We’re back this week with Part 2 of the Matt Christensen Q&A. In part 1, Matt discussed disruptive innovation as an investment strategy and touched on some of the main points defining disruptive innovation. In part 2, Matt explains why the concept of disruptive innovation has been historically difficult to adopt among corporate leaders and what industries are on the brink of disruption.
You touch on the point that this idea of disruption has become mainstream. In that sense why is it still difficult for companies to identify disruption and head it off before it becomes a threat?
I think that the same ideas that were in place when my dad wrote, The Innovators Dilemma, were going back even further. Fundamentally, it is very hard for a company with an existing healthy business model, or even an existing broken business model to change, and address a new business that has a very different business model. That relates to when I was talking about how you define this stuff; one of the things I think so many people misunderstand is they frame everything within technology and that sets you up to get the whole thing wrong from the start. People struggle with that mightily and to add insult to injury a large part of the problem, more often than not, is the time you need to be addressing these situations are when things are going the best. So if you look around and try to rally support for a change [when things are going good] you're probably not going to get a lot of support.
So, that explains some of the historical failures of industry leaders. In that sense, do you think there are certain market segments or industries that may be too big to disrupt? My thinking is let’s look at Wall Street.
You know I think it’s theoretically possible. Fundamentally I think there are opportunities to do things differently that are occurring to some extent around the edges. A few examples, all of which if you roll them all up are still a tick on the buffalo hide of the financial services industry, have really occurred in the last 3-4 years, starting really with Green Dot (Prepaid Card Provider) IPO. I've paid more attention to the services for the un and under banked because historically, these are a category of people who have been ignored by Wall Street and the financial systems in general. So, I think it’s an interesting space and as I say that, last week Amex announced that they will offer a prepaid card similar to Green Dot. Amex is a pretty successful incumbent at this stage so I’m interested in that they are finding it to be a business worth getting into. Now, more narrowly, the secondary shares markets could potentially be very disruptive especially now when you see Facebook, Groupon, and those companies who have had less than favorable IPO’s and post IPO’s. So it brings up the question of; what are the quality of the markets that were trading those preferred securities prior to the IPO? But as a category, it is telling that it was SecondMarket and SharesPost who were doing those things and not under rating these companies. Now, I also think you can see it in asset management, the emergence of ETFs; I would say are disruptive relative to traditional mutual funds and index funds. I would call it disruptive; ETFs are lower cost and with the emergence of ETF players it has shown that there is an appetite for lower fees, lower fee products, that in many ways have shown a different business model that is reflective in the fact that it was different organizations that commercialized these products. So, Fidelity can lead the world in the actively managed funds universe, Vanguard is going to lead the world in index, and now you have other players who now dominate the ETF market.
