In this post I share the Free Exchange column from the September 6, 2014, edition of The Economist. It addresses one of my favorite things: Change.
DESTROYING the old to make way for the new is the essence of market economies. Karl Marx thought it one of the nastier qualities of capitalism whereas Joseph Schumpeter, an Austrian economist, cast “creative destruction” in more positive light, as the only route to sustained growth. In the 1990s Clayton Christensen, a professor at Harvard Business School, gave the notion a modern sheen with his theory of “disruptive innovation”. The term is now everywhere. Uber is said to be disrupting the taxi business, Cronuts are disrupting breakfast and Twitter is disrupting communication.
A disruptive innovation, in Mr Christensen’s work, is a very specific thing: a new technology that is inferior in certain respects to existing ones, but has other desirable attributes. He cites eight-inch floppy disks, which could store more data than smaller ones, but were nonetheless supplanted because they were too big and expensive for desktop computers. By the same token, publishers of music and newspapers were wrong-footed by the advent of online distribution, which was initially of lower quality. So was digital photography, but it nonetheless ended up displacing film.
Most studies that examine the size of a firm and its capacity to innovate fail to detect a relationship between the two. Yet that in itself is odd. Established firms ought to enjoy big advantages over would-be disrupters: skilled employees, infrastructure at the ready and the opportunity to share costs among products. At worst, incumbents should be as capable as new entrants of succeeding in nascent markets. Yet research by Rebecca Henderson of Harvard Business School finds that the money old firms in fast-evolving industries devote to research brings much lower returns than the research budgets of their younger rivals.*
Divining the reason for this poor performance is a challenge. Firms with straitened finances might be unable to invest adequately in a new business without cannibalising the old. That, in turn, might lead them either to decide not to invest in the new market, or to invest less than they should in both the old and the new. Yet the adjustment is often most difficult for firms that are wildly profitable in their established lines of business.
Profitable firms might underinvest in a competing technology for fear of hastening the end of their existing, successful business. Rational managers should be able to see that cannibalising their own sales and surviving is preferable to sticking to their knitting and falling prey to competitors. But bosses may not think much about the long term, or may be reluctant to write off sunk costs.
Yet even short-sighted or embarrassed managers should react when the threat from upstart technologies becomes clear. They do not, economists reckon, because of organisational rigidities. Ms Henderson suggests firms can be seen as giant information-processing organisations that evolve a structure and personnel to fit their respective business. Information on sales or production is efficiently filtered to decision-makers, who can then direct new research. When new technologies are no more than tweaks to old ones, this set-up is a competitive advantage. When innovations are more radical, however, the old networks are a hindrance.
In other research with Sarah Kaplan of the Wharton School of Business, Ms Henderson considers why older firms struggle to pursue new technologies. Many of them have systems in place to detect and respond to changing market conditions or new technologies. But they have also built up a system of incentives to ensure employees meet existing goals. Systems designed to encourage consistency and efficiency in the production of established goods or services might be a powerful deterrent to experimentation or creative thinking about new markets, regardless of what the corporate memos say.
One still might expect more adaptability given a serious enough threat, argues Ms Henderson in another paper along with Timothy Bresnahan of Stanford University and Shane Greenstein of Northwestern University. Established firms, they point out, can always set up loosely affiliated “entrepreneurial” divisions with the freedom to build a new business from the ground up. Yet even this will often prove difficult, they argue, thanks to assets like a firm’s reputation that cannot help but be shared between the old business and its internal rival.
IBM, for example, was initially a mainframe computing company that set up an internal unit devoted to developing personal computers. The PC business did well at first, thanks in part to IBM’s longtime reputation for quality. Yet this became a problem when the mainframe buyers became big consumers of PCs—an embryonic business in which kinks were still being ironed out. Customers began to interpret quality problems in the PC business as quality problems within IBM as a whole, undermining the existing mainframe business. When IBM resolved internal tensions by reabsorbing the PC unit, it in effect conceded the PC market to others.
Innovate or buy
Disruption need not be a death sentence, however. IBM remains a big, profitable firm. Work by Matt Marx of MIT, Joshua Gans of the University of Toronto and David Hsu of the Wharton School suggests that survival often comes down to what they call “co-operative commercialisation”. Once it becomes clear that start-ups have an edge in a new technology, incumbents can respond by striking deals with or purchasing their new rivals. The authors focus on the business of speech-recognition, but there are lots of other examples: Facebook, for instance, has gobbled up one competitor after another. To most, “If you can’t beat them, join them” has a more appealing ring than “Innovate or die”.
The future is here, happening every day. And, the robots are coming. Are you ready?
Before I saw this article in The New York Times, I had been considering a self-imposed time out from social media. Then yesterday, I maxed out. I took a step back and realized how obsessed I am with keeping up with you all and everything that’s it. I do not want to miss a beat. You all are so interesting.
But, as Brazilians say, “Chega!” “Enough!”
With you as my witness, I hereby vow to take a thirteen-day break from all online things social beginning today. Almost TWO weeks. No checking in, no posting photos, no liking what you’re up to, no tweeting, nada.
It will give you a break, too.
And, no, there’s no deep reason, no one is forcing me, I’m not trying to set a good example. I just want to.
See you in two weeks.
Taking a big step can be scary.
I begin a new job tomorrow. Off on an (very) early morning flight to the big city. I cannot wait!
Leaving something you know, something you enjoy is hard. People wonder why you want to change. But these people understand. They know me. They matter.
I really like it.
A trip to the ladies’ room used to be non-eventful. Well, maybe it was or wasn’t…but, ahem, whatever. When it came to drying my hands, I always avoided the slow, boring hand dryer and went straight for the paper towels. Or the back of my pants.
My first Xlerator experience? I almost remember it to the day. The place? The USS Yorktown at Patriots Point. On a World War II-era Navy behemoth. A coworker came from the bathroom and exclaimed, “You have got to try the hand dryer in there!” Well, okay then. I did. Now when I see one I get giddy.
There’s competition. The Blade. But sticking my hands down into something? No thank you.
At about $400.00 a pop, I think how an Xlerator would nicely adorn our master bathroom wall…
Have a few minutes? Listen to an NPR interview with Denis Gagnon of Excel Hand Dryer, Inc.
Employees and employers may access Form I-9 and Employment Eligibility Verification information and the updated Handbook for Employers: Instructions for Completing Form I-9 (M-274) en español. ¡Qué grande!
But, remember, only employers in Puerto Rico may use either the Spanish version or the English version of the Form I-9 for official purposes. The rest of us in the United States may use the Spanish version as a translation guide for Spanish-speaking employees, but must fill out and keep the English version for our records.
I thought I would share two articles I read recently in the New York Times.
The first is by Paul Theroux, a writer notorious for his travels. Someone who you would think has been everywhere. But, he hasn’t.
The second, a compilation of the top destinations to visit this year. (On a side note, kudos to the Times’s web team on an improved interface. Very nice.)
Maybe I am sharing these because I get to go somewhere this week. And, I am always excited when I get to travel. Giddy, giddy.
This is good news for many of PeopleMatter’s customers. Hiring in the hospitality and service industries never takes weekends off. Onboarding must go on!
The U.S. Citizenship and Immigration Services announced last week that its National Customer Service Center is now open on Saturdays. This will be a big help to hiring managers responsible for completing the Form I-9 for a new employee. Questions…there are ALWAYS questions. And, this task is not to be taken lightly…I-9 compliance is at the forefront of all businesses these days, especially those that hire our frontline service workers.
Need more info? You may contact the USCIS national toll-free customer service line at 1-800-375-5283.