Learning From the Low End

Sometimes it’s better to be at the bottom than the top.

Explaining, Harvard’s Clay Christensen starts his story with the huge integrated steel firms and ends with the mini mill. Relatively cheaply, the mini mills melted scrap in electric furnaces but their steel was inferior. Responding, the big mills said, “Great. We can make the expensive profitable stuff for cars and washing machines. You can have the low end of this business.”

But it did not work out that way.

The mini mills got increasingly better at steel making until they too could make the high quality products. Imagine a stairway to the top that the mini mills were climbing. Step by step they made more of what the bigger guys produced, gradually improving quality for a lower cost.

Dr. Christensen believes the mini mill lesson is universal. The firm at the top wants to continue making distinctive goods. Meanwhile, though, the firms at the bottom with lower costs and lower quality make cheaper products that are easier to use. Because most customers think they are good enough, they gradually engulf market share.

In a recent interview, Dr. Christensen presented example after example. He talked about disk drives moving from 14 inches down to 5 1/2; the bigger ones were better but the smaller ones became more popular. During the 1950s, the first  Sony transistor radios were not as good as RCA or Zenith but, starting with teenagers, they spread. Even phone cameras, at first so bad but still so handy, they improved. You could also add to the list cell phones replacing traditional landlines, discount retailers moving in on department stores, retail medical clinics taking business from traditional doctors’ offices.

You see where this is going. Called disruptive innovation, it all begins at the bottom where, because the product is cheaper, vast numbers of consumers enter a market that had been too expensive for them.  The stories are fascinating and told in much greater detail in an excellent New Yorker article, at Dr. Chistensen’s website, and in books he has written that include The Innovator’s Dilemma.

Dr. Christensen reminds me also of Joseph Schumpeter and creative destruction. Whether moving from the bottom up or from an upstart entrepreneur, new ideas destroy the old and fuel capitalism.