Clay Christensen makes a very important point in his essay in Sunday's New York Times "A Capitalist's Dilemma, Whoever Wins the Election." Unfortunately, it is a point that has been made before in a slightly different form over 30 years ago.
Christensen begins by noting that "innovation" is actually made up of three types:
Here is the important insight derived from this taxonomy: Ideally, the three innovations operate in a recurring circle. Empowering innovations are essential for growth because they create new consumption. 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.
- Empowering innovations which "transform complicated and costly products available to a few into simpler, cheaper products available to the many." These are the new products and services that create jobs and new wealth. He cites the Model T, the first personal computers, the transistor radio and online services as examples.
- Sustaining innovations which "replace old products with new models." These are the newest version of an existing product. As such, they create few new jobs but "keep our economy vibrant." They also account for the bulk of what we call innovation. The example he sites is the a Toyota Prius replacing a Camry.
- Efficiency innovations which "reduce the cost of making and distributing existing products and services." These innovation generally reduce the number of jobs but may make the companies more internationally competitive (thereby saving some jobs).
The dials on these three innovations are sensitive. But when they are set correctly, the economy is a magnificent machine. In the last three recoveries, however, America's economic engine has emitted sounds we'd never heard before. The 1990 recovery took 15 months, not the typical six, to reach the prerecession peaks of economic performance. After the 2001 recession, it took 39 months to get out of the valley. And now our machine has been grinding for 60 months, trying to hit its prerecession levels -- and it's not clear whether, when or how we're going to get there.
The economic machine is out of balance and losing its horsepower. But why? The answer is that efficiency innovations are liberating capital, and in the United States this capital is being reinvested into still more efficiency innovations. In contrast, America is generating many fewer empowering innovations than in the past. We need to reset the balance between empowering and efficiency innovations. Christensen goes on to blame the situation on what he calls "The Doctrine of New Finance" with its emphasis on RONA (return on net assets), ROCE (return on capital employed) and I.R.R. (internal rate of return).
I believe he has a strong point - but am not sure this is such a new problem. Over 30 years ago, Robert Hayes and William Abernathy published in HBR their seminal paper Managing Our Way to Economic Decline. They argued there are three tasks of a manager:
- Short term--using existing assets as efficiently as possible.
- Medium Term--replacing labor and other scarce resources with capital equipment
- Long term--developing new products and processes that open new markets or restructure old ones.
As I've pointed out before, we overcame the competitiveness challenges of the 1980's by meeting them head on. We put in place a number of new government policies and companies engaged in a new wave of innovation. We need the next wave of policies to meet the new competitiveness challenges we face today. Christensen has outlined a few of his ideas in his article. There are many more that I could come up with. The point is not whether my list or Christensen's list is the right list. The point is to have a debate that recognizes the real forces underlying the problem. Simply cutting and "letting the economic work" is a recipe for a new round of managing our way to economic decline. View article...