One of the things that I love about blogging is meeting fascinating people that have a common interest in disruptive leadership topics. Last week a gentleman by the name of Thomas Thurston got in touch with me after he read A Lesson Learned. Thomas had also previously worked for Intel (INTC) and was involved with some of the same emerging market projects.
The highlight of meeting Thomas was his story. He created a fairly simple model from Clayton Christensen’s theory on disruptive innovation that could predict, with 85% accuracy, whether a business venture would succeed or fail. His model caught the attention of Clayton himself at Harvard Business School (HBS) who asked him to join him for a full year fellowship at HBS, fully paid for by Intel. He then took that same model and used it to create a stock portfolio that is wildly successful (more on that later).
Thomas 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 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 Christenson’s theories on disruption. He 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 initiatives over a 10 year period. He was able to get access to the original Power Point proposals that had been approved, and based on the information from these proposals, put him through his model.
He had two basic variables. The first was whether the venture was a “sustaining” business or disruption. A sustaining business is one that positions itself as having better performance than existing competitors, or “incumbents,” in that market. If it was a disruptive business, then it was either a low-end disruption (a business that had less performance than other products in the existing market but was more affordable and provided some unique value) or new disruption.
The second variable was whether Intel was a new entrant or an incumbent in the market. If Intel went into a brand new market were there are already incumbent businesses, then Intel was a new entrant. They were considered an incumbent if they were already in that particular market.
He then looked at each of these 48 ventures to see if they were successful (e.g. growing and profitable) or failures (losing money or shut down). It turned out the model was 85% accurate for predicting whether a venture would succeed or not. About 10% of the businesses Intel funded succeeded, which is not atypical for new ventures. One caveat is that Intel sometimes killed a venture that might have been successful, which may have skewed the results slightly.
Looking deeper into the findings is even more instructive. If a project was a sustaining venture and Intel was the incumbent, then Intel was very likely to succeed. If Intel was a new entrant in an existing market with other existing incumbents, than Intel was very likely to fail.
If the project was disruptive to an existing market where Intel was an incumbent, then Intel was effectively disrupting itself, and would typically fail. 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 is disruptive and its a new market, the venture is very likely to succeed.
I asked him about what his model predicted for the Classmate PC. He considered the Classmate PC a low-end disruption to notebook PC’s (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 (AKCPF.PK) and Acer have been the primary beneficiaries of this disruption.
When Thomas sent his results to Clayton Christensen, Cristensen invited him to join him at Harvard Business School to continue his research. Intel fully paid for the fellowship. 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, NBI and Thomas were laid off 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. He applied this same model as a methodology for picking stocks. According to Thomas, for a period of one year (August 1st 2008 to July 31 2009), a diversified portfolio of 30 or so stocks attained a whopping return of 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 Clayton Christensen has developed a similar portfolio which is 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.