In The Capitalist’s Dilemma, Clayton Christensen and Derek van Bever introduce a powerful new theory which works to explain the relative paucity of growth in developed economies … The authors draw a causal relationship between the mis-application of capital in pursuit of innovation and the failure to grow.[1]
In particular, they observe that capital is allocated toward the type of innovation(s) which increase efficiency or performance, and not toward(s) those means which create markets (and hence long-term growth and jobs). This itself they argue is caused by a prioritization and rewarding of “performance ratios” rather than cash flows, and that that in itself … is due to a perversion of the purpose of the firm.[2]
For this statement of causality to be confirmed, one needs to observe whether it predicts measurable phenomena. For instance/starters, do companies which create markets apply capital toward market-creating innovations, or do companies which create value through efficiencies or performance improvements hoard abundant capital …
Notes:
1. and, indirectly, in the increase in inequality and hence the destabilization of socio-political institutions. [↩]
2. That being the creation of customers, and not shareholder returns. [↩]
HBR’s Synopsis
Sixty months after the 2008 recession ended, the economy was still sputtering, producing disappointing growth and job numbers. Corporations seemed stuck: Despite low interest rates, they were sitting on massive piles of cash and failing to invest in new initiatives. In this article, a leading innovation expert and his HBS colleague explore the reasons for this sluggishness. The crux of the problem, they say, is that investments in different types of innovation have different effects on growth but are all evaluated using the same (flawed) metrics. “Performance-improving innovations,” which replace old products with better models, and “efficiency innovations,” which lower costs, don’t produce many jobs. (Indeed, efficiency innovations eliminate them.) “Market-creating innovations,” which transform products so radically they create a new class of consumer, do generate jobs for their originators and for the economy. But the assessment metrics that financial markets–and companies–use always show efficiency and performance-improving innovations to be better opportunities. This is the capitalist’s dilemma: Doing the right thing for long-term prosperity is the wrong thing for investors, according to the tools that guide investments. Those tools, however, are based on an unexamined assumption: that capital is scarce, and that performance should be assessed by how efficiently companies use it. The truth is, capital is no longer scarce, and our tools need to catch up to that reality.