Clayton Christensen: How Pursuit of Profits Kills Innovation and the U.S. Economy
21st November 2011
Christensen retells the story of how Dell [DELL] progressively lopped off low-value segments of its PC operation to the Taiwan-based firm ASUSTek [LSE: ASKD]—the motherboard, the assembly of the computer, the management of the supply chain and finally the design of the computer. In each case Dell accepted the proposal because in each case its profitability improved: its costs declined and its revenues stayed the same. At the end of the process, however, Dell was little more than a brand, while ASUSTeK can—and does—now offer a cheaper, better computer to Best Buy at lower cost.
Christensen also describes the impact of foreign outsourcing on many other companies, including the steel companies, the automakers, the oil companies, the pharmaceuticals, and now even software development. These firms are steadily becoming primarily marketing agencies and brands: they are lopping off the expertise that is needed to make anything anymore. In the process, major segments of the US economy have been lost, in some cases, forever.
Of course, it’s not the pursuit of profit per se that causes the problem, but the pursuit of insanely short-term profit, a distinction that Christensen doesn’t care to make and which the author of the article appears delighted to avoid.
Christensen recalls an interesting talk he had with the Morris Chang the chairman and founder of one of the firms, TSMC [TSM], who said:
“You Americans measure profitability by a ratio. There’s a problem with that. No banks accept deposits denominated in ratios. The way we measure profitability is in ‘tons of money’. You use the return on assets ratio if cash is scarce. But if there is actually a lot of cash, then that is causing you to economize on something that is abundant.”
Chang, who is Chinese and therefore sensible about business, obviously understands the necessary distinction, and assumes that his listener understands it as well, which I suspect is not the case.
Yet another case of smart people asking the right questions but unfortunately grabbing a not-quite-right answer and running with it. (Cf. the ‘cult of the shoe’ in Monty Python’s Life of Brian.)
November 22nd, 2011 at 13:51
But of course you have the right answer. Wonder why you weren’t asked to speak? Probably part of that Left Wing Media Conspiracy. The bastards…
November 22nd, 2011 at 19:10
I and about a million other folks; I wasn’t asked to speak for the same reason that you aren’t Obama’s driver. There is a left-wing media conspiracy, and they are bastards, the just don’t see the people in Flyover country. Sorry if that’s a disappointment to you.