Directors can subtly encourage management teams to innovate to create top-line growth, says Clayton Christensen, professor at Harvard Business School and author of such books as The Innovator’s Dilemma (1997) and The Innovator’s Solution (2003). He serves on the boards of FranklinCovey and Tata Consultancy Services, which are public, and of underwriter W. R. Hambrecht and plastic manufacturer Nypro, both private. He talked to Directorship about the board’s role:
Should directors be involved in decisions that relate to new technology?
More often than not, directors come with perspectives that aren’t necessarily helpful to management. They’ve learned lessons from their own experience, but many times those lessons aren’t applicable to the situation the company is in. Generally, in a company, the directors are the least informed people. Their only access to information is what management gives them. It takes a lot of energy on the part of a board to dive in and understand these technologies in a way that they can contribute.
But many managements seem to develop a tunnel vision about their business. Couldn’t a good director be helpful in getting management to focus on broader trends?
That’s the role they should play. Generally, outside directors cannot add a lot of value to decisions about a specific technology or product investment, but they do need to be in a position of saying, “The company is growing okay, but in five years this core growth model is going to be maturing, and we’d better start the next business model now so that in five years it is big and growing rapidly.”
Can you name a company where the board actually does that?
I think historically Johnson & Johnson’s board has been really good at that. In their medical devices and diagnostic businesses, for example, almost all the growth in the past 10 years has come from business model innovations that they either initiated or acquired. The J&J board of directors seems to really have the vision to get these guys into new growth businesses even when the core is still quite healthy.
Intel’s board is at the other end of the spectrum. They have not really driven the company to create business model innovations. Instead, their investments have been to feed the core microprocessor business. Now that that business is very mature, the company is in trouble.
How does a board figure out where new growth can come from?
I’ll give you an example. I’m on the board of FranklinCovey in Salt Lake City. It is associated with Stephen R. Covey [author of The Seven Habits of Highly Effective People]. They do management training and have about $150 million in annual revenue. The company had been in a free fall, because the Franklin Planner had been disrupted by the Palm Pilot. The CEO, Bob Whitman, had staunched the losses and cut back expenses massively. Then Bob gave the directors a copy of my second book, The Innovator’s Solution, which is really a handbook for how senior executives can create new waves of growth. That gave the board a common language. Because we share a common framework for how growth is created, that board has been very effective in helping management see what’s next.
And what did the directors see?
Some of the board realized, “We’re training people to be highly effective, but they go to work in organizations that aren’t highly effective. So how could we use the same kind of thinking to ensure that three levels below the CEO, everyone is prioritizing the same things that the CEO knows to prioritize?” Typically, people below have no idea what the priorities are. Fixing that problem in organizations is a new growth business for FranklinCovey.
You’ve also been working on the U.S. medical system. What have you learned?
In many industries, the ability to provide the product or service far more cost-efficiently and far more conveniently has moved at a pace that really outstrips the progress the medical industry has made.
How much does the system cost the country?
Between 13 and 17 percent of the economy, depending on how you measure it.
But isn’t the increase due in large part to huge advancements in treatment?
That’s precisely the dilemma. If you go across the sweep of business history, the pursuit of profit is what causes companies to continue to try to make better and better products that they can sell at better prices to their best customers. So, for example, the mainframe computer companies were intensively engaged in making better mainframes that they could sell for higher profits. Ford and General Motors tried to make bigger cars that they could sell for higher profit margins to their customers. If you look at the progress that today’s hospitals and the medical profession have made, they continue to push the leading edge of what’s very difficult to do.
But that’s a very different dimension of performance improvement than the one that makes more people better off, and that is making it affordable and accessible. In technology, affordability and accessibility did not come from making mainframe computers better but rather from commoditizing mainframes so that average people with average money can have access to high-quality computing, meaning personal computers. It came from disruptive technology rather than improvements on the existing system.
In health care, rather than replicating the expensive expertise of Mount Sinai Medical Center or Massachusetts General Hospital or replicating the expensive expertise of doctors, we have to commoditize their expertise. That comes through the precise ability to diagnose the diseases that people have. Our ability to diagnose the diseases is moving ahead at a breathtaking pace, but regulation and reimbursement are trapping the delivery of rules-based medicine in high-cost business models.
Many people think the pharmaceutical industry is at the root of what’s wrong.
The pharmaceutical industry has been focused on therapy, not diagnosis. The medical profession has simply accepted that many of these diseases are well-diagnosed when, in fact, they aren’t. As a consequence, we haven’t moved the health care profession into a world where nurses can provide diagnosis and care. Regulation is keeping the treatment in expensive hospitals, when much low-cost delivery models are available.
Wouldn’t doctors strenuously resist the solution you’re offering?
Oh, yes. As in every piece of my research, the leaders always disparage it and resist and ultimately get toppled by it. Toyota attacked General Motors with the simplest products and then moved up-market, and they just killed General Motors and Ford. And Dell came in with the simplest of personal computers, and all the mainframe and minicomputer companies have been killed.
So health care is an industry where innovation means going down-market?
The current health care system is divided into buckets. You have the insurers, the employers who put up the money, the providers such as doctors and nurses, and the hospitals. Because they exist as independent companies, they can each improve themselves, but they can’t re-architect the system in the way that it needs to be changed. There are two health care systems in the West, Intermountain Healthcare in Utah and Kaiser Permanente in California, that are, in fact, integrated across each of those pieces of the system. They are far ahead of the rest of the world in bringing rules-based diagnosis and therapy in cost-effective business models to their patients.
What would it take to spread those models?
Once they frame the problem correctly, smart people can come up with pretty good solutions. The government will be the hardest, because a lot of the regulations were put in place during a prior era . The regulations just haven’t kept up with the science.