Over the last few months I have kept going back and forth on Professor Clayton Christensen’s paradox he has named “The Capitalist’s Dilemma.” This ‘hit the world’ when he wrote a piece in the New York Times last November, 2012. I gather this has been one of his best, if not his best read article ever.
As I’m sure you are aware Professor Christensen must be regarded as if not the top, then one of the top experts, on innovation. For me he sits at the top, so when he explores a theory, you stop to think about what he is trying to explain. It takes some of us mere mortal awhile to grasp and relate to these ideas and theories.
Theories into solutions sometimes is a long wait for wrong reasons
Firstly an aside, I need to get this off my chest. Although I suspect a book will eventually emerge, perhaps only next year 2014, far too often this is a little later than preferred or when really needed. The ‘currency’ or present day relevance often suffers from this parallel world of academics, moving on a much slower level. They are still working within the publishing strictures and structures where a book has to be firstly written, reworked, proofed by editors, printed, bounded and distributed.
As you might guess here, I just wish some of these breaking theories that emerge from the academics could be sped up, they are seemingly just caught up in the dogma of rigour, validation and peer review. Weighed down in this legacy they often fail to provide the valuable insights that can alter the present day where the theory or dilemma has arisen. That valuable thinking to address the very problem we need a solution too is today not having even further debate after a book comes out, sometime in the future. We need to begin to travel the road, not just survey it!
Actually it is rather ironic in one of Professor Christensen’s own theories, the disruption theory, that this is one of the real challenges within the publishing industry, of being “disrupted,” as they fail to deliver in this faster world in the new alternative mediums many are looking for, that he of all people chooses the old slower avenue of a printed book. Still he chooses to use this medium, such a shame when he expands on the very theories that explain much of what is presently going on today.
The world has sped up and I would urge Professor Christensen to get out of one of the very traps he has previously identified, and explains so well to others, for himself. I would suggest his insights and suggested solutions are applicable to today’s problems and need exploring now. Can we afford to wait?
So what makes “the Capitalists Dilemma” so relevant today?
The basic concern today in most developed economies is the lack of real growth and the worrying concerns that each capital stimulus round seemingly does not offer that number of new jobs you would expect. Old ones are being constantly being stripped away at a much faster rate. We are seemingly caught in a broad jobless economic recovery.
At the heart of this dilemma seems to lay the issues of the type of innovation being employed, the way we measure profitability, where this capital is being invested to offer increased returns and the lack of political and leadership will, or understanding, to change this.
Again when you read the article Professor Christensen talks of a doctrine of New Finance, taught over recent years by him and countless others in Academia, of failing to catch up with the new realities and teaching theories we need to operate in a changing world. One of those is the need is to ‘account’ more in creating new jobs and people (gainfully) employed do not seem to be as much within any capital equation. Our new norm is certainly bringing increasing financial returns but without this job creation.
We seem to be faced with focusing on jobless innovation outcomes that are measured by magnifying each dollar invested by the classic ratios of RONA (return on net assets), ROCE (return on capital employed) and I.R.R (internal rate of return), used more when capital was scarce and costly so you husband resources.
Today capital is abundant and cheap – no, really!
Today capital is abundant and cheap, new skills are becoming scarcer, education is lagging the new knowledge economy need and we are applying these old rules of measuring outcomes in the wrong way in our changed world. Professor Christensen argues that successful companies are making the right economic decisions within the wrong situation or economic needed times. Capital is not scarce, it is abundant, yet it seems we are investing in the wrong types of innovation. We still are measuring capital as though it was scarce when it is not.
Companies continue to drive assets off their books, they choose innovations that provide fast returns, they continue to outsource and they consistently keep the time horizons deliberately short for improving the rates of return and constantly higher dividends in focusing on the quick wins.
The politicians have not grasped the need to change the thinking to invest in longer term innovation that makes for more breakthrough and radical innovation activity. Those that employ more people, kick starts new economic activity with fresh investment, new equipping to supply these new activities, and finally also attempt to reposition dividends in their longer-term value for the recipients.
Awash with money
In the Economist there was a recent article “A world of cheap money” stating: “The message from the rich world’s central banks is clear: the era of ultra-loose monetary policy is here to stay.”
The Economist goes on to state: “Unfortunately, the effect on output has been more muted. America’s GDP is showing signs of accelerating. But Europe’s economies are flat or shrinking. Overall, rich-world growth is likely to be barely over 1% in 2013, little better than in 2012″
“Given the gap between financial froth and feeble growth, are central bankers doing the right thing? Supporters argue that cheap money is essential for economic recovery, particularly when (as in Europe and America) austerity-minded governments are tightening fiscal policy. Critics counter that low rates simply pump up asset bubbles, distort financial markets and risk inflation”
Clearly “monetary policy should not just operate in a vacuum” and it is Professor Christensen’s insight on where innovation is playing it part, or not in most cases, that can hold one of the real keys for rethinking how we measure success. Let me explain if you have not read his thoughts on this.
There are three types of innovation in his view where jobs occur or are lost.
These are summarized by Professor Christensen as:
Empowering innovations: these create jobs, because they require more and more people who can build, distribute, sell and service these products. Empowering investments also use capital — to expand capacity and to finance receivables and inventory. Empowering innovations are essential for growth because they create new consumption.
The second type is “sustaining” innovations: these replace old products with new models. They replace yesterday’s products with today’s products and create few jobs. They keep our economy vibrant — and, in dollars, they account for the most innovation. But they have a neutral effect on economic activity and on capital.
The third type is “efficiency” innovations: these reduce the cost of making and distributing existing products and services. Taken together in an industry, such innovations almost always offset the net number of new jobs, because they streamline processes. But they also preserve many of the remaining jobs — because without those, entire companies and industries would disappear in competition against companies abroad that have innovated more efficiently.
Efficiency innovations also emancipates capital. Without them, much of an economy’s capital is held captive on balance sheets, with no way to redeploy it as fuel for new, empowering innovations until it is released.
His view here is: “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” and suggests we are today not doing that.
The innovation machine is out of balance today
Today, our innovation activities are out of balance. I can strongly relate to this on where organizations are spending their innovation dollars: in short-term fixes, incremental thinking and efficiency relating projects, not on deepening innovation capacity.
We are presently encouraging our managers to measure profitability based on a return on net assets, or return on capital employed. That encourages companies to liberate their capital, so they invest in efficiency innovations, which means they can make even more money with fewer resources, so why would they invest in those more-longer term capital-intensive innovation projects under “empowering innovation?”
Professor Christensen offers this thought “what the economy ultimately needs are empowering innovations—like the Model T, the transistor radio. Empowering innovations require long-term investments, which tie up capital for years and years. So companies are using capital to create more capital, and the world is awash in the result, more capital but the innovations we need to advance aren’t there”- this accumulating capital is remaining idle.
Today’s growth sustaining challenges are not framed properly
The need is to “unlock” the right type of innovation that creates a renewed, sustaining wealth for economic and industry revitalisation. There needs to be a shift from investing in efficiency innovation that tend to cut out jobs, where the focus is constantly on focusing on less capital in use and fewer people so that the extra release of capital is re-invested in more efficiency, not in disruptive or empowering innovation. The present day realities within business are how success is measures and if that is on RONA, ROCE and I.R.R then that is where the focus will remain.
Changing the existing paradigms takes time and convergence.
Empowering innovation takes time – anything from six to twenty years depending on many of the necessary long-term wealth creation factors required based on research and vision.
Two factors are well in place. We have capital, almost at zero borrowing rates, that the future net present value of any future stream of growth is identical to one that yields a return in weeks. We have a growing and compelling set of social needs to resolve many grand societal challenges that come more from empowering innovation.
Offsetting this we have a powerful set of factors to change if we see job creation as part of any economic recovery. We first have this current risk-aversion prevailing and we spend public capital on propping up ailing industries but do not pursue the alternatives with a grander vision and plan.
We are holding renovation back in some of these politically motivated decisions yet the young in most countries cannot find any jobs. We prop up banks with their bad loans yet the defaults by small and medium-sized enterprises will continue to rise. In Spain, Italy, Portugal, Greece, Ireland, and many parts of the UK, along with others all have growing at alarming rates, bad debts. So many smaller businesses are close to the ‘tipping point’ of going bust here in Europe.
A bolder innovative framing is necessary
We need bolder re-framing of our challenges, a clear recalibration of our measuring success and a set of cohesive strategies, policies and political judgements. What will eventually bring this to the boil is the unrest, unemployed, stagnating economies, risks of growing debt and loss of property and capital achieved from the past unless those in policy decision don’t ‘face up’ and make bolder, imaginative steps. Our markets need stimulating and this will either be from importing the type of goods that meet our declining economic needs as those are produced more efficiently elsewhere. Not a good prospect to face.
Lastly the very company that needs financing does not get the financing it needs. Capital is presently hoarded in the billions on pristine balance sheets of the biggest corporations; billions are inert and uninvested in private equity funds and sitting in countless private bank accounts offshore. According to one report $1.8 trillion just sits in American listed firms alone.
The missing link is between cheap money and finding ways to achieve new corporate investments in the developed economies that need this, otherwise there continues to be growing issues of dealing in the latest crisis or further kicking the can down the road in future pay off from continuous mounting debts and a lack of addressing bad loans and all the structural problems we are not facing today except in applying ‘selective’ austerity..
So why has this caught my attention?
Simply incremental innovation (sustaining, efficiency innovation) is getting us no-where fast. You see so many people within many of our organizations, big and small, working longer hours, feeling reduced identification with what they are doing and lacking that sustaining satisfaction. There are millions out of work that could offer positive economic activity contribution. We could have innovation that is exciting, that is empowering and this does come from working on challenging that are game changing concepts that we often suggest today as distinctive, disruptive, breakthrough, radical and certainly are empowering.
We are failing to translate today’s set of challenges because the metrics applied are inappropriate to our needs today and in the future. We are applying solutions often in their vacuum, they boost sufficiently in small ways but lack boldness, changing the dynamics and policies, the way we should be measuring and valuing success. We reflect where we are in the West – far too timid, applying often just a real hard dose of harsh austerity, minimal structural reform that have a constraint on growth as we don’t people in their rightful place within the equation, they are being progressively written out of the capital model we seem to be locked into. We apply “selective” innovation solutions to meet mostly short-term gains.
There are different solutions that need discussion
There are different innovative solutions, those I will attempt to outline in my next article, more to stimulate and trigger awareness of alternatives for today’s more jobless innovation outcomes.
In the meantime watch Professor Clayton Christensen’s talk at the World economic forum under “an insight, an idea with Clayton Christensen”. Worth watching, believe me, and then you might be reflecting on why we do need to change that does bring that real, fresh growth from innovation that has people and jobs as part of the lasting equation, that fits more in today’s world, needing innovation to begin a stronger recovery than we have seen in a number of years.