Clayton Christensen: How Pursuit of Profits Kills Innovation and the U.S. Economy (via Forbes)
In an interesting talk at the Gartner Symposium ITExpo 2011 on October 16-20, 2011, Clayton Christensen explains why the basic thinking taught in business schools and promulgated by consultants is killing innovation and the US economy.
You can watch Christensen’s 1 hour talk online at http://gartner.mediasite.com/mediasite/play/9cfe6bba5c7941e09bee95eb63f769421… - he talks extensively about his core concepts from his books the Innovator’s Dilemma and Innovator’s Solution.
He highlights his perspective (41:45) on why profit maximization naturally causes ratio manipulation, which can be a prime driver of falling into the Innovator’s Delimma trap. Christensen believes this situation is…
“…driven by the pursuit of profit. That’s the causal mechanism for these things… The problem lies with the business schools which are at fault. What we’ve done in America is to define profitability in terms of percentages. So if you can get the percentage up, it feels like we are more profitable. It causes us to do things to manipulate the percentage. I’ll give you a few examples.• There is a pernicious methodology for calculating the internal rate of return on an investment. It causes you to focus on smaller and smaller wins. Because if you ever use your money for something that doesn’t pay off for years, the IRR is so crummy that people who focus on IRR focus their capital on shorter and shorter term wins.
• There’s another one called RONA—rate of return on net assets. It causes you to reduce the denominator—assets—as Dell did, because the fewer the assets, the higher the RONA.“We measure profitability by these ratios. Why do we do it? The finance people have preached this almost like a gospel to the rest of us is that if you describe profitability by a ratio so that you can compare profitability in different industries. It ‘neutralizes’ the measures so that you can apply them across sectors to every firm.”
Read the whole article here: http://www.forbes.com/sites/stevedenning/2011/11/18/clayton-christensen-how-p…
Also, as a sidenote for all the MBAs out there who haven’t yet, take a look at the MBA Oath. Put simply, it a voluntary pledge for graduating MBAs and current MBAs to “create value responsibly and ethically”.
