How "Disruptive Innovation" Might Transform Health and Education Services--and Why Today's Establishment Needs to Watch Out

WASHINGTON, NOVEMBER 4, 2008--Breakthrough technologies--from personal computers to transistor radios to cell phones--have drastically altered the way we work, live, and communicate. Why, then, have some of these same technologies failed to transform the most consequential arenas of our lives--education and health care?

For fifteen years, Harvard Business School professor Clayton Christensen has studied how dramatic innovations have reshaped hundreds of private-sector industries. His two new books, Disrupting Class and The Innovator's Prescription, apply his theories to improving accessibility and quality in education and healthcare. On October 27, Christensen and two of his coauthors, Michael Horn and Jason Hwang, both of the Innosight Institute, discussed their latest work at an American Enterprise Institute forum.

The cornerstone of Christensen's theories is the concept of "disruptive innovation," the process by which a company "comes into the bottom of the market with a technology that greatly simplifies the industry's technological problem," incorporates that technology into a profitable business model at market's bottom, and then, almost invariably, becomes the new industry leader, toppling established companies that seemingly had all the initial advantages to compete.

Christensen's work has sought to explain why established industry leaders almost always fail to maintain their edge when faced with disruptive innovation. When a dramatically new technology emerges, he says, the tendency for industry leaders is to "cram the technology into the existing market [and] the existing business models." But this strategy will always be much more difficult to carry out than the new entrants' most viable option: to compete against nonconsumption by making a product "so much more affordable and simple that a whole new population of people can now own and use the products." Nonconsumers are the easiest customers to satisfy because "all you've got to do is make a product that's better than nothing."

Horn explained how this model can be applied to public education: "computers have failed to make the difference that they might have--and that they have in many other industries--because we have crammed them into conventional classrooms." Even though we know "we learn differently" and that "computer-based learning is inherently modular," he explained, our schools still "standardize and create monolithic experience for students." In order to spur disruptive innovation in this arena, the key would be to use computers to compete against nonconsumers: for instance, students seeking credit recovery or advanced courses and homebound or home-schooled students.

The market in education and health care is different from the private-sector market, as any critic is quick to point out. Christensen has tweaked his model accordingly: whereas private-sector business managers build strategies in response to quality and profitability of products, public-sector leaders are oriented toward "what is politically important or financially important at the high end and what's a drag on our finances on the low end."

One complicating factor in the public sector is that individual customers rarely pay directly for services, and they consequently have nebulous measurements of price and quality. This is a particularly intransigent problem in health care. Panelist Mark McClellan, a former commissioner of the Food and Drug Administration and administrator of the Centers for Medicare and Medicaid Services, said that "you need to be able to measure quality and cost effectively in order to pay for value." A significant hurdle to our ability to measure costs more precisely is the traditional general hospital model itself. Hospitals are unviable business models, Christensen explained, for they conflate three very different business models, offering consulting services (diagnoses), value-adding processing services (medical procedures), and networking services at the same time, and thus cannot price their services appropriately. "Were it not for the complex system of cross-subsidization, of competitive regulations, and philanthropic life support," Hwang explained, hospitals would disappear. The potential technological enabler that would greatly advance the quality and value of health care and give us more concrete measurements, Christensen suggested, would be "the ability to diagnose precisely" through such advancements as molecular diagnostics and imaging technologies. As long as we rely on our bodies' "limited vocabulary" of physical symptoms, which tell us little about root causes, we will continue to be dependent on the "skill and the training and the intuition of the best physicians money can buy."

Other barriers in the public arena are government regulations and the interest groups that support them. Both McClellan and education panelist Chester E. Finn Jr., president of the Thomas B. Fordham Institute, emphasized that these barriers should not be underestimated. While he agreed with the "basic logic and power of disruptive innovation" and "the immense potential of technology," Finn said, the political and regulatory forces in education may be insurmountable: "I predict that . . . the usual forces of resistance and pushback and inertia and habit and ineptitude . . . will continue to dampen and discourage the use of technology in brick-and-mortar schools by public schools systems as we know them."

McClellan commented that while there may be a positive "policy role to promote more disruptive innovation," it may take an arduously long time. Christensen and his colleagues may talk "about health IT serving as the connective tissue between these different elements of a reformed health care system," McClellan added, but "we don't seem to be getting there very quickly. These variations and clear inefficiencies in delivering care seem to persist." Even more a reason, Hwang and Christensen emphasized, to embed new technology in business models that initially target nonconsumers. If you first "play where the regulators are not," Hwang explained, you can put down "some roots before you can start to disrupt the incumbents," allowing technology to develop and prove its clout in areas in which the stakes and public scrutiny are relatively low and products are simple.

The path of disruptive innovation is counterintuitive, Christensen said. This is why longstanding industry leaders often miscalculate. It directly counters an age-old business axiom of listening to one's best customers, giving them more of what they need, and investing where profit margins are most attractive. The paradigm that enables a company to advance can paralyze the best managers amid disruptive innovations, making it "impossible for them to pursue less profitable products that aren't used by their best customers." Similarly, in the public sector, leaders are "confronting head-on, every day, the most complicated problems" in the industry, Christensen added, and it is tempting, when a disruptive solution arises, "to stack the solution against the hardest problems." But again, he cautioned, "the disruptive solutions start with the simplest problems first."

Ultimately, Christensen intends for his theories to instruct people how to think rather than what to think within the confines and context of a given sector. He underlined the importance of thinking in terms of entire interdependent systems instead of individual entities, calling upon the lessons gleaned from evolution: "individual organisms simply do not evolve. They were born, they die. But little by little, the mutants gain market share so that the population can evolve even though the individuals within it don't." Each business unit within a corporation "was designed to deliver a particular value proposition--it was not designed to evolve." The same can be said for schools and hospitals, but perhaps, he hopes, with "a common language and a common way to frame the problem," the systems writ large can evolve.

--ROSEMARY KENDRICK

For video, audio, and more information about this event, visit www.aei.org/event1812/. For more information about AEI's Education Policy Studies program, which sponsors research, conferences, and books on how to use entrepreneurship and competition to improve public schools, visit www.aei.org/education/.

For media inquiries, contact Véronique Rodman at vrodman@aei.org or 202.862.4870.

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