Review & Outlook

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Disrupting the Theory of Disruption

23 June, 2014 by Ben O'Brien in Commentary

The term ‘disruption’ seems to be everywhere these days. It began as jargon in business schools and Silicon Valley but has spread to other industries such as health care and education and into mainstream media.  The theory of disruption, which was formulated by Harvard business professor Clayton Christensen in his 1997 book The Innovator’s Dilemma, has become a fundamental part of the way that business schools and consultants and even businesses themselves think about competition and innovation.

The theory seems to boil down to a fairly simple message: innovate or die. Disruption describes the competitive threat of new technology and innovation that can rapidly make whole industries obsolete. Any business that does not anticipate the threat of new technology and innovation, according to the theory, will go the way of the horse-drawn carriage or the typewriter. It seems intuitive and almost obvious. Who could disagree?

A recent essay by another Harvard professor, historian and New Yorker writer Jill Lepore, however, attacks the theory, charging that its foundations are shaky and its predictions inaccurate. Lepore analyzes the case studies that Christenson uses in Innovator’s Dilemma to illustrate his theory and finds that they are inconsistent and “hand picked.” She comes up with counterexamples and points out some of Christensen’s failed predictions such as his call that the iPhone would fail.

The gist of Lepore’s criticism is that while disruption is clearly a powerful force in business, the precise way in which it plays out is highly complex and difficult to predict. There are examples of businesses that prospered while avoiding innovation and examples of failed attempts at innovation that ruined good businesses. One case was Canadian financial services giant  TD Bank, which avoided the innovation of complex derivatives and mortgage securities in the years leading up to the financial crisis and prospered as a result, expanding across the U.S.

Another recent article in the Economist demonstrates how many business successfully reinvented themselves after facing devastating competitive threats. The article tells the story of Swiss watch makers who survived the advent of digital watches and grew larger than ever as watches remained popular as fashion items even after they were no longer necessary for telling time. Other examples included tailored clothing and independent bookstores which are both on the rebound.

Christensen later responded to Lepore’s article in Businessweek, making some reasonable rebuttals,  but I think Lepore’s main point still stands.  Business and technology and innovation are highly complex and difficult to predict and not reducible to reliable laws or models. When it comes to investing you need to make specific predictions and timing is important. You cannot rely very much on abstract theories like Disruption. Each business and industry needs to be evaluated individually on its own merits.

An example is our recent decision to buy Macy’s (M). According to the theory of disruption department stores should be in trouble, but this one is doing fine. We’re going to bet it will prosper and defy the theory. So far the numbers bear us out.

Theory is essential in the investment business, though not in anticipation so much as in retrospect. We think you can look backward and explain with theory more than one can look forward and predict. A subtle but important difference.