One of the things that I love about blogging is meeting fascinating people that have a common interest in disruptive leadership topics. Last week Thomas Thurston got in touch with me after he read A Lesson Learned. Thomas had also previously worked for Intel and was involved with some of the same emerging market projects.
The highlight of meeting Thomas was his story. He created a model from Clayton Christensen’s theory of disruptive innovation that could predict, with 85% accuracy, whether a business venture would succeed or fail. His model caught the attention of Christensen himself at Harvard Business School (HBS), who asked Thomas to join him for a year at HBS, fully paid for by Intel. Thomas then took that same model and used it to create a stock portfolio that is wildly successful (more on that later).
Thomas had worked in the New Business Initiatives (NBI) group at Intel. NBI was then part of Intel Capital, Intel’s “venture capital” group that invests billions of dollars in external companies. NBI’s charter was to fund and incubate business ideas and products internal to Intel. Individuals and groups that had a product or business idea could present their proposal to Intel Capital, and if it was approved for investment, was put into NBI.
Thomas, like myself, was fascinated by Clayton Christensen’s theories of disruption. Thomas used disruptive innovation theory to see whether a predictive model could be created to evaluate which of the business ventures in NBI would succeed or fail. He looked at 48 business ventures over a 10-year period. He was able to get access to the original PowerPoint proposals that had been approved and, based on the information from these proposals, put them through his model.
He had two basic evaluation criteria. The first was whether the venture was a “sustaining” or “disruptive” business. A sustaining business is one that positions itself as having better performance than existing competitors, or “incumbents,” in that market. The second was whether Intel was a new entrant or an incumbent in the market. If Intel entered a new market that already had incumbent businesses, then Intel was a new market entrant; but if Intel was already in that particular market, it was considered an incumbent.
He then looked at the 48 business ventures to see if they were successes (e.g., growing and profitable) or failures (losing money or shut down). It turned out the model was 85% accurate in predicting whether a venture would succeed or not. About 10% of the businesses Intel funded succeeded, which is typical for new ventures. One caveat is that Intel sometimes killed a venture that might have been successful, which may have skewed the results slightly.
Bottom line: If a business was a sustaining venture and Intel was an incumbent, Intel was very likely to succeed; but if Intel was a new entrant in an existing market with other existing incumbents, then Intel was very likely to fail.
If the business venture was disruptive to an existing market where Intel was an incumbent, then Intel was effectively disrupting itself, and would typically fail unless the new business had enough autonomy from Intel. Christensen’s theory says that an incumbent with a disruption to its own business will only succeed if the incumbent protects or firewalls the new business from its core business. If the venture was disruptive and in a new market, the venture was very likely to succeed.
I asked Thomas what his model predicted for the Classmate PC. He considered the Classmate PC a low-end disruption to notebook PCs (e.g., as Thomas so eloquently put it: “Classmate PC was classified as disruptive because it was cheaper and worse then other notebooks”). The Classmate PC led to the market for netbooks, creating a disruptive ecosystem to the notebook computer. ASUS and Acer have been the primary beneficiaries of this disruption.
When Thomas sent his results to Clayton Christensen, Christensen invited him to join him at Harvard Business School to continue his research. (Intel fully paid for the the year at HBS.) Thomas and Christensen subsequently looked at about 200 ventures at Intel and other companies. The ironic ending of this story is that after returning to Intel, Thomas was laid off and NBI was scaled back as part of Intel’s many multiple downsizing initiatives. Whether Intel is still using this predictive model for evaluating ventures is unknown.
Thomas has since set up his own consulting company, Growth Science International, and has been expanding his research to encompass even more fascinating (and rewarding) ventures. For example, he applied his model as a methodology for picking stocks. According to Thomas, for a period of one year (August 1, 2008 to July 31, 2009), a diversified portfolio of 30 or so of the stocks picked attained a whopping return of more than 60%! Compare that to the S&P return during that same period of minus 22% (keep in mind that this period of time straddles the worst economic crisis in decades). He mentioned that Christensen has developed a similar portfolio that is also doing remarkably well.
Thomas has agreed to do a guest post for Disruptive Leadership and dive deeper into his results and methodologies. I, for one, look forward to that post.