If you’ve spent time in the tech sector during the last several decades there’s at least one thing you’re familiar with that we all have a common understanding of: disruptive innovation. We’ve seen a great deal of disruptive innovation in our careers and it would be understandable to think we invented the idea, but it’s an old tale and others got there ahead of us. What can we learn from it to help determine what’s next?
Disruptive innovation can be traced at least to Joseph Schumpeter, the early 20th century American economist, who coined the term “creative destruction.” A disruptive innovation delivers products and services that are so superior to what was in place that it replaces most of the prior invention and leaving the older technology to a much smaller niche.
Examples are numerous. The automatic transmission was so superior in usefulness that it drastically shrank the market for the manual variety that used a clutch and a manual shift. A key point, though, is that you can still purchase a car with a manual transmission and some driving purists still prefer a stick. So, although the automatic is by far the dominant transmission type today, even in such manly vehicles as pickup trucks, sticks endure. In economic terms we might say that the automatics’ niche expanded and took over much of the transmission market from the grassroots. No one mandated automatics, the market simply saw them as a superior choice and moved in their direction.
Transmissions are just one example in a world full of them; here’s another. Calculator was once a term that referenced people, mostly women, who ran equations and calculations for engineering and scientific efforts. Do the basic engineering work and hand the math over to the calculators for checking. That was how things were done. World War II might have been significantly shorter if electronic rather than manual calculators (or better yet, computers) had been available. It took a year to check the math on the Manhattan Project. Today, a single grad student could do the Manhattan Project’s math and recheck it in a couple of days and calculators aren’t people.
Disruptive innovations come in many sizes, and not all of them are world-beaters. Some disrupt a market (like the automatic transmission) but others change everything in society. The silicon chip is of the latter variety. It changed everything in our world after 1959, the year it was patented. By the early 1970’s several industries had grown up around it and they would spend the next 50+ years changing the world.
KONDRATIEV’S ECONOMIC WAVES
Disruptive innovation happens more than we realize, and a good question is why we’re routinely late to realize its effects. Schumpeter got some of his insights from the work of a Russian economist, Nicolai Kondratiev, who was an advisor to Vladimir Lenin. Kondratiev’s job was explaining capitalism to the Bolsheviks. During Lenin’s life, Kondratiev had a respected position in academic economics; when Stalin came to power after Lenin’s death, Kondratiev’s theories didn’t fit Stalin’s world view and he was liquidated.
Kondratiev observed that really big disruptive innovations begin a 50- to 60-year economic cycle that Schumpeter later called K-waves in his honor. The idea of a K-wave is simple: For the first 25 to 30 years after its introduction, a technological disruption expands the economy, creating jobs and whole industries as massive amounts of capital flow into that new industry.
The reason for expansion is simple. Very often a disruption is in high demand, but it requires some form of construction to diffuse the innovation throughout society. Construction costs money and employs many people who may not have a great deal of training or education. Paved roads were one form of build-out after the invention of automobiles. Stringing cables throughout the country were natural follow-ons for disruptions in electricity generation, telephone, and cable TV all of which were innovations that disrupted the status quo. During the first half of a K-wave, economies expand and inflation is up as increased purchasing power (thanks to many new jobs) chases relatively fewer goods and services. The working and middle classes do well early in a K-wave.
The second half of a K-wave offers many opportunities for wealth creation, but it is less kind to unskilled workers. For the next 25 to 30 years all of the capital invested in the first half of the wave kicks into high gear and rewards the original investors with impressive returns on the prices of stocks. Infrastructures are complete by now and the focus turns to efficiency and effectiveness. Unfortunately for workers, the goal is reducing or eliminating overhead; automation to remove labor inputs and further shrinking and simplifying componentry are highly prized. At this stage products have to become highly reliable and intuitive because service and support are greatly reduced. All this results in fewer calls on capital for things like building out infrastructure and significantly more revenue falls to the bottom-line thus enriching the investors.
At the same time, the disruption enters the mainstream, meaning that almost any business can enter the market creating surpluses; a price war that erodes margins inevitably ensues. If anyone can make the disruptive product, everyone will try, which places downward pressure on prices and profits and means that many industries and jobs will decamp for lower wage locations. As a result, the original innovation commoditizes, and it no longer has the capacity to drive the economy. In contrast, it becomes just another part of the economy. At that point the economy at large is ready to take on a new disruption. In fact, it must do this or the economy will stagnate.
LATE IN A K-WAVE
If you’ve read this far, you might be thinking that the current economy has similarities to the second half of a K-wave. I can’t disagree but I am not here to make any political points. In fact, there are none to be made: K-waves come and go and parties of all political stripes experience them. It’s not surprising, though, to see populism ascendant when industries contract or move off shore and jobs decline while wages stagnate.
The end of the Industrial Revolution, the first K-wave, saw a revolt by out-of-work textile workers — the Luddites — who rampaged through textile mills destroying advanced machinery that was automating away jobs. That didn’t stop the inevitable commoditization of textiles and jobs though. The machines were replaced and eventually the jobs were shipped offshore to lower wage countries. It was the first wave of globalization.
Back then we had POTS — or Plain Old Telephone Service — but now we have telecommunications via devices attached to the Internet through cables or wirelessly and satellites bouncing signals around the world. In place of POTS we have multiple forms of media including voice, music, video, and fast data transmission. Back in the day, jobs at IBM or ATT were considered the gold standard, secure places to spend a career. Their stocks flew high, their benefits were things to be admired and emulated; today, not so much.
Devices, cloud computing, and the Internet are all contributing to the ultimate commoditization of the tech sector. But don’t fret, there’s still plenty of life left in tech. Analytics, robotics and other wiz-bang innovations still have the power to make a great deal of money and drive further invention. But their wealth generating economic power is dissipating. They operate in smaller markets not concentrated on one continent and they employ fewer, though more highly educated people.
If you are trying to make a comparison, the first part of a K-wave puts money into the pockets of many people who spend it on the necessities of life thus driving the economy. In the second half of a K-wave, cash goes into fewer pockets and those pockets are distributed around the world so the impact of that cash on any single economy is muted. Also, the leaders in the latter part of a disruption might not even spend all the money they make (that’s why there are millionaires and billionaires) so the effect of that cash is further muted.
FORMING A NEW K-WAVE
It’s difficult to see a K-wave in its totality because it lasts a bit longer than a typical working life. Figure a working career is 40 years, give or take. Because a K-wave is a bit longer it’s easy for individuals to think that the economic environment just is what it is and there’s no rhyme or reason to it. Sometimes you do well and other times you don’t; it’s just part of life’s many vicissitudes. Right?
That’s not the case, though, and scholars have traced five K-waves through the centuries since the beginning of the Industrial Revolution. In all cases, which I have documented in my book, The Age of Sustainability, you see the same repeating patterns, but you see something else, too. The seeds of a succeeding age are sprinkled throughout the present one. They are parts of solutions or simply interesting inventions that don’t seem to go anywhere important. My favorite example goes back to John Wilkinson’s boring machine and James Watt’s steam engine during the Industrial Revolution.
Watt was the inventor of a greatly improved, and what we might call modern, steam engine. During the early 1770s Watt’s advanced design called for pistons and cylinders that were precisely matched so that they lost very little steam during a power stroke — which was essential to converting coal energy to rotary power. But existing technology made achieving that fit time consuming, difficult, and thus expensive–all things preventing commercial success for the modern steam engine.
Wilkinson’s boring machine, essentially a kind of specialized drill press, was originally invented for producing cannons, which had the same need–a precise fit between the cannon ball and its cylinder that would assure maximum force, in this case to propel the projectile. It took some time for the inventors to become aware of each other and compare notes but once they did, magic happened. Watt met Wilkinson in 1774 and by 1776 Watt’s steam engines were being installed in commercial businesses.
You could say the rest is history but there’s an important sidebar. Watt’s initial steam engines were stationary, designed to operate a factory or run the pumps in a mine, both very important jobs. But the steam engine is, perhaps, better remembered for the revolution it started in transportation once it could be “miniaturized” or at least made small enough, to fit in a boat or on rails. So the steam engine was actually a disruptive force twice in history.
Eventually the piston engine gave way to the steam turbine which makes more efficient use of fuel and runs longer between maintenance breaks. Turbines using steam generated by coal, oil, gas, and nuclear fuels make most of our electricity today; yet another disruption for steam. In a lifetime, steam power went from a disruption to commonplace and today occupies an important though largely unheralded part of the economy.
In its own way the silicon chip has spawned its own three level set of disruptions: first with “big iron,” then microcomputers, and today handheld devices and tablets.
THE NEXT AGE OR K-WAVE
A logical question would be what interesting new technologies are out there today that will drive the next big disruption? Who is our Wilkinson, who is our Watt?
There are plenty of examples, but they might not be in IT. Some of our greatest needs today involve finding enough energy to run the world that our kids will inherit at mid-century when it’s expected global population will swell to 10 billion souls. Energy is only one of those concerns. Consider how we’re going to grow enough food or produce enough clean water for that vast population and you quickly realize that energy is the key for running as yet unbuilt cities or to producing enough irrigation water, just to pick some examples.
The need is especially urgent because conventional fossil fuels are running out in addition to poisoning the environment. The 2014 BP Annual Report (pdf) stated that there was about a 53-year supply of oil left in the earth. Others have pointed out that we haven’t found net new oil anywhere on the planet since 2003. That’s the economic environment renewables are evolving in. Here are some examples:
- Over the course of decades solar panels have been steadily improving to the point that today they are competitive for electricity generation at industrial levels. The reason is readily understandable–Moore’s Law. Silicon chips designed to capture photons have become denser packed and solar panels more efficient. Wind turbines have traversed their own exponential growth curve too..
- But there’s also geothermal electricity generation to consider and there are businesses all over the world generating electricity from heat mined from the earth’s crust. For instance, in Sonoma Valley, Calpine, a publicly traded company, generates 750 MW of geothermal power, enough to run a city like San Francisco.
- That’s just the tip of the iceberg: A recent report from MIT says that there’s a thousand times more heat energy under the Rocky Mountains than we use today from all sources. That’s enough to replace the fossil fuel paradigm.
- Virtually every car maker has announced plans to sell electric cars as soon as this model year.
What’s missing at this point is a way to diffuse the new technologies throughout society. You might think that’s no problem with electricity generation, but think again. The places where clean electricity is generated might not be the places that powerlines already run through. For instance, the Chinese built so much solar generating capability recently that it will take five years to hook it all up.
Also, at the moment, electric cars run on batteries that ought to be rechargeable at every parking lot but there aren’t nearly enough charging stations. But even more, why can’t an electric car simply get most of its power from the road? Answering these questions and others will require infrastructure construction typical of what we’ve seen before at the start of a K-wave.
And what about fresh water? It doesn’t rain enough to supply all of the water needs of the planet. Climate change is causing drought in food producing regions and causing farming to move to other areas with different resource complements. Think about Syria. Much of their problems started with a drought in the farming region that caused a population shift to the cities. That simple fact destabilized that country and rippled through many other governments. What if that became a norm?
Solving these interlocking challenges requires some amount of infrastructure construction. That’s what typically happens in the first part of a K-wave and it’s why the new K-wave forming is all about sustainability. The free market is generating a wide variety of signals for both supply and demand that point to converting the energy paradigm from fossil fuels to renewable electricity. We know how to generate clean power and understand the need for new uses such as supporting ecosystem services. We also have a massive incentive for taking on this new K-wave including dwindling conventional energy sources, their attendant pollution, and the steady population rise.
It looks like demand and supply are aligning.
These issues are not black and white. We’re nowhere close to abandoning fossil fuels because they supply solutions for which there are no alternatives. For instance, they are the starting materials for a wide variety of solutions and synthetic products that we can’t live without from pharmaceuticals to rubber and plastics. They are also essential for defense and commercial aviation. Don’t look for Boeing or Air Bus to introduce an electric plane anytime soon.
But fossil fuels are now too valuable to burn. They’re running out and we need to conserve them. This also leaves us with the problem of what to do about all the carbon already in the environment. I’ve written about how to handle that but it’s a discussion for another time.
We’re at the beginning of a new economic cycle, a K-wave; one that will offer the greatest industry, job, and wealth generating opportunities in history. It is highly unlikely that everyone will be on board with this analysis or be supportive of its implications. That’s okay, we don’t need consensus. The way free markets work, grass roots efforts will succeed by making money and that will inspire other, larger efforts. We’ve already seen this pattern in solar and wind and there will be other successes. This script has played out in the tech sector thousands of times.
As with any disruptive innovation, it’s always the early innovators at the grass roots who have the best chance of success and of making great profits. So there will be K-wave skeptics–and there should be just to keep everyone honest. But they’ll disappear soon enough.
For now, though, if this movie looks familiar it’s because you remember the beginning of the age of IT and telecommunications.
(Cross-posted @ ZDNet | Social CRM: The Conversation)