In a new Harvard Business Review article titled “The Capitalist’s Dilemma,” a pair of Harvard Business School faculty members say companies are focusing on the wrong kind of innovation—and it’s coming at the cost of the wider economy.
The article is written by the influential Harvard Business School professor Clayton Christensen, who is best known for having coined the term disruptive innovation and as the author of “The Innovator’s Dilemma,” along with senior lecturer Derek van Bever. They sought out to understand why, almost five years after the recession was declared over and interest rates remain low, companies are sitting on massive troves of cash and the economy is slogging along.
In short, the authors write, companies are focusing on short-term gains, which tend to come at the cost of jobs, without keeping an eye on the long-term, which might create them.
The authors define three different types of innovation. The first they call performance-improving innovations, like a new model of a car for car companies, or the newest version of a video game system.
The second type is the efficiency innovation—the type of innovation that makes it easier and less expensive to produce a given product. Think machinery, outsourcing, or otherwise automated processes.
Finally, there’s market-creating innovations, the kind of innovation that can “create a new class of consumers. In other words, this sort of innovation starts with a brand new but exclusive product and ultimately finds a way to bring it to the masses. As an example they offer the personal computer, which has reached its most broadly affordable iteration in the smartphone.
In an ideal world, Christensen and van Bever write, all three types of innovation are practiced at once. After all, in many cases, making it more efficient to produce something often is the reason it can eventually reach the masses—and should free up money to be spent elsewhere in the organization. “Efficiency, if targeted toward making a product more affordable and accessible, can create net new jobs, not eliminate them,” they write.
However, according to the authors, companies’ budgets show them to be putting their resources toward efficiency-focused innovations without much focus on ultimately selling more stuff to more people—a concept that, by many definitions, is at the core of capitalism, and that tends to lead to greater job creation, but that costs a lot of money.
The authors attribute this decision partially to companies themselves, who think it’s much easier to find ways to make the bottom number smaller—to cut costs—than it is to make the top number bigger—by growing market share. Investors, too, seem overly focused on the short-term, putting the onus on companies to deliver quick financial returns. “Capitalists seem uninterested in capitalism,” they write.
The article fits within the broader discussion about how automation and robotics will ultimately mingle with a human workforce, and the extent to which they can coexist. Some estimates say as much as 47 percent of today’s jobs could ultimately be automated within the next 10 years.
The authors suggest several possible solutions to the dilemma, which were crowdsourced and culled from a group of more than 150 HBS alumni.