Clayton Christensen on Innovation and Macro Economics
Clayton Christen takes look at the macro-economic impacts of innovation in this lecture at Oxford University.
He discusses disruption innovation (creating new markets for complex expensive products: for example, from mainframe computer to personal computer to smart phone), sustaining innovation and efficiency innovation. He explains that disruption innovation increases employment as the market expands and more employees are needed to serve the much larger market.
Sustaining innovation (adding nice features to existing products: decreasing the amount of gas needed to drive cars or finding a new drug that doesn’t need refrigeration [while the previous drug used for that treatment did]) and efficiency innovation (selling the same goods more efficiently – for example Amazon.com) don’t create jobs, in fact they reduce them as the same needs are meat more efficiently).
He discusses the example of Toyota freeing up a great deal of capital (compared to GM or Ford) by reducing the amount of inventory needed. If the capital that is freed up is invested in disruptive innovation the economy does very well.
As long as efficiency innovation are creating enough capital we can launch disruptive innovations. And as long as disruptive innovations create more jobs than efficiency innovations eliminate… and my sense is over the last 150 years, in North America, our machine worked in this way.
His premise is that this process has broken and that has been creating large macro-economic disruptions we have seen in the last 10 years.
He discusses what he calls the seminary of new finance. The tenants of that seminary he proposes are to deploy capital very carefully because capital has been a scarce resource and the advantage to those deploying this scarce resource effectively has been huge. They have many new measures (ratios) that are the commandments to maximize in the seminary of new finance.
The problem with disruptive innovation is it pays off in 5 to 10 years and it uses capital… [Investments in efficiency innovation pay] off in 1 to 2 years and it creates more capital… occasionally a little bit of capital goes up into disruption. But in America in the last 20 years the number of disruptive innovations that our economy has produced is about a third the number of disruptive innovations that emerged in our economy in the 50’s, 60’s and 70’s. So we are talking a lot of jobs out relative to the number we are creating with disruptive innovation. And that is what is wrong with our economy.
As he points our economy is now awash in capital. Using thinking that is based on the importance of not investing our precious capital unless we can gain an immediate large return is not aligned with the marketplace today.
Long term thinking is one help for businesses caught in the trap he discusses. Companies like Toyota and Apple have been willing to invest large amounts in projects that will pay off only in the long term.