Innovation Economies & The Benefit Of Creative Destruction

…Business is not a sporting event. Victory for one company doesn’t mean defeat for everyone else.
- James Surowiecki

Innovation As An Economic Mover And Shaker
Today innovation sits at the heart of economic value creation. If the 1980’s were all about productivity, the 1990’s were about quality, and the 2000’s about globalization, the current decade will most likely be about the capacity of organization to harness the controlled chaos inherent in innovation to create value. With the acceleration of globalization process, innovation is more and more seen as the appropriate tool to create business value. We recognize that innovation within an enterprise occurs in a framework of economic production and diffusion.

That framework is governed by (Porter’s) five major forces:

1. Customers Buying Power. Towards them must be oriented all the efforts of the firm, particularly concerning modifications of switching costs, manufacturing processes, or the positioning of the products and services. Innovation in the way the customer sees your industry or product may directly shift the balance of their buying power. Consider the commoditization of the flat panel TV industry as one area in which that balance has shifted in the space of a couple of years.

2. Suppliers Bargaining Power. Due to their huge power of negotiation, especially when they may be sole supplier in an innovative new industry sector, they are able to use their influence to shift supply chain economies causing disruption.

3. Threat of Substitute Products. Firms must pay attention to the threat of substitutes, and to the fact that followers do not have to support the R&D costs in the production process, and thus are able to implement the innovative service or product at a lower cost.

4. Threat of New Entrants. Anticipating and managing if necessary the different entry and exit barriers should be one of the major preoccupations of the firms operating on the market.

5. Intensity of Industry Competition. Rivalry among competitors has numerous consequences on the level of activity, as well as on the value chain, by increasing or lowering one or several structural elements of the market. Innovation may enable an enterprise to insulate from direct competition due to a technological advance for example.

This microcosm in which a firm survives requires constant surveillance and response as it continuously shifts and changes. What makes an awareness of these forces more important is that the timescale governing observation and impact has shifted; due to marketplace innovations the pace of change and rate of response has accelerated. The undercurrent at work here is that it is not enough to be aware of the environment in which innovation occurs; the effectiveness of the implementation of an innovation is critical. That is what drives economic growth.

It’s Not What You Know – It’s What You Do With What You Know
As a direct response to the neoclassical economics-fostered reasonable allocation of scarce resources, innovation economics focuses on spurring economic actors (the individual, the organization or firm, industries, cities, and even entire nations) to create value through increased productivity and implemented innovation. Innovation is a mighty lever for change and value creation. It disrupts existing systems and plays havoc with what we think we know, creating new paths for the exchange of goods, services but, more importantly, new ideas. It also provokes and promotes growth through expenditure.

Entrepreneurial profit is the expression of the value of what the entrepreneur contributes to production.
- Joseph Schumpeter

As new products are developed, new materials requiring new sourcing capabilities may be required. This creates employment opportunities, which impacts local communities. If those products become viable in the market, a whole microcosm of support is required to support the new endeavor. In the service sector, innovation practices create opportunities through the elimination of wasted time, freeing resources to be applied to other more fruitful activities. All of which is in support of value creation. Yet in order to achieve these ends innovators must forcing critical decisions in their organizations – what do we need to stop doing to make this innovation a reality? Without answering that question, innovation may become stuck.

To Make Something New You Might Need To Blow Something Up
In innovation economics, innovation lies at the center of value creation. Innovation economists recognize that innovation and productivity growth take place in the context of institutions. Indeed, it is the “social technologies” of institutions, culture, norms, laws, and networks that are so central to growth. In the eyes of conventional economists these are the elements that are too difficult to model or study. For a neoclassical economist, the focus is on the use of scarce resources to produce valuable commodities and distribute them among different people. Innovation economists view innovation as an evolutionary process in a market where firms act on imperfect information and where market failures are common.

Economic progress, in capitalist society, means turmoil.
- Joseph Schumpeter

Which leads us to one of the elder statesmen of innovation economics, Joseph Schumpeter. In his seminal work, The Theory of Economic Development (1911, 1934) Schumpeter did more than any other economist to increase the understanding of the role the entrepreneur plays in the capitalist economy. In particular, he defined the crucial role of the entrepreneur in the process of innovation and creative destruction – today it is virtually impossible to conceive of a dynamic capitalist economy in the absence of Schumpeterian entrepreneurs.

The startling thing is that Schumpeter also saw that the capability of the lone entrepreneur to significantly change the world would, over time, be supplanted by innovation through larger collaborative efforts. Schumpeter claimed that due to the application of modern techniques and modern modes of organization the innovation process would become more and more automated. Innovations would increasingly become the fruits of the organized effort of large teams. This would be done most effectively within the framework of large corporations.

Schumpeter foreshadowed, the destruction of the role of the solo inventor, and the subsequent rise of the “wisdom of the crowds” and “open innovation” before we even recognized the larger economic benefits of collaborative innovation. No matter how it is accomplished, Schumpeter clearly saw the case for the chaos and failure that innovation creates.

In fact, successful innovation is normally a source of temporary market power, eroding the profits and position of old firms (disrupting if not destroying their viability), yet ultimately each innovation succumbs to the pressure of new creations being commercialized by competing entrants. The creative destruction resulting from innovation practices is a powerful economic driver because it explains many of the dynamics of industrial change. The ongoing, dynamic transition from a competitive to a monopolistic market and back again, speaks to the impact of innovation economies.