7. Is it Hard for Companies to Invest in Market-Creating Innovations?

Many believe it is truly hard for companies to invest in MCIs. 

Do you agree? If so, what factors make it difficult?  How would you address those challenges?

Some theories covered in BSSE note the great difficulty many companies face trying to avoid future disruption. The RPP (Resources-Processes-Priorities) theory, for example, points out that the priorities of companies evolve as they migrate up-market – seeking higher and higher margins, thereby becoming less inclined to target smaller business opportunities or opportunities that conflict with the way the company is structured to make money.  While Professor Christensen does point out potential solutions in creating new capabilities for the company, we have seen from both historical and present examples that even managers equipped with these theories have a very difficult time executing the right strategies.

One could similarly expect that investing in market-creating innovations would present seemingly insurmountable obstacles for managers as well. On the other hand, it could be argued that the output-driven characteristic of market-creating innovations (i.e. they create jobs and/or sustainable economic growth) makes championing them in organizations easier than championing disruptive innovations.

So, what about market-creating innovations makes them so difficult to invest in? If they are not truly difficult to invest in, then why are companies not producing more MCIs?

11 thoughts on “7. Is it Hard for Companies to Invest in Market-Creating Innovations?

  1. 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.

  2. I wonder whether companies are truly able to identify whether their projects are performance improving, efficiency, or market creating innovations without the benefit of hindsight. Do companies know they are creating an MCI before it becomes an MCI?
    Right now, it seems difficult to tell whether jobs and/or sustainable economic growth were the intent or purely the outcome of successful MCIs.

  3. Maybe there’s a first mover disadvantage: somebody has to invest quite a bit of time and money into a project. If the result is a general purpose technology (GPT) like continuous casting or IT, they may not have the ability to exclusively monetize it. Or maybe fast followers can knock off the principle without running into IP.

    Anybody thanked Ransom Olds for the assembly line or Xerox for the mouse lately? Could Apple have built the GPS system? Maybe Bell Labs could have.

    I read recently that innovative periods usually had less patent activity (!), with firms rushing to file only after things had settled down a bit and it was time to get trolling.

    If it pays to wait, who’s going to go first? So far it looks like sovereign wealth funds and tech billionaire eccentrics. And G-d bless them!

    1. Very interesting take, Gavin. In reference to your comment about reading that “innovative periods had less patent activity,” could some of that have to do with the way patents and licensing are structured as well as economic means toward developing an invention? Here’s an interesting HBR article titled, “When America Was Most Innovative, and Why?” that addresses the correlation between innovative periods and the number of patents. Much of what was historically true seems to apply today as well. https://hbr.org/2017/03/when-america-was-most-innovative-and-why

  4. It is definitely hard for companies to invest in MCI’s. We could categorize the difficulties in terms of “will” and “skill.”

    Companies find it hard to have the will to invest because their existing RPP’s prioritize sustaining innovations on existing products and existing customer segments. MCI’s look uncertain and unprofitable in comparison to clear investments that can deliver incremental product improvements for an established customer base.

    Even if companies manage to find the will, however, they can also have a gap in skill. It’s very difficult to identify a need that the customers themselves cannot articulate. How can you dig this need out through customer research? And how can you identify the right customer segment and build a profitable business model around them? Popular tools like design thinking don’t provide a silver bullet — in fact, there is no well-established process to develop an MCI.

    Between the difficulties of will and skill, it’s no wonder that companies find it very difficult to prioritize MCI investments over business as usual.

  5. It seems like in some companies, revenue growth loosely trends with workforce growth. When a new opportunity deserves investment, the company invests in factories, etc. Is this true? If a company is focused on growing its revenue, will it automatically be ready to invest in more innovations and, with a delay, ultimately create jobs?

    1. Great question. I would be curious if investing in MCIs is a common intention and practice correlated to steady revenue growth, or if intention is rare considering many MCI’s are accidental. Does revenue growth automatically prompt sustaining and efficiency innovations since the company wants to build on a winning formula? Investing in finding a market-creating innovation is risky, possibly costly, and time consuming. Do companies have to feel “financially secure” before pursuing an MCI? I would also be curious if there’s correlation between certain market cap valuation levels and inclination to invest in MCIs. Is there a somewhat common stage at which a company will look to invest in more innovations?

      Here’s a relevant article: https://www.inc.com/minda-zetlin/the-1-mistake-that-causes-most-innovators-to-fail-according-to-a-brilliant-harva.html?sf53617243=1

    2. If you look at the case of Deere, their labor force grew along with their sales over 1910-1980, after which the number of workers began dropped despite continued sales growth. The company started moving to increased automation in their factories, which increased the productivity of their workers but led to a decline in the ratio of workers to output. In the frameworks of BSSE, only Deere’s initial tractor-powered machinery could be considered disruptive and market creating. Over time, their innovations became more and more sustaining in nature. It is difficult to point to the precise year when this transition from “disruptive” to “sustaining” happened, although I would guess it was closer to their early years (say, 1920-1940). It is probably accurate to say that manufacturing jobs were created during both the “disruptive” and “sustaining” phases of innovation at Deere (at least, until automation came online in the factories in the 1980s and beyond). Whether or not enough manufacturing jobs were created to offset the loss of jobs in the “disrupted” market, i.e., farm laborers, has been very difficult to determine precisely but my preliminary research suggests that it was not.

  6. I echo Neha’s comment and doubt the majority of managers and executives disaggregate performance improving and MCI at the time of investment decision. Beyond the lack of framework, typical managers/executives are moving in and out of roles more quickly than ever. This makes the short-term nature of most performance improving innovations even more appealing.

    There is also a prevailing intuition that innovating closer to the core is the default way to go. In BSSE, many times we default to constructing arguments for a course of action because it “leverages the core competency of the firm”, even when theory would point us in another direction. I suspect the inertia would be even stronger for someone unfamiliar with the BSSE theories and their implications. In the corporate setting, groupthink and consensus-based decision-making make the odds of MCI even smaller.

  7. On p. 214 of “The Second Machine Age” by Erik Brynjolfsson and Andrew McAfee, it reads:

    “[Schumpeter] also argued that innovation was less likely to take place in incumbent companies than in the upstarts that were trying to displace them. As he wrote in The Theory of Economic Development, “New combinations are, as a rule, embodied . . . in firms which generally do not arise out of the old ones. . . . It is not the owner of a stage coach who builds railways.”12 Entrepreneurship, then, is an innovation engine. It’s also a prime source of job growth. In America, in fact, it appears to be the only thing that’s creating jobs. In a study published in 2010, Tim Kane of the Kauffman Foundation used Census Bureau data to divide all U.S. companies into two categories: brand-new startups and existing firms (those that had been around for at least a year). He found that for all but seven years between 1977 and 2005, existing firms as a group were net job destroyers, losing an average of approximately one million jobs annually.13 Startups, in sharp contrast, created on average a net three million jobs per year.”

    Firm size is certainly just a correlation, but that doesn’t mean one should overlook the correlation as causality being wrapped up in there somewhere. While it may be worthwhile to study the anomalies to this pattern (i.e. large incumbents who are creating jobs), overall, it’s still seemingly disproportionately the startups/new firms which are more likely to invest in market-creating innovations that lead to job creation? Why is that? What would a study of that pattern reveal?

  8. 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”).

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