← Why Conscious Capitalism is Not a New Paradigm The Natural Case for Employee Engagement →

Clayton Christensen at Davos: An Ecological Perspective on Innovation

Posted on January 29, 2013 by David

Professor Clayton Christensen

When interviewed at the 2013 World Economic Forum in Davos, Clayton Christensen discussed what he has called “The Capitalist Dilemma”. It goes like this: There are basically three kinds of innovation in the economy: empowering, sustaining and efficiency. Empowering (or disruptive) innovation transmutes complicated and costly products available to a few into simpler, cheaper products accessible to many. The Ford Model T is a classic example of this kind of innovation; it transformed automobiles from expensive custom-built works of art into inexpensive, mass-produced vehicles. Empowering innovations are great creators of jobs – just think of the automobile ecosystem with its highways, dealerships, gas stations, and the oil exploration, production and distribution system that supports it.

Sustaining innovation replaces old models with new products that often incorporate new technology and novel design features. But the new products are often substitutes for other similar items. Christensen cites the Toyota Prius as an example – if a Toyota customer buys one, then he or she will not need to buy a Camry. Sustaining innovations may add some jobs, but not nearly as many as the original empowering innovation. Thirdly, there is efficiency innovation, which makes existing products more proficiently. Lean production is a good example. Such innovation economizes on capital and labour – when compared with mass production, lean frees up both capital and jobs.

Christensen says that industries cycle through all three kinds of innovation, as does the economy as a whole. For much of the last 150 years the number of jobs created and the capital requirements of empowering innovation have more than soaked up the labour and capital released by efficiency innovation. Over the last twenty years, however, the relationship among the three types of innovation has broken down. Efficiency innovations are releasing capital and people and there is not enough empowering innovation to utilize them. This is why we have interest rates at zero and high unemployment. This is the capitalist dilemma.

Christensen uses machine metaphors to analyze the situation and argues that we need to reset the balance between empowering and efficiency innovation. He attributes part of the problem to what he calls the “Doctrine of New Finance”. These are the financial frameworks developed at a time when capital was scarce and its use had to be rationed. The Doctrine uses measurements like RONA (Return on Net Assets), IRR (Internal Rate of Return) and ROCE (Return on Capital Employed) to economize on what was once a scare resource. Now that capital is abundant, however, firms end up spending a huge amount of time and effort trying to answer the wrong question!

An Ecological Perspective

Christensen’s machine metaphors are sprinkled throughout his New York Times article. But a much better way of looking at the challenge is through an ecological lens. From this perspective, one can see ecological processes working in social systems at multiple levels: firms, industries, economies and even capitalism as a whole. At the upper levels the ecological narrative feeds into work by technology researchers like Carlota Perez (Technological Revolutions and Financial Capital) and economists like Tyler Cowen (The Great Stagnation). At the level of the firm it feeds into the ecological perspective in The New Ecology of Leadership.

On the ecocycle Christensen’s three phases look like this:

The Ecocycle and the Three Phases of Innovation

Empowering innovation is the result of entrepreneurial activity based in communities of trust and practice, which historically have often been communities of faith. In the firm this is the start-up period, when the small enterprise runs on adrenaline and passion. Once the firm has wrestled its technological and operating issues to the ground, and understands cause-and-effect in its system, it will shift into sustaining innovation to enhance and extend its products and services. This is the period when the firm grows through the application of reason and strategic management. In the last phase, as the firm matures, innovation style shifts to efficiency. The firm is now modular (specialized) and stratified (hierarchical). Initially it is a productive, enabling bureaucracy but over time it becomes a structure of dominance and the bureaucracy becomes coercive. This is the power phase that tends to freeze the organization and sets the stage for crisis and destruction and possible renewal. The process of renewal recreates the communities of trust that lead to empowering innovation and the cycle is ready to begin again.

We can avoid going through the full ecocycle only by staying in the “sweet zone” with the objective, not of maximizing anything, but creating a sustainable future. The ecocycle dynamic highlights the risks and difficulties of doing this, with traps on either side of the sweet zone. Of course what is difficult for one firm can be easier for many, and one could construct a similar diagram for the economy as a whole, with whole industries in different phases of the ecocycle. The problem in the West is that whole economies are now skewed toward efficiency innovation.

In his NYT article Christensen offers three “seeds” for a productive discussion (the only use of an organic analogy that I could see in his article). They are:

Change the metrics – maximize the return on education, not the return on capital.
Change the capital-gains rates encouraging the holding of investments for longer periods of time.
Change the politics to encourage empowering innovation

In his Davos interview he suggests that we need a more circumstantial, “situation-based” framework to teach business students. Although he doesn’t mention it, this is in effect a call for a context-dependent, ecological perspective on business and management issues.

The ecological perspective suggests that the capitalist’s dilemma is not a matter of resetting the dials on a machine but rather more complex. It is unlikely to be solved through top-down prescriptive solutions. It is a wicked problem and the way you frame wicked problems is the first step, not toward a solution but toward what Toyota call “counter-measures”. If you frame the capitalist dilemma in machine terms, then this will encourage machine solutions. If you frame it in ecological terms it encourages ecological solutions. These imply that our counter-measures will be bottom-up as well as top-down. Christensen’s three “seeds” may well help, but what is required is the ability to reframe our challenges in every social system in ecological terms.

The ecological perspective is an idea whose time has come!