For much of its history, the U.S. has been a place of innovation, where new ideas and products could flourish. But that era may be coming to an abrupt end, warns Clayton Christensen, who coined the term “disruptive innovation” and teaches at Harvard Business School.
Christensen, author of “The Capitalist’s Dilemma,” believes that American business practices are killing any potential for real growth. Rather than focus on the long term, businesses are obsessed with efficiency metrics and short-term returns. Continuing to do so, Christensen predicts, will put America in the same position as Japan, with an abundance of capital but nowhere to invest.
I talked with Christensen about the current state of innovation in America, and his thoughts on the future of the American economy.
[This interview has been edited and condensed. For audio of the full conversation, visit www.innovationhub.org. See also Christensen’s response to a recent New Yorker article that challenges his disruption model.]
Kara Miller: Have American businesses really become less creative?
Clayton Christensen: It’s not that we’re not creative. But the way we measure success has actually broken the system. It has caused us to do exactly what we don’t want to do, which was to invest more and more of our energy in creating free cash flow. So now, in America, amongst publicly traded companies, there is $1.5 trillion in capital on the balance sheet of public companies. The cost of capital is very close to zero. But they can’t invest.
KM: So what’s in store for the American economy?
CC: If you’re interested in where America is headed, just look at Japan. There was a time in the 1960s, 70s, and 80s, when Japan was growing at unprecedented rates. What was the engine behind this growth? It was market-creating innovations, competing against non-consumption. Toyota didn’t attack the world with a Lexus. They came in with a Corolla so affordable that the low end of humanity—we call them college students, today—could have a car. As more people bought, Japanese companies hired more people to make and distribute products. But in the early 1990s, their corporations began to measure success with efficiency metrics. Since 1990, Japan has generated only one market-creating innovation, which is the Nintendo Wii. It’s the only one we can see. They continue to invest, but only to become more efficient. They have capital everywhere; the cost is zero. But they just can’t invest in the long term. They’ve been in this quandary for twenty years. That’s where America is headed.
KM: Are there companies that have broken away from the standard orthodoxy of the short-term model?
CC: Well, I’m sure there are. But most of them are stuck. On every one of their income statements, there’s a number for research and development. If you peel the cover off of that number, you’re going to see most of it targeted at efficiency innovations—trying to do more with less. These innovations, by their very nature, eliminate jobs. Another part of that number goes into sustaining innovation, which is to make good products better for people who already have the product. And that never creates jobs either. It doesn’t create real growth. But the company adds up all these different numbers, makes it look good, publishes it, and the executives can say, “Oh, we are investing in innovation.” But they’re not investing in the big ideas.
KM: What is going to take us out of this system?
CC: Anybody who says it’s easy doesn’t understand the problem. Believe it or not, God did not tell us to measure efficiency of capital by internal rate of return. We need managers to come out and say, “We are not going to measure success by these metrics.” Any company that wants to be innovative, they just have to announce this. The second important factor is measuring non-consumption in our market, because that will show us where growth will come from in the future.
Oliver Lazarus contributed to this report.