Wednesday, April 13, 2016

Christensen's Second Principle

Clayton M. Christensen’s second principle for confronting disruptive technologies in the Innovators Dilemma resonated with me as I drew connections to my readings for business organizations. According to Christensen, well-established, large firms that have proved able to capitalize on disruptive technologies do so through a subsidiary entity. The small emerging market created by the disruptive technology does not “solve the growth needs of large companies” (13). So, it is necessary to delegate responsibility for commercialization of the disruptive product to a business entity whose size matches the target market (13). These entities are more responsive and flexible to the changing needs of a start-up enterprise. Moreover, the “formal and informal resource allocation processes” of well-established companies constrain their ability to incubate the growth of the new technology.
These are only a few of the benefits derived from the parent-subsidiary set up. Others include the concept of asset partitioning. Developing disruptive technologies is cost intensive and often you will not see a return on investment until several years down the road. The risk of failure is high and so is the risk of defaulting on the loans that a subsidiary business will be sure to require. If the subsidiary goes bankrupt, creditors are prevented from going after the parent company to satisfy any debts owed. Another dimension of asset partitioning is shareholder protection via the corporate veil. In the same vein, a third-party cannot come after a shareholder’s personal assets to satisfy the corporation’s debts.
The parent-subsidiary relationship also eliminates the compulsion and need of well-established businesses to “systematically allocate investment capital to innovation that promised the best returns.” As a director or officer of a corporation, you have a fiduciary duty to your shareholders to, among other things, maximize profits and the value of your company’s shares. This proves problematic when profit maximization requires significant investment in one area at the expense of another. By establishing two separate corporate entities, and thus two different boards and management teams, you can satisfy your obligation to maximize profits without hindering the growth of another product line. A parent-subsidiary relationship also makes acquisition by another entity more viable. This possibility is significantly higher when investing in disruptive technologies.

What’s more, the new subsidiary business entity can design its own unique internal structure to best utilize the company’s talents and increase profits. As Christensen explains, these entities can design a “cost structure honed to achieve profitability at the low margin” (12). Additionally, since corporations have abilities separate of their individual employees, management can install a value and process system that best serves their needs (14). Lastly, the major benefit of dividing the entities is brand cultivation. Each company can develop its own identity that may conflict with the others. What really matters is aligning your brand with the needs of your customers. Disruptive technologies cater towards fringe customers so this is a critical distinction. 

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.