Clayton Christensen was a renowned management scholar and author who developed the theory of **disruptive innovation**¹. He also wrote about various topics related to management, such as organizational structure, product innovation, financial tools, mergers and acquisitions, and personal development¹.

According to Christensen, disruptive innovation is the process in which a smaller company, usually with fewer resources, is able to challenge an established business (often called an “incumbent”) by entering at the bottom of the market and continuing to move up-market³. This process usually happens over a number of steps³:

– The incumbent focuses on improving its products or services for its most demanding customers, and ignores or overshoots the needs of its less demanding customers.
– The entrant offers a simpler, cheaper, or more convenient alternative that meets the basic needs of the less demanding customers, and gains a foothold in the market.
– The entrant improves its offering over time, while maintaining its cost or convenience advantage, and attracts more customers from the incumbent.
– The incumbent is eventually displaced or disrupted by the entrant, or forced to retreat to a smaller niche in the market.

Christensen applied this theory to various industries, such as steel, disk drives, personal computers, retail, education, and health care¹³. He also suggested some strategies for incumbents to avoid being disrupted, such as creating separate units to explore new markets, allocating resources based on future potential rather than past performance, and being willing to cannibalize their own products or services³.

As for his stock selection process, there is no known specific information on how Christensen selected his investments. However, based on his writing, here is the kind of companies which would meet his thinking:

– Companies that had a clear understanding of their customers’ jobs to be done, that is, the problems they were trying to solve or the outcomes they were trying to achieve¹.
– Companies that had innovative business models that aligned their value proposition, profit formula, resources, and processes¹.
– Avoiding companies that were too focused on short-term results or shareholder value, and instead preferred companies that had a long-term vision and a purpose beyond profits¹.
– Companies that were creating or disrupting new markets, rather than competing in existing ones³.
– Companies not afraid of taking risks or making mistakes, as long as they learned from them and improved their decision-making process¹.

(1) The Essential Clayton Christensen Articles – Harvard Business Review. https://hbr.org/2020/01/the-essential-clayton-christensen-articles.
(2) What Is Disruptive Innovation Theory? 4 Key Concepts | HBS Online. https://online.hbs.edu/blog/post/4-keys-to-understanding-clayton-christensens-theory-of-disruptive-innovation.
(3) Ce que nous devons à Clayton Christensen, théoricien majeur du management. https://theconversation.com/ce-que-nous-devons-a-clayton-christensen-theoricien-majeur-du-management-130707.

The capitalist dilemma is a term coined by Clayton Christensen, a renowned professor and author on innovation and strategy. He defines it as the situation where corporations are sitting on massive piles of cash and failing to invest in innovations that might foster growth, despite low interest rates and abundant capital¹².

According to Christensen, the capitalist dilemma is caused by the way investors and managers evaluate and reward different types of innovation. He distinguishes between three kinds of innovation:

– Performance-improving innovations, which replace old products with better models.
– Efficiency innovations, which lower costs and enable companies to do more with less.
– Market-creating innovations, which transform products so radically that they create a new class of consumers¹².

Christensen argues that performance-improving and efficiency innovations are necessary but not sufficient for long-term growth and job creation. They tend to reduce prices, improve margins, and free up capital, but they also eliminate jobs and commoditize markets. Market-creating innovations, on the other hand, are the ones that generate sustainable growth and employment. They create new markets, expand demand, and increase consumption¹².

However, the problem is that investors and managers tend to favor performance-improving and efficiency innovations over market-creating ones, because they are easier to measure and predict. They use metrics such as return on net assets (RONA), internal rate of return (IRR), and earnings per share (EPS) to assess the attractiveness of investment opportunities. These metrics assume that capital is scarce and that performance should be evaluated by how efficiently companies use it¹².

Christensen contends that these metrics are outdated and misleading in today’s economy, where capital is abundant and cheap. They discourage companies from investing in market-creating innovations, which often require more time, risk, and capital to succeed. They also encourage companies to distribute their excess cash to shareholders through dividends or buybacks, rather than reinvesting it in growth opportunities¹².

Christensen proposes that companies should adopt a different set of metrics and incentives to overcome the capitalist dilemma. He suggests that they should focus on the ratio of free cash flow per share (FCFPS) to EPS, which measures how much cash a company generates after reinvesting in its business. He also suggests that they should reward managers for creating new growth platforms, rather than for maximizing short-term profits¹

(1) Clayton Christensen Is Wrong. This Is The Real Capitalist’s Dilemma.. https://bing.com/search?q=christensen+capitalist+dilemma.
(2) The Capitalist’s Dilemma – Harvard Business Review. https://hbr.org/2014/06/the-capitalists-dilemma.
(3) The Capitalist’s Dilemma – Article – Harvard Business School. https://www.hbs.edu/faculty/Pages/item.aspx?num=50982.
(4) Clayton Christensen Is Wrong. This Is The Real Capitalist’s Dilemma.. https://www.forbes.com/sites/gregsatell/2015/04/10/clayton-christensen-is-wrong-this-is-the-real-capitalists-dilemma/.
(5) Clay Christensen: The Wrong Kind of Innovation | Inc.com. https://www.inc.com/christine-lagorio/clayton-christensen-capitalist-dilemma.html.
(6) The Capitalist’s Dilemma | Innosight. https://www.innosight.com/insight/the-capitalists-dilemma/.