes to mini-computers to personal computers to laptops and mobile devices, Christensen said. (Mainframes actually still exist, but they have been marginalized.) His discussion of the steel industry since the 1970s—how cheaper, simpler mini-mills gradually displaced billion-dollar integrated mills—was particularly captivating. And some ongoing case studies include low-end automakers Hyundai, Kia, and Chery threatening the long-term future of Toyota and other incumbents.

Turning his attention to healthcare, Christensen said, “I had thought competition drives cost down. It turns out that’s not true. Sustaining competition among similar business models generally adds cost.” What he means is that hospitals “keep having to add scope and depth.” If one hospital gets a fancy new MRI machine or surgical robot, competing clinics feel they have to as well. In Christensen’s model, hospitals are the centralized incumbent. “They have become extraordinarily capable, but in the consequence, they’ve overshot the amount of care most patients ever utilize, and yet they have to pay for it,” he said.

OK, so how to disrupt this industry? “Decentralization is only beginning in healthcare,” he said. “What has to happen is we have to drive technology into outpatient clinics…and then keep driving technology into that venue…ultimately needing fewer and fewer of the expensive hospitals. We need to bring technology to primary-care doctors, nurses, physician’s assistants, and homes. By enabling lower-cost things and care and lower-cost care givers to do more sophisticated things, that’s the mechanism by which healthcare becomes affordable and accessible.” (Some examples of related companies in the Pacific Northwest might be Qliance, Clarity Health, and ZoomCare.)

It’s a similar landscape in education. Look at the cost of food services and athletic facilities at universities now as compared to 30 years ago, Christensen said. To disrupt a huge, interdependent industry like education, it sounds like you have to start on the edges. For example, it could begin with small online education programs and cheap cell phones in primary and secondary schools, rather than putting computers into classrooms, which hasn’t really worked after 25 years.

Christensen didn’t have time to really explain this, but he talked about the importance of infant education—parents talking to their babies before age 3, and how that correlates with later performance in school. His hypothetical idea would be to support a program in Everett (it wasn’t clear whether he meant in WA or MA) which focuses on early infant education, tracks how the kids do in school, and then, if it’s successful, “roll out point solutions” in other parts of the country.

He also had shrewd insights into the venture capital and private equity industries. Suffice to say he thinks they’re ripe for disruption. “Most [venture firms] which 10 years ago built themselves making early-stage venture capital investments still have the word ‘ventures’ on their business cards,” Christensen said. “But really they have become later and later-stage private equity as the amount of money they have to put to work grows, so you have this odd sense of there is too much capital at the big, late-stage end of the business chasing too few deals and a paucity of capital at the bottom.”

I spoke with a few experts after the talk to hear their reactions, and to flesh out some of the ideas in healthcare and education. One of them, Thomas Thurston of Growth Science International, a research and consulting firm in Portland, OR, has been working with Christensen on testing disruption theory, and has been building predictive models of whether a company will succeed or fail. He has clearly drawn inspiration from Christensen’s teachings.

Thurston boiled down how disruption theory can be applied to healthcare. “A lot of the time, it’s about helping less skilled, less wealthy people do what was done by the rich and skilled,” he says. “Healthcare is expensive because almost everything you do has to be done by very skilled people. Because lives are on the line, you can’t release buggy software. More than other industries, healthcare is particularly prone to ‘sustaining’ [non-disruptive] innovation. That’s why there are these monopolies; only a few pharmaceutical firms, only a few [medical] device firms. They’re better at sustaining innovation. Startups need to help the less skilled. The shortest way to disrupt healthcare is to pick off a piece of the hospital—something a nurse practitioner can do instead of a cardiologist [for example].”

Other emerging areas are prosthetics, which Thurston says is disrupting some surgeons’ practices because new prosthetic limbs take a lot less skill to attach; and drug repurposing, whereby a company will take an old drug and find new applications for it, which is much cheaper than developing a drug from scratch. An example of that is cyclobenzaprine (Flexeril), originally designed as a muscle relaxant, being used to treat insomnia.

In education, Thurston says, “Disruptive innovation tends to start at the periphery of the market, not in the center…Where you’re seeing disruption in education is not with the core curriculum, but a few students interested [in fringe courses like Russian]. There’s an awful lot of people and interests, more of those than the base curriculum, collectively. So people are adopting computer-based learning in trade schools, for instance…One Laptop Per Child, that’s fine, but the most prevalent computing technology in the classroom is the cell phone, and that’s growing by leaps and bounds. Some day kids will show up with their little tablet [computer].”

As for Christensen’s comments on VC and early-stage startups, Thurston advises, “You often want to look at the periphery for good deals. For entrepreneurs, you should be looking for your go-to-market at the periphery. But to not go for the big market is a horrifying thing for an investor and an entrepreneur…You start in the periphery and go towards the mainstream. But if you start in the mainstream, you’re dead.”

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