CLAY CHRISTENSEN: Our Obsession With Efficiency Is Killing Innovation

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Harvard Business School professor Clayton Christensen is the man who came up with the term disruption as we currently use it, and is one of the foremost experts on how companies innovate.In a Q&A with Alan Hall at Forbes, Christensen argues that there are three types of innovating. Empowering innovations, which transform expensive products into affordable ones, sustaining innovations, which replace older models with new ones, and efficiency innovations, which reduce or simplify the delivery of something.   

The first two can create jobs, in the case of empowering innovations, millions of them. Efficiency innovations actually destroy jobs. Unfortunately, it’s that last type of innovation that’s the focus of our current economy. 

Here’s what Christensen told Hall:

“In our traditional economic cycles, all three kinds of innovations occurred within a natural and repeatable sequence. Our current economy, however, has gone off of the rails in large part because we are focused almost entirely on efficiency innovations—on streamlining and wringing bottom line savings and additional profits out of our existing organisations.

We are focused on the wrong metrics. Our universities are training entrepreneurs—and investors — to focus on fast and efficient return on capital investment. Efficiency innovations provide return on investment in 12-18 months. Empowering innovations take 5-10 years to yield a return. We have ample capital — oceans of capital — that is being reinvested into efficiency innovation. As long as this continues to happen, we will continue to experience the tremendous chasm between capital investment and the creation of meaningful numbers of new jobs and especially of highly specialised jobs.”

Our businesses and economy are focused entirely on the short term. That hurts us in the long run because the lack of jobs keeps the economy weak, and the lack of real innovation keeps us from making leaps forward. Efficiency innovations tend to push benefit up towards a select few, rather than throughout the country. 

Christensen suggests that we change the capital gains tax rate so that it decreases the longer an investment is held. He believes that would encourage investment for the long run and encourage real innovation, as opposed to short term measures designed to boost the next quarter’s results. The impact on the budget would be small because capital gains taxation doesn’t provide that much revenue, but the long term consequences could be huge.

Find the full Q&A at Forbes

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