Saturday, January 24, 2009

How Hard Times Can Drive Innovation

The Wall Street Journal:

Sure, the economy's bad. But it's a good time to innovate, according to Clayton M. Christensen, a Harvard Business School professor who focuses on innovation.

Prof. Christensen, tell us a little bit about what you think the effects of the financial crisis and economic downturn will be on the environment for innovation.

I think it will have an unmitigated positive effect on innovation.

That's counterintuitive.

Well, it will force innovators to not waste nearly so much money.

One of the banes of successful innovation is that companies may be so committed to innovation that they will give the innovators a lot of money to spend. And, statistically, 93% of all innovations that ultimately become successful started off in the wrong direction; the probability that you'll get it right the first time out of the gate is very low.

So, if you give people a lot of money, it gives them the privilege of pursuing the wrong strategy for a very long time. In an environment where you've got to push innovations out the door fast and keep the cost of innovation low, the probability that you'll be successful is actually much higher.

In other words, what you're saying is that prosperity tends to insulate innovators from market realities and allow them to pursue their vision -- a vision which is probably wrong, statistically speaking.

That's a perfect summary of how I think the world works. The breakthrough innovations come when the tension is greatest and the resources are most limited. That's when people are actually a lot more open to rethinking the fundamental way they do business.

How long will it take for that to take effect? Do you think we will see the fruits from the current lean period, say, five years from now, or three years from now?

Five years from now, we'll see some home runs have emerged. But I bet even two years from now, you'll see a difference.

I'm sure many people will be glad to hear that in this environment. There must be, though, cases where concerns about the market cause companies to abandon their plans for new products or really retrench. Or do you see that happening less these days as companies realize the importance of keeping up with changing markets?

In the next two years, I think the answer will hinge quite a bit on the role that hedge funds play in driving stock prices. By now, 95% of all trades on the stock exchange are executed by hedge funds, mutual funds or pension funds that you could not call shareholders. They're share owners, but they don't even hold the shares long enough, on average, to vote the proxy. And long-term shareholders are always better for innovation than the short-term people are.

So we might see innovation more from private companies?

Absolutely right. And there's another business model toward which more and more companies need to move. It's a business model you see with Li & Fung in Hong Kong, Tata Sons in India, and Cox Enterprises in Atlanta. In this model, the holding company is privately held, and then certain of the subsidiary companies that have the right characteristics take their shares public on the market.

What that allows those companies to do is, when they have a disruptive innovation that they need to launch, they can just do it under the private umbrella of the holding company, and not have it reduce the near-term performance of the publicly held subsidiaries.

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