Clayton Christensen: Innovation Is The Answer

So how do governments encourage innovation, or is that really not their role?

Christensen: The government can’t get on that side of the problem and pull the solution in, the government has to stand behind the problem, push it. And the government can’t put its arms around the problem. Only capitalism can do that. That’s not what we intended to see as we started. One of the key ideas came from the noodle story.

Ojomo: Thirty years ago, it’s 1988, Nigeria is a military regime, very poor, a lot poorer than we are today, 80 percent living in poverty, no infrastructure, I mean the country was just struggling. Many people were running away from Nigeria. These guys, these two brothers, look at it and say, “People need to eat, they’re having a lot of babies, they need to figure out how to feed their kids. I think we can sell noodles in this country.” Mind you, noodles are not part of the staple food, so [people] don’t know what it is and think its worms. But they’re convinced that they see what we call non-consumption: people don’t have access to food.

To create the market, to Clay’s point, they had to wrap their arms around everything. They couldn’t just bring noodles in and take it to the stores and have people buy it. We didn’t have stores so they had to build retail stores. We didn’t have distribution so they had to build one of the big distribution companies in the country. We didn’t have access to electricity, at least the majority of people, so they had to build power plants for their factories and their offices. Water, water treatment, the same thing.

We studied the role of government, and it’s fairly obvious when you think about it. If the government funds schools, roads, water, things like that, society would be better off. We didn’t feel we needed to write a book about that. Instead, what we’re trying to get at is, how do we get governments to get there? If you look at some of the chapters, the evolution of governments has looked pretty similar, maybe not identical but quite similar. When you have countries that are very poor, the governments look pretty similar. They’re not good for the people, crony capitalism and so on and so forth. As people become more prosperous, as these market-creating innovations happen, the relationship between governments and the people starts to change and it becomes less parasitic and more symbiotic.

One of the issues being wrestled with on Wall Street right now is short-termism. They’re going to say, “I’ve got to build a port in order to sell a noodle?” Has innovation been dampened down by the lack of patient capital?

Christensen: Yes. The way you frame it, exactly.

Ojomo: I think the categorization of innovation, the three types of innovation, helps. Wall Street is optimized to go after efficiency innovations.

We use the word innovation, right? Innovation, it’s flashy, it’s nice, but you know, [Clay] had this insight, he said, “There are three types of innovation.” There are market-creating innovations. These are the innovations that make products simple and affordable so that many more people could have access to them. Fifty years ago, we couldn’t afford computers, now you have a very powerful computer recording this. Now, that innovation creates new markets, it goes after non-consumption, and it’s really the foundation of economic development.

Then you have sustaining innovations, and sustaining innovations make good products better. But from an economic development standpoint, they’re substituting the character. You buy the iPhone X, you don’t buy the iPhone 6. You don’t need a whole new plant to build a newer version iPhone. The last are efficiency innovations, and these are innovations that help us do more with less.

Market-creating innovations require capital when you’re creating the market, any market: Ford Model T, new smartphones, not now but the new ones before when there was no market. Mobile phones in Africa, when they were creating the market, you needed capital.

With sustaining innovations, you can sell similar products with higher margins. You get a nicer camera and you improve operation somewhat and you get higher margins that keep your company vibrant.

Christensen: But the insight on this is that this type of [sustaining] innovation doesn’t create jobs. And almost all of the innovation you see when you drive and walk around are sustaining innovations, they make good products better but they don’t create jobs. The efficiency innovations—we haven’t really talked in our research about efficiency innovation before. I just never thought deeply about it. Innovations that help you do more with less. People in Africa get ticked off at Shell Oil because…every time they make an oil well, they squeeze and they don’t create jobs. Their purpose is to eliminate jobs.

We puzzled about why would China have such a vibrant society as a communist dictator-led society and the Russians just struggle to grow? When you look at it from these fronts, there’s almost no market-creating innovation going on in Russia. In China, there’s somebody doing market-creating innovations on every corner.

We saw Mexico. Why are they just forever impoverished? Then we realized that that’s the same problem. Ford can go to Mexico and build a plant and it’s an efficiency innovation. They’re not creating new cars, they’re creating a limb and trying to eliminate cost. Then if somebody creates another plant in Guatemala or in Nigeria, they’re efficiency innovations. So they will shut down the one in Mexico and move this to Vietnam. And we complain that they’re not creating jobs.

Tesla is a sustaining innovation, trying to compete against BMW and Porsche and so on. God bless them if they think they can beat the best at this game of cars. The theory says go down to the bottom of the market—and that’s where you’ll see electric cars emerging.
When you go to Beijing next, go outside the front door and walk for 50 yards left or right and over that distance you will see one or two electric cars. They don’t look like a Tesla. They’re narrow. These are delivery cars running on narrow streets.

Go up and put your hands on one. It’s plastic, and it cost about $4,000. That’s where the theory says the electric car will start: at the bottom of the market, and go up. So if I wanted to create growth in Mexico and I’m on Wall Street and I have all that money, I would go to either Mexico or Nigeria and start [making] one of these little cars.