Clayton Christensen, in his book The Innovator’s Dilemma, discusses how disruptive technologies will kill incumbent technologies. Basically it is about how the crappy and cheap will eventually take over the sophisticated and expensive.
The well-worn example is in the computing world. The PC (which until recently cost thousands of dollars) killed the dominance of the mini-computer and mainframe (which then cost tens of thousands of dollars). The new $300 netbooks may eventually become the dominant computing platform. Or maybe a $100 mobile phones will eventually replace computers altogether.
The dilemma arises because most companies focus their innovation energies on building faster and more sophisticated technologies: becoming bigger and better. That is, they move towards the right of the graphic above. Unfortunately, the newer, cheaper developments – even if they are lower quality (in the beginning) and don’t perform as well – will ultimately be the winners. Or in other words, the left part of the graphic above.
The US Economy Dilemma
I fear that the same dilemma exists for the US economy. Instead of disruptive technologies, we are talking about disruptive economies and countries.
The US economy – and most of the “Western world” – is based on constantly improving everything: becoming bigger and better.
But what if affordability and accessibility are the names of the game? How will we compete with China or India?
This poses a serious dilemma. In these situations, the incumbent often loses. The Western world is the current incumbent.
Innovation and the US Economy
What can be done? How can the US survive?
Some would claim that we need to become more creative. Use our right brain more. Focus on design and experiences. Taking things to the next level. Although this may be true, I wonder if it perpetuates the innovator’s dilemma thinking. Bigger and better. Moving towards the right.
What if the answer is to find ways of offering more affordable, more accessible, and more simplistic offerings? Moving towards the left. Of course, this too requires right brain, creative thinking.
Earlier today I spoke with Charlie Brofman, President and CEO of Cybersettle. This company offers online settlement and dispute resolution technologies. Interesting stuff. We tend to think of legal claims as being complicated, expensive, and manually intensive. However, Cybersettle’s patented technology almost totally automates the process. It’s low touch but low cost. During a two-year pilot, the city of New York saved over $25 million in administrative costs.
Maybe the development of this less expensive and more accessible solutions can help fend off low cost labor. Or maybe there are other solutions.
What idea do you have for revitalizing the US economy and preventing it from falling victim to the Innovator’s Dilemma?
P.S. Be sure to read my follow-up article on how to make your products and services more affordable and accessible.
Rich DiGirolamo says:
Interesting point Stevel I think you’re on to something. Have you given Obama your thoughts?
On another note, I guess it’s a good thing I bought that crappy/cheaper American brand car instead of the German or Japanese one.
Mary says:
This could also be a great concept for serial entrepreneurs who want to start things, but not grow and improve the same thing forever.
Be new, novel, and simple. Then let the competition come in and fight with each other to make improvements while they also squeeze each other’s margins.
Philip says:
Hey Stephen,
From Europe it still seems like the states has enough Entrepreneurial drive to make a go at it. Some things need to change to make you guys competitive in the 21st.
My guess is that you need to free up the capital that politically locked into plans/companies that should stand/fail on their own merits. There’s too many bailouts and subsidies and distort the market. The money then doesn’t go to the little innovator but to the biggest lobbyist.
Innovation is facet of a free economy. Its actually that simple. Compete with low cost producers? Simply step back, stop having a plan and let people do their thing and you’ll find its all good 🙂
Stephen Shapiro says:
Philip, I agree that in the short run, we can continue to push to the right of the curve. What I am referring to here has nothing to do with low cost providers. It was partly, if not mainly, precipitated by a housing bubble and tightening credit.
One economist I saw speak in Thailand predicted this mess (and I know many others did too). He suggest the reason for it was that people were spending too much in general. If the average American has nearly $20,000 credit card debt, in addition to mortgage payments, the system breaks down when people can’t pay their bills.
Therefore, if when we come out of this mess, people learn (maybe) to reduce spending, the ability to provide accessible solutions will become increasingly valuable. Of course, this is in addition to the more traditional innovation.
It will be interesting to see how things evolve.
Eric Lutz says:
Stephen – I agree with you as far as technology is concerned, but flip the curve upside down label the x axis cost and the y axis time, and it’s called the bathtub effect. New innovative products have upfront develeopment and distribution costs that are passed along to the consumer (e.g $1500 Blue Ray players). As technologies become mainstream and affordable, their costs drop to commodity level, where margins are squeezed and they become loss leaders for services (e.g. free cell phones). As they are outpaced by newer technologies, it becomes more and more expensive to maintain and devleop them any further, thus increasing their TCO to the point where they can be replaced for less than the cost of repair.
I’m not sure how this applies to global economies, but American automakers are looking for handouts to continue unprofitable businesses iwht high union labor costs; perhaps they are at the right side of the bathtub. And some of the new start up economies in alternative fuels and energy conservation may fall on the left side of the bathtub with high initial costs.
Thanks for the intelligent and thought provoking discussion.
Steve Shapiro says:
Eric, you are so right. There are two issues at hand.
1. Development costs and initial production costs drive high initial consumer costs. Therefore, it goes to reason, that the “leader,” has done the hard R&D and creative work for their competitors. Fast follower can be a more powerful strategy…but not always. I look at Accenture, where I worked. We never developed anything new. Back in 1992, business process re-engineering became the buzzword. In a matter of months, we created a methodology and trained thousands of people. Within 18 months, we captured over 35% of the market and grow our business significantly. The same concept of fast-follower can be true for technologies and economies. The US R&D tends to be the leader. But maybe that just is not the best use of investment money in the long-run. Maybe fast followers will rule.
2. Your point about American car companies is spot on – certainly from a cost basis. They are definitely on the right side of the bathtub. Unfortunately, high costs do not always imply better products! If you are going to have high costs, you had better have a clear differentiator. That does not appear to be the case with Big 3.
Thanks everyone for your comments!