Where Does Growth Come From?

This is the question Clay Christensen poses at the beginning of his lecture I was lucky enough to attend at HBX ConneXt. Where does growth come from? Why is it so difficult to sustain?

Coming of age in a jobless recovery, that's all analysts seem to talk about. Why can't qualified college graduates find jobs? Where did they all go?

Christensen argues there are three types of innovations:

Disruptive Innovation

Disruptive innovation makes something previously unheard of accessible and affordable to the masses. These are new products designed for new markets. This drives incredible growth because it's making something brand new.

Christensen imagines all industries starting at the center of a circle that radiates outward from the privileged few to the multitudes to illustrate this point. Think of how cars began: at first, they were a toy for the wealthy (a la Great Gatsby). Then, Ford created the Model T, a disruption that allowed cars to be mass-produced at cheaper and cheaper prices. Today, cars range from play toys like Porsche 911s to affordable every-man cars like the Toyota Corolla.

Very few companies are capable of producing disruptive innovations more than once. This kicks off a cycle where next:

Sustaining Innovation

Once companies produce a new product, they must continue to innovate on that product. Sustaining innovation means that companies iterate on a version to make it better and better. This isn't because companies want to, but because if they don't, they'll lose market share to a competitor and get killed off.

Almost all the innovations we see are really sustaining innovations. Think of the newest version of your iPhone. It's not disruptive (though the creation of the first cellular phone was). It's just making it better so it can compete with Android and the other competitors in the space.

Efficiency Innovation

Efficiency innovations make more with less. It's when companies find ways to produce the same product cheaper and faster. It frees up cash flow for companies to invest in disruptive innovations—or at least, used to invest in that way.

So What Happened?

Lately, the link has been broken. We'd rather make our products more and more efficient, cut costs, and take the easy way out. It's easier because we measure our success by accounting ratios that not only skew how we look at business, but they also give businesses incentives to take the easy path—adjusting the denominator, instead of the numerator (profitability).

An example: RONA, or profitability over assets. As a manager, do you increase profitability, or do you simply decrease your assets to make your bottom line?

Related: How Healthy Is Your Business?

Most people choose the latter. Be someone that chooses the former and seeks innovation that disrupts how we do business. That brings something previously unheard of to the masses.

Because as soon as we all stop innovating, we all stop living.

This is connected to a series of reflections inspired by my courses at HBX, an online business school cohort powered by Harvard Business School. With Business Analytics, Economics for Managers, and Financial Accounting, I'm learning the fundamentals of business. Find the whole series here.