Truly disruptive innovation — the kind that creates new markets, opens up new ways of looking at problems, and greatly expands wealth — is in short supply, and that is what is dragging the current economy. There isn’t enough innovation because business leaders and managers have become too focused on short-term gains.
That’s the view of disruptive innovation guru and Harvard professor Clayton Christensen, who, in a New York Times editorial, explains why America’s innovation system has gone off the tracks.
Basically, the economy has long been driven by three types of innovation that all industries cycle through: empowering innovations, which transform complicated and costly products available to a few into simpler, cheaper products available to the many (think Ford’s Model T); sustaining innovations, in which old products are replaced with new models (think Toyota’s Prius); and efficiency innovations, which reduce the cost of making and distributing existing products and services (think Geico in online insurance underwriting).
The problem these days, Christensen says, is that instead of cycling through these three phases, businesses are stuck on efficiency innovations — streamlining, paring, cutting and squeezing. While efficiency innovations liberate capital, there isn’t enough energy and resources going to empowering innovations — which generates new wealth and opportunity within underserved or unserved parts of markets.
In other words, Christensen says, business leaders and managers are too focused on wringing efficiency and savings out of their organizations, but are missing out on huge opportunities to expand their wealth by creating new markets.
It would be like Henry Ford spending all his time shaving costs and increasing margins in custom-built automobiles for the wealthy, but completely missing out on the vast new markets of working-class drivers. Or, for another analogy, Bill Gates focusing entirely on producing well-designed high-end microcomputer systems for big enterprises in the early 1980s, and not recognizing the huge market for non-tech consumers.
As a result of this cloistered thinking, we’re seeing the impact in anemic economic growth: “Efficiency innovations often add workers with yesterday’s skills to the ranks of the unemployed,” Christensen points out. “Empowering innovations, in turn, often change the nature of jobs — creating jobs that can’t be filled.”
Fiscal and monetary policymakers are partially to blame, and the educational system — which focuses on efficiency over empowering innovation — is partially to blame, he adds.
Christensen lays out three ways to shift the emphasis back to empowering innovation:
- Change the metrics: “Optimizing return on capital will generate less growth than optimizing return on education.”
- Change capital-gains tax rates: Reduce the rate the longer an investment is held — to encourage long-term investing.
- Change the politics: Give the wealthy incentives to make long-term investments, versus higher tax rates.
The idea is to move away from short-term profits and toward long-term bets on new innovations. It’s a healthy choice, says Christensen: “As long as empowering innovations create more jobs than efficiency innovations eliminate, and as long as the capital that efficiency innovations liberate is invested back into empowering innovations, we keep recessions at bay,” he says.