Re: your point on increasing the number of “silent capitalists” — don’t you think that allowing passive index funds to have so much power could cause shareholders to no longer feel a sense of ownership? In your discussion of making managers become capitalists (i.e. having them feel a sense of ownership and responsibility over the company’s future), you talked about unlisted or family-run companies being better at focusing on the long term, due perhaps to their concerns of their legacy. But if more people buy into passive index funds, we would run into the agency problem: Vanguard, for example, may not have its objectives/goals aligned with those of the people who’ve bought Vanguard funds.
If you think about it, market-creating innovators are not INVENTORS in the “purest” sense of the word. That is, they take whatever already exists beforehand (which presumably only sells to the rich and skilled) and makes it accessible to the masses. The Ford Model T wasn’t the first automobile. Capital One didn’t produce the first credit card. The iPod wasn’t the first MP3 player.
So while it is true that MCIs are difficult to champion in resource allocation decision-making when there are performance-improving and efficiency innovations that can be more easily quantified, I wonder if MCIs have as much uncertainty surrounding them as the first invention (what we’re calling “Foundational Innovation”).
This is really interesting, because previously we viewed the empowered employment (what you’ve called “job economy”) enabled by MCIs to be a case of customers using the MCI to create their own jobs/businesses (e.g. customers of smartphones/app stores creating their own businesses by becoming app developers). In the case of this NGO, it seems like there is no clear customer who takes the innovation to create their own jobs, but instead the NGO’s mission itself enables children to enter the workforce. It’s an example that doesn’t quite fit into our current framework.
Along those lines, while I think this is an amazing and certainly admirable organization, but I am not certain if this counts as a market-creating innovation based on a set of criteria that we commonly see in MCIs. To run it through the criteria below:
– Does it democratize something that’s only accessible to the rich and skilled? – Not directly, but it brings food and education to those who were previously “denied access to education because of hunger.” (Source: website)
– Does it create a new value network? – They boast of a customized distribution system and scalable design, but I don’t know if this counts as a new business model, per se.
– Does it empower customers to create something of their own? – If you count education and its empowering effects as a direct consequence of this business, then yes.
As I mentioned above, I’m not fully convinced because the NGO’s product doesn’t quite fit into this framework. It could certainly be the case that it’s an anomaly that we should consider revising/expanding our framework for.
Do you think that pension plans of today have also fallen into short-term investing? I also wonder if individual investing in 401k’s counts as active investment — most people tend to just select an index to purchase.
The Economist seems to sit in the middle ground — that AI will lead to neither huge net gain nor net loss of jobs.
The Impact on Jobs: Automation and Anxiety — https://goo.gl/h5MAZc
“So who is right: the pessimists (many of them techie types), who say this time is different and machines really will take all the jobs, or the optimists (mostly economists and historians), who insist that in the end technology always creates more jobs than it destroys? The truth probably lies somewhere in between. AI will not cause mass unemployment, but it will speed up the existing trend of computer-related automation, disrupting labour markets just as technological change has done before, and requiring workers to learn new skills more quickly than in the past.”
With machine learning research yielding more clues about what we could expect from technology in the future, the way we think about the role of humans in innovation will also have to evolve. Ben Thompson puts it better than I can, so I’ll leave an excerpt from his blog here:
“Just as we designed the cotton gin, so we designed accounting software, and automated manufacturing. And, in fact, those are all related: all involved overt design, in which a human anticipated the functionality and built a machine that could execute that functionality on a repeatable basis… Machine learning is different. Now, instead of humans designing algorithms to be executed by a computer, the computer is designing the algorithms… the truth is that humans have made machines to replace their own labor from the beginning of time; it is only now that the machines are creating themselves, at least to a degree.” (Source: https://stratechery.com/2017/the-arrival-of-artificial-intelligence/)
I believe we’re still far off from reaching the level of artificial intelligence that would immediately replace human jobs that involve thinking and emotional judgment, but we certainly will get to a point in the short-term where manufacturing and design of machines could easily be done by other machines. I could see this kind of innovation definitely resulting in a net destruction of jobs.
The question, though, is whether this kind of innovation can be counted as a market-creating innovation. From what I can see, machine learning doesn’t seem to target nonconsumption nor empower those who previously didn’t have access to the forerunner product.
I agree — one of the many reasons companies aren’t pursuing market-creating innovations is probably because their customers aren’t demanding them. Classic example of how listening to the customer can actually be a hindrance for innovative progress. I would add though that maybe the customers aren’t demanding MCIs because they don’t know that they want it until it exists?
On globalization as a driving force against the case for MCIs, I think these guys would would agree with you:
– Peter Thiel: “1-to-n” companies that simply take what exists and sell them broadly across the world
– The authors of “The Innovation Illusion”: Globalization involved two phases: (1) horizontal expansion of big firms, which pursued new markets with the same products; (2) vertical restructuring of value chains, to absorb and make use of the comparative advantages of different geographic locations. Global companies also put up higher barriers to entry, to protect themselves from radical innovation contesting markets.
I would argue that the education sector’s contribution to the problem is as large as the role of the financial sector’s short-termism. In the resource allocation process chain, the managers and decision-makers are ill-equipped to deal with the dilemma of taking a short-term hit to foster MCI vs. reaping short-term gains through performance-improving or efficiency innovation. These managers are likely ill-equipped because (1) they haven’t had the chance to learn how to navigate these processes in any “school of experience”; and (2) business schools separate strategy and finance, and rarely offer courses on cross-functional decision-making.
The WSJ article on the dismissal of Klaus Kleinfeld from the CEO position of Arconic yesterday (https://www.wsj.com/articles/klaus-kleinfeld-steps-down-as-chair-and-ceo-of-arconic-1492435894) mentions a raging debate in Wall Street over “how to balance a company’s goals for the future with its returns in the present.” It certainly seems that there are just as many loud proponents of long-term growth as there are for quick gains.
From FT this morning: https://www.ft.com/content/1b71ad96-2008-11e7-a454-ab04428977f9
“Like Mr Zuckerberg, who famously urged his workers to “move fast and break things”, the Amazon boss has turned speed into an obsession. Sometimes, he says, it’s better to make any decision — even the wrong one — than spend too long trying not to make a mistake.”
As a company that didn’t stop at the online bookselling business, and continued on to become a leader/major player in general online retail, e-books, and recently TV shows/entertainment, Amazon has demonstrated that it is possible to replicate an initial MCI success. It is certainly recognized as a company that does not seem to be as hung up by internal barriers and fears of uncertainty as it “should be”, given its size and age.
Jeff Bezos said in a shareholders letters yesterday that “Most decisions should probably be made with somewhere around 70% of the information you wish you had. If you wait for 90%, in most cases, you’re probably being slow.” His advice is that one should be able to make “high-quality, high-velocity decisions” like a start-up. “If you have conviction on a particular direction even though there’s no consensus, it’s helpful to say, ‘Look, I know we disagree on this but will you gamble with me on it? Disagree and commit?'”
I think the article’s point is that it doesn’t matter if there’s more capital, and that even with so much surplus money, companies are not allocating those funds to invest in the right kind of innovation (i.e. the kind that results in warp drives and teleporters). The big question then is: how do you get individuals and groups to dream big? If they do already dream big, how do you get rid of whatever obstacles are stopping them from executing on those dreams?
The article is more or less in line with how I’m thinking about the matter (i.e. eventually there will be net job creation). I still haven’t really made up my mind, though…
The authors of the book “The Innovation Illusion” have a chapter called “Capitalism and Robots”, where they offer their take on the whole “robots are going to eliminate tons of jobs” scare that’s been going on. They seem to be more optimistic, saying that the rate of adoption for radical technological innovation usually takes a long enough time for the economy to adjust, and ultimately results in a much smaller impact on employment than anticipated. Here’s what they say in the chapter, after discussing the societal panic in the 1960s when people were scared of mass unemployment due to machine and computer development:
“…Automation, like previous technological shifts, destroyed jobs, but it also created new ones, and much safer and better-paid jobs at that. An automation blitz never occurred; the process took several decades as technology had to adjust to the composition of markets, companies, and several other aspects than simply the capacity of machines to substitute for labor. Just as in the industrial revolution, automation did not win merely by showing up. It progressively improved and adjusted to the economic, social, and institutional conditions for innovation.
Contemporary prophets of the New Machine Age make the same mistake. They judge the speed and quality of future innovation on the technological creation they see today, not on how the economy works…”
I see market-creating innovations and new market disruptive innovations (from “The Innovator’s Dilemma”) as one and the same, by definition. As the prompt mentions, managers would face different kinds of obstacles when allocating resources for MCIs vs. for innovations targeting the lower end of the market. The challenges would be less about unattractive lower profit margins, and more about general uncertainty surrounding a nonexistent/undeveloped playing field. I see two macro-causes that exaggerate and exacerbate that fear of uncertainty: (1) lack of tools and (2) lack of patience.
(1) Lack of tools: Includes the problem of decision-makers not being equipped with a clear innovation taxonomy (such as the one Clay proposes in the “Capitalist’s Dilemma” article) to guide them in designing a diversified innovation portfolio. Another big problem is the lack of metrics – traditional methods of valuing projects are ineffective and unhelpful when trying to value market-creating innovations.
(2) Lack of patience: Beyond the general trend of stakeholders’ seeking short-term profits, this impatient behavior is encouraged by incentive/reward systems that favor risk reduction and short CEO tenures.
I wonder if a diversified revenue stream is an indicator worth investigating. In company annual reports, one can find the revenue split between different divisions of the company (e.g. Corning’s 3-4-5 framework and its business segments: display technologies, environmental technologies, optical communications, life sciences, specialty materials). Would a wider, diversified spread of business segments be one sign of a company that’s open to exploring new markets and investing in market-creating innovations?