Clayton Christensen innovator's dilemma research—steel mill cost data

Tom's daughter, working summer research for Christensen, can't find published steel mill construction costs. Tom supplies a slide with his Burns-Harbor billion-dollar estimate, which appears as a reference in *The Innovator's Dilemma*.

Anybody heard of the book The Innovator's Dilemma by Clayton Christensen? None of you? About ten or twelve years ago this was the greatest thing in business management. Clayton Christensen is now a professor at Harvard Business School. He was writing this book in the mid-1990s, and he's got three examples of the innovator's dilemma. The dilemma is: whether you're Digital Equipment trying to build mini computers while IBM's making mainframes — you're coming in at the bottom of the market, and the innovator was IBM making computers, and they started making bigger and fancier and more expensive computers. Digital Equipment came in and took over the bottom end of the market and ate away until mini computers got to be powerful enough for desktops. That's one example. Another is the mini mills taking over the integrated steel mills. The book became a top-ten New York Times bestseller.

Anecdote about origin of the $15 billion integrated steel plant cost figure cited in *The Innovator's Dilemma*. Tom sketched it on a napkin in Saginaw, Michigan airport; daughter Rebecca passed it to Christensen during a summer job. Used as a teaching point about citation laundering and scientific rigor — Bureau of Labor Statistics later cited Tom's welder-count estimate the same way.

The other time is, how much does it cost to build a steel plant. My oldest daughter was working for Clayton Christensen one summer when he was writing his book, The Innovator's Dilemma. She came home — she was in college, it was a summer job — and said, Dad, Clayton wants to know how much it cost to build an integrated steel plant and I can't find that anywhere in the literature. I said, you won't, Rebecca, because no one's built one except a country since — you know, I told you that story yesterday. I said, however, I have a slide that I use, and I'll bring you a copy of it. This slide was put together in a little airport in northern Michigan. I was sitting there with a graduate student, and we'd just visited General Motors, and we were talking about steel plants, and I just sketched out — this is what a mini mill would cost approximately, this is what — and I had $15 billion for an integrated steel plant. So I gave Rebecca my slide, and I'm referenced in Clayton Christensen's book. We just pulled it out of the air at an airport in — oh, Saginaw, Michigan. I was in Saginaw, Michigan, sitting in an airport, nothing else to do, I came up with a number. And there it is — the rest of the world now knows it costs $15 billion. They haven't got a clue where the number comes from, but they will all reference it. There actually is a basis for my pulling out these numbers, but anyway, just pull the number out. There's probably a few others I don't even know about. Just tells you about scientific rigor.

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Tom's critique: Christensen presents the integrated-mill vs. mini-mill choice as a genuine managerial dilemma; Tom argues the answer was obvious to anyone outside the steel companies' conventional-wisdom bubble.

The conventional wisdom at the steel companies — and I was one of these employees back then — was that you couldn't make the same quality steel. All they could ever make was garbage steel. They might be able to make kids' little red wagons, they could make concrete reinforcing bar, but they couldn't make automotive sheet, they couldn't sell General Motors. And therefore they were never going to be important. That's why Clayton Christensen, in his book Innovator's Dilemma, defends the steel industry as these great paragons of managerial wisdom who were torn between integrated production and electric furnace production. He presents it as if it was a real question that someone with a brain would have to think about. But in fact it was obvious to anyone.

Tom names Christensen's *Innovator's Dilemma* (~2001 in Tom's reckoning) as framing the question of whether companies defend the top or the bottom of their market. Foreshadows the steel-industry case to come in later sessions. ## Figures referenced (recurring numeric anchors, not cases)

If you've got the market, you don't care too much about inventing a new material. You're happy just going along and not innovating and waiting for someone else to do the innovation. Most big companies are too busy not innovating. Are people familiar with Clayton Christensen's book The Innovator's Dilemma? Donny, you must know — at Legos, right? You haven't heard of Innovator's Dilemma? So fifteen years ago Clayton Christensen at Harvard Business School wrote a book called The Innovator's Dilemma, and he pointed out that big companies are so busy just maintaining the product they've got and trying to improve their high-end business — let's take Boeing as an example, since you are Boeing people. They wanted to make an all-composite aircraft. The 777 originally was going to be all composite, until they started pricing it. They said, oops, we'll never build this one in the next ten years, so they decided it was going to be thirty percent composite and seventy percent aluminum, rather than one hundred percent aluminum. But then when they got to the 787, they said we're really going to do it now, and they did build a 787, and it's about, what, eighty percent composite? It's a huge change. The V-22 Osprey in the 1990s, Bell Boeing, that was a hundred percent composite because it had to be. There wasn't a choice. You're going to pay 60 million dollars for an aircraft that holds 16 people, as opposed to paying 250 million for an aircraft that holds 250 people. So the economics are different for a military aircraft and a commercial aircraft, but you can do it. There have been all kinds of headaches whenever you're the innovator. Mostly people let other smaller companies eat at the bottom of their business, and that's the innovator's dilemma.