Tuesday, November 6, 2012

Innovation and Getting Out of Recession

Clayton Christensen has revolutionized our understanding of innovation - and in fact business - by providing a theoretical framework around sustaining and disruptive innovation[1].

A couple of days Christensen published an article in the New York Times, showing how different types of innovation either created, destroyed or just maintained jobs in the overall economy.  And without new jobs, the US will not emerge from recession.

Empowering Innovation (what he has called new market disruptive innovation in the past) creates jobs, whereas efficiency innovation (what he has called low-cost disruptive innovation) destroys jobs.  Sustaining innovation doesn't create jobs, but does manage to preserve reduced job numbers in an industry that might otherwise fade away.  Very interesting analysis.  It takes his thinking about innovation at the level of an individual company to a thoughtful analysis of how innovation affects a whole nation.

He goes on to discuss the perniciousness of some of our financial metrics for measuring company success.  Let me take one he mentions, RONA, or return on net assets.  You can improve this ratio, like any other ratio, by increasing the numerator (return or profitability) or reducing the denominator (net assets).  Too many companies have focused on the denominator, clearing net assets off their balance sheets.  Outsourcing manufacturing activities to another party gets those big expensive factories (assets) off your balance sheet, improving RONA but outsourcing jobs and reducing your own control of your destiny in business.  And it certainly doesn't grow jobs in your own country.

I highly recommend reading this article.  It'll get you thinking.

[1] Disruptive innovation is a term of art coined by Christensen.  It's means something quite different from what you'd read in a dictionary by looking up disruption.  Read The Innovator's Dilemma to get the whole picture, or my post here to get a quick summary.

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