Clayton’s Crystal Ball on Chrysler

Tuesday, June 24, 2008

As far as I know, Clayton Christensen (innovation guru) has not publicly commented on Chrysler’s predicament (fifth place in US sales, sales down 25% in May, only 2 of 21 models listed among Consumer Reports’ recommended models – full disclosure, I own one of those models, the Chrysler 300 and I love it) but his research into the impact of disruptive technology in various industries can give us somewhat of a crystal ball look into Chrysler’s future – and its not pretty.

Chrysler’s migration up the sustaining technology curve in search of greater and greater margins and profits mirrors the actions of many other big players in different industries. It’s no surprise that Chrysler, along with GM and Ford, all fell in love with pick-ups and SUV’s for the primary reason of the bigger margins they commanded than smaller cars, leaving that market to smaller, start-up car manufacturers looking to gain a foothold in the US auto market. So while the Big Three went after these higher margin vehicle sales (wouldn’t you if your internal cost of capital forced you to look for more and more profitable vehicles?), the foreign car manufacturers focused on the smaller car market, honing their cost structure to be profitable in such a tight market.

Christensen’s research revealed that these disruptors started by offering an adequate product or service that met most of the needs of an underserved consumer population. Once the disruptor start-ups established themselves at the down market, they started working up the sustaining innovation curve, getting closer and closer to matching the established companies’ product offerings, all the while honing their cost structure to remain profitable in whatever market they were in. The established companies would end up competing by adding even more functionality to their up-market offerings in order to entice a shrinking, highly demanding customer.

So here is where Chrysler finds itself in the midst of a $4.00+/gallon US market – its big model debut this fall is the overhauled Dodge Ram pick-up with satellite TV, a carlike ride and a bin in the cargo box for hauling 10 cases of beer. I don’t know about you, but I can’t think of anyone who is looking to pay $40,000 to get 15 mpg in city driving. But it’s hard to get off that track of chasing greater and greater margins when you’re on it. So if I were to guess Dr. Christensen’s prediction for Chrysler, it would be the corporate equivalent of hospice.

All of which makes last week’s Wall Street Journal article (“Nardelli Tries to Shift Chrysler’s Culture”) that much more revealing. In it Mr. Nardelli blames Chrysler’s woes on its “Old Detroit mind-set” and he himself is leading the charge on building a customer-driven corporate culture. It’s hard not to see this as re-arranging the chairs on the deck of the Titanic because all signs point to the Principles of Disruptive Innovation (see Introduction in Christensen’s “The Innovator’s Dilemma”) winning again.

My Chrysler 300 is looking more and more like a Packard every day.