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I don’t know why I’ve taken so long to have Denis Pombriant here as a guest contributor. The guy is remarkable: Not only has he carved out a place as one of the leading influencers in the CRM (and “ish”) world; he’s also a thought leader who sees the biggest picture — the meta-trends and models that apply to not only the narrow band of CRM and the tech industry but to the rest of the social, economic, and scientific forces roiling the world. He is a man of deep thoughts and solutions. He is also a friend – someone I love and admire and am actually willing to listen to -which, trust me, isn’t a common occurrence. I think its time that you listen to him. He’s got a website up to take on the problems and present the solutions to what he is calling “The Age of Sustainability.” Watch his video here. If you want to learn more about his services and what he does, go to his company site, BeagleResearch.com and dig in. Either way, you’re in for a helluva ride.
Take it away, Denis…
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.
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.
Caveat
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.
Final thoughts
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.
Related Topics:
Tech Industry
Digital Transformation
CXO
Innovation
Enterprise Software