Why do Smart People Screw up?


In early 1995, Harvard Business School professor Clayton Christensen co-authored an article to make sense of one of the most consistent patterns in business he was observing—the failure of leading companies to stay at the top of their industries when industries or markets change.

Why were established companies failing even though they were making the necessary technology investments to retain customers? His observation of successful companies getting blindsided by newcomers offering less good but simpler, more convenient and affordable products and services became known as disruptive innovation.

Christensen's theory about the puzzling lack of questioning was that business people, managers, are not trained to ask questions. In A More Beautiful Question Warren Berger says:

Why didn't others—particularly the smart people running those companies he studied—see the innovator's dilemma themselves? Why did it a take a business professor to point out what was going on in their business, their industries, under their won noses? Why weren't they asking the questions Christensen was asking?

What had changed? The world in which they operated had changed.

For starters, the rate of change in the underlying technology created opportunity for new entrants to cater to customers who were left out or served poorly by the products and services that had become too sophisticated, too expensive, and too complicated to buy and use.

New entrants with new business models could work differently to serve customers. Their new product or service technology-enabled. So the perfectly serviceable and sensible theories these business people had learned in school was no longer serving them. These leaders were not able to step back and wonder why what made them successful before was not working anymore.

According to Christensen, the three necessary conditions for disruption to happen are:

  1. serve a lower end of the market, an underserved or niche segment
  2. have a new business model that creates a different way of serving those customers
  3. enabling technology, which determines the rate of improvement (rather than just speed)

Pixar used technology to disrupt animation, for example. Rather than describing impact on established market, disruption is a pathway, a process, as Christensen defines it:

whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses. Specifically, as incumbents focus on improving their products and services for their most demanding (and usually most profitable) customers, they exceed the needs of some segments and ignore the needs of others.

Entrants that prove disruptive begin by successfully targeting those overlooked segments, gaining a foothold by delivering more-suitable functionality—frequently at a lower price.

Incumbents, chasing higher profitability in more-demanding segments, tend not to respond vigorously.

Entrants then move upmarket, delivering the performance that incumbents’ mainstream customers require, while preserving the advantages that drove their early success. When mainstream customers start adopting the entrants’ offerings in volume, disruption has occurred.

Grappling with a new phenomenon explains in part why leaders at established companies tends to have a hard time with it. To be sure, the issue is a little more complex than just reacting to change. Because not every disruptive path leads to a triumph. In fact, only a small number of internet-based retailers that pursued disruptive paths in the late 1990s succeeded.

But, contrary to popular belief, disruption doesn't happen fast. Company leaders could be asking:

What if the business market is now upside-down—and the bottom has risen to the top? And if that's the case… How should my business respond to this new reality? How do we rewrite the old theories?

The underlying why question—why are the smartest people in the world not seeing the opportunity that is before their eyes? Why are they having this problem? Can best be answered with three counter intuitive points. But before we talk about them, we should think about the nature of innovation and the mental models associated with it.

When we're set on creating efficiency, with optimizing a current strategy, as so many organizations do for the short term, we miss the longer shots, for one. So we don't use more expansive questions that would help us gain a clearer sense of purpose and a vision for the future.

Part of the issue is that we misuse words. For example, disruption. If a company enters a market with a better offering, say Apple's iPhone, their product is not disruptive per se. Instead, it is fighting a cross-sectional battle—winning over customers who already use phones—before they go and win the longitudinal battle over PCs.

Michael Rayner, who co-authored the follow-on to The Innovator's Dilemma, The Innovator's Solution with Christensen, says that is the case with Uber as well. The company created “a better mousetrap, and the world beat a path to their door.”

To think about the forces at work better, it's useful to define how innovation and strategy differ.

While innovation is anything that breaks a constraint, strategy is about the constraints we embrace. Disruption is a particular path of innovation. In the pursuit of successful strategies, companies focus on continuously improving existing services and products thus making them more complex, expensive, and exclusive and opening the door to the job being done better more simply.

In some cases, the old business model is not a good fit for a market where speed, flexibility, and collaborative inquiry are important. “The pressure on short-term results tends to drive questioning out of the equation,” says Harvard education expert Tony Wagner.

Given how we tend not to know what we don't know, companies have a hard time figuring out what questions to ask, too. We think about strategy as a noun. Once we make something a noun, it turns into a thing, and the static nature of this thing becomes charged with assumptions. It ceases to be dynamic and changing. 

A more reliable way of starting to question why we do what we do is to ask—“why are we here?” Many companies' reason for being was an unmet need, maybe this was making something easier, more convenient, a better experience. When we start asking “why are we here?” type questions again, we open the door to creating better ways, what ifs, to do what we do, the how.

We are all called to make decisions with tough trade-offs—growth at all costs, or upholding the values we say we hold? Patagonia's Yvon Chouinard shows brands they don't have to buy into the usual growth path story, for example.

According to Rayner, when we face the question of what wins in the here an now, we should think about three rules:

  1. better before cheaper
  2. revenue before cost
  3. there are no other rules

These are the reasons why we have a hard time figuring out how emergent companies create value for customers—superior value or lower price—how they generate value for themselves—the profit imperative—and what to change when everything else changes—anything except for the first two rules.

Data is always ambiguous. If we can't bias-free, the best we can do is having better bias, which comes with better questions. We should not ignore reality when we prioritize and make trade-offs.

Neil Blumenthal, CEO of Warby Parker, says it's all about focusing on customer experience and innovation.


Thinking of strategy as a noun may also be what keeps us stuck. When we look at the type of actions we need to take in a business, they are all dynamic. For example, we keep an eye on the emergence of patterns meaningful to the business, look to understand how to develop, enact, and amplify influence, work to navigate the transformation of the environment through growth.

Why not a verb? Strategizing. Whereas strategy involves choices based on assumptions, strategizing involves choice based on time dependent information. One of the problems with assumptions is that they skip the whole critical thinking process, new contextual-based data on preferences and needs, as well as observation and inquiry.

We don't challenge our assumptions enough. We have always done things in a certain way, we are what we've become as an organization over time.

Biases hold us to remain consistent with our existing trajectory even when it doesn't serve us well anymore, they also prevent us from making a different move. Asking “What business are we in now?” and figuring out whether we're still serving the original purpose and how well. It helps us with—“whom should we become?” 

New entrants are not married to previous assumptions. Their questions are of a different nature—“why does this problem exist? Why hasn't anyone addressed it?” Change the nature of their choices.

Andy Grove of Intel asked a powerful question when he looked at the company's business “if we were kicked out of the company, what do you think the new CEO would do?” What new decisions could we make if we weren't married to our old ones?

Grove's belief that “Business success contains the seeds of its own destruction. Success breeds complacency. Complacency breeds failure. Only the paranoid survive,” also drove him to insist on having a system of “constructive confrontation” in the company. One in which the power of knowledge and data trumped position.

We screw up when we root our decisions on static assumptions of what used to work, when we detach ourselves from purpose, when we stop being curious, and forget to keep asking better questions. What if our business, company, organization didn't exist?  What if our job didn't exist? What would we create?