The role of innovation in creating inclusive prosperity across the world
Innovation is a change in the process by which an organisation transforms labour, capital, materials or information into products and services of greater value – so it follows that innovation is the key to addressing societal issues such as global poverty, says Efosa Ojomo
It’s safe to say that
many students hope Business
Schools will arm them with the skills and knowhow they need to become
productive members of society, and are looking to learn how to solve
problems more efficiently than they currently can.
Most Business Schools
deliver on that by offering classes in finance, strategy, operations management
and leadership. But simply helping students understand the ins and outs of
business may not be enough.
Over the past few decades, more wealth has gone to the world’s richest. For example, the wealthiest 1% of those in the US now own an estimated 40% of the nation’s wealth, according to a 2017 paper by economist and New York University Professor, Edward Wolff. Consequently, many are beginning to question the virtues of business and, perhaps more surprisingly, capitalism itself. The system that has created prosperity for so many in the US no longer seems to be working for everyone. Business Schools can help by educating the next generation of business students about their individual roles in society and the role of business in general – and how they can collectively create inclusive prosperity.
The power of
business
I was fortunate to
attend Harvard Business School for my MBA and it was there that I met Professor
Clayton Christensen, one of the world’s leading thinkers on innovation.
Christensen cemented the idea of the critical role businesses can play in
advancing nations. Though we often look to governments to move nations forward,
it’s businesses that have most of the power. Businesses create and eliminate
jobs, and pay wages and taxes. They build so much of our economies’
infrastructure that, in many ways, they are
our infrastructure. Businesses can increase inequality, or they can reduce
it.
The one common
activity that makes each business so critical to an economy is innovation, and
no other category of higher education teaches innovation better than Business Schools.
However, not all innovation impacts society in the same way. For business
students to truly have a positive impact on society, it is essential that they
learn this distinction.
It’s important to note
that innovation doesn’t have to be high tech or feature-rich; it’s simply a change in the process by which an organisation
transforms labour, capital, materials or information into products and services
of greater value. From an economic development standpoint, there are three
types of innovations, each of which has distinct characteristics that impact
organisations and societies differently: sustaining innovations, efficiency
innovations and market-creating innovations.
Understanding these
and how they differ can guide policy makers, entrepreneurs and investors as
they each look to foster innovations that lead to inclusive growth and
prosperity.
Not all innovation is created equal
Sustaining
innovations target demanding, high-end consumers with products
that have better performance than what was previously available. In the
automotive industry, for instance, innovations that make cars faster, safer and
more luxurious are sustaining. These innovations are a critical component in
the economic engine since they help companies increase their margins, enable
companies and countries to remain competitive and also help industries advance.
However, because sustaining
innovations are designed for existing consumers, they typically do not expand
the market for a particular product, and their impact on job growth tends to be
marginal. Sustaining innovations have a substitutive effect on production and
consumption. In other words, when companies produce newer and better products,
they stop producing and selling older versions, enabling them to repurpose the
capital and labour. This leads to very little net new growth.
Efficiency innovations enable companies to do more with fewer resources. These innovations allow companies to squeeze as much as possible from existing or newly acquired company resources, and they come in all shapes and sizes – from outsourcing a company’s operations to lower-cost regions, to leveraging automation. Although they free up capital, they are notorious for eliminating jobs. This means that they can be can be detrimental to economic development and can even leave communities hopeless.
The third type of innovations
are called market-creating innovations.
These powerful innovations target nonconsumers – the segment of the population
who would benefit from owning or using a product, but cannot due to the
product’s cost, time or the expertise necessary to use it. These innovations
transform complex and expensive products into simple and more affordable ones,
making them accessible to a wider segment of the population.
A perfect example of a market-creating innovation is Henry Ford’s Model T car. In the early 1900s, cars were toys for the rich and most Americans couldn’t even dream of riding in one, let alone owning one. All that changed when Henry Ford developed a car that was inexpensive enough for most Americans with a modest income to purchase. He also made the car easier to drive so that owners would not have to hire a driver or need special expertise. Ford transformed the car from a product that was complicated and expensive into one that was simple and affordable.
As market-creating
innovations target nonconsumers, who are typically the majority in most
societies, innovators must hire many people to make, distribute, sell and
service their products. From a job-creation standpoint, market-creating
innovations are therefore often net positive. Of greater importance, perhaps, is
their impact on economic and societal development. Before the democratisation
of automobiles, for instance, most people lived close to where they worked and
were confined to cities. The concepts of long-distance travel, living in the
suburbs, or going out to restaurants near or far were distant. The Model T
changed that.
Even with expensive cars already
in existence, an extensive network of roads was too costly to build and
maintain. It wasn’t until Henry’s Ford Model T that the revenue from fuel taxes
on petrol (gasoline) was able to fund many of the US’s roads during this time,
which further enabled the creation of many more construction jobs.
Market-creating innovations unleash a chain reaction of economic growth that
only gains momentum with time.
Navigating the innovation cycle
Although it’s tempting to conclude
that market-creating innovations are good and efficiency innovations are bad,
that would miss the point. Every innovation is important for sustained economic
development, and to keep businesses vibrant. The real lesson Business Schools
must impart on their students is to consider how investments in each type of
innovation might impact an organisation and the economy.
For tomorrow’s business leaders, that might mean
following investments in efficiency innovations with investments in
market-creating innovations, so the impact their efficiency innovations have on
employment will be less severe. It could also mean anticipating the effects of
efficiency innovations in a region and planning accordingly, like retraining
workers who stand to lose their jobs through outsourcing or automation.
Policymakers can also begin to think differently
about the portfolio of innovations in their regions and choose different tax
policies to mitigate the deleterious effect of efficiency innovation. Other
ideas could be for companies to reinvest their profits from sustaining
innovations into low-income communities that aren’t served by their business.
Perhaps most ambitious of all would be for companies to engage in a balancing
act, carefully managing and leveraging all three types of innovation to boost
profits and create inclusive prosperity in the process.
I got far more out of my Business School experience
than I bargained for and I believe that it is still the place where ordinary
people can learn to use our greatest weapon – innovation – to make the world a
better place.
Efosa Ojomo is co-author of The Prosperity Paradox: How Innovation Can Lift Nations Out of Poverty, and a Senior Research Fellow at the Clayton Christensen Institute, where he leads its Global Prosperity research.
Find out more about the role of Business Schools in addressing global poverty by reading AMBA’s exclusive research into the topic.