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Disruptive Innovation and economic growth (PART ONE)
Ever wondered why economic heroes keep falling? The US, having dominated the world economy for as long as we can remember, has been trying to get itself out of recession for almost a decade now. Japan has been losing its entire market to its main economic and political rival, China. The UK does not pop into anyone’s mind when economic prosperity is under discussion anymore.
At the same time, China and India are doing quite well. Hong Kong, Singapore, Malaysia, Taiwan, and Thailand have been growing at an exponential rate since the 1950s, and has maintained sustainability ever since. There are various speculations that have been made to explain this bizarre occurrence, starting from housing bubbles to the war on terror. Clayton Christensen, a professor at the Harvard Business School attributes development to a concept called disruptive innovation. In this article, we will extend our earlier discussion about disruptive innovation, and relate the concept to economic growth.
There are three types of innovations: . Disruptive innovation, as discussed earlier, penetrates a market by introducing a simpler and cheaper version of an existing product and creates employment as a result. Sustaining innovation focuses on improving the same product for the same customer base. This does not generate a demand for labor since the increase in operations required for this is insignificant. Apple’s iPhone is an example of sustaining innovation, since the previous products are improvements of the prior. Efficiency Innovation focuses on developing cheaper means of producing the same product for the same customers. Mini-mills used in the steel industry, which manufacture steel products at 20% lower cost, is an example of this. The most important feature of this form of innovation is its general tendency to cut down on both labor and capital. In layman’s terms, efficiency requires an increase in output and a reduction of prices. The need for reducing costs is served quite well with de-employing labor and capital.
Interestingly, economic growth is highly effected by the three types of innovation. Disruption innovation is the best way to enter a market, since it is quite difficult to compete in the high end market with the top companies during initial stages. Catering to the bottom of the pyramid is quite simple. However, most companies cannot carry on with disruptive innovation for long. A company using disruptive innovation as a strategy is bound to move up the market, replacing old market leaders as a result. In doing so, these companies will eventually have to move to Sustaining innovation and efficiency . This phenomenon is delineated by Toyota, a Japanese car manufacturer. Toyota entered the global market with the low end Toyota Corona, a product mainly targeted towards college students who could not afford Ford and Cadillac. After a series of gradually developed products, Toyota succeeded in entering the high-end market with products like the Lexus brand. Despite the initial strategy of being Disruptive, Toyota eventually had to move to Sustaining innovation, where it focused on improving the Corolla, Lexus, Premio etc. Given the competitive market, the current market leader in automobiles had to direct its innovation towards cost-cutting techniques.
Clayton Christensen claims that economic growth will be sustainable if efficiency innovation is eventually followed by Disruptive innovation. The capital which is saved in efficiency innovation can be used to develop a new product line. This eventually creates a new market, new jobs, and a completely new source of revenue. This new product, as dictated by nature, has the potential to eventually reach the top of the market, and hence move into sustainable and efficiency innovation. This cycle ensures three things:
Therefore, it is quite reasonable to assume why an economy has a greater chance to sustain if companies within that nation follow this innovation cycle.
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