1Innovation
These things, indeed, you have articulate,
proclaim’d at market crosses, read in churches,
to face the garment of rebellion
with some fine colour that may please the eye
of fickle changelings and poor discontents,
which gape and rub the elbow at the news
of hurlyburly innovation.
from: Henry IV, Part 1, Act V, Scene 1, by William Shakespeare 1597
An innovation is a particular novelty. The prefix “in” indicates that a new item does not just somehow occur but is deliberately introduced “in-to” the world. Therefore intention, purpose, and effort, have gone hand in hand with innovations such as the printing press around 1450, the steam engine in 1712, the phonograph in 1877, or the synthesis of ammonia in 1909. Mere occurrences, like a meteor strike, an earthquake, the evolution of a new species, or even a coincidental acquaintance of people may be also new—and occasionally also the reason for long-lasting changes—but these can hardly be called innovative. An innovation is not just something new but something that is deliberately achieved.
This aspect of human activity was primarily identified and described by the economist Joseph Schumpeter in 1912 in his Theory of Economic Development [2]. In this book he analyzed the renewal of commodities and other economic goods through the action of creative entrepreneurs. In this sense an innovation signifies in particular the accomplishment of new economic value.
An innovation is therefore basically related to the human particularity of attributing a certain value to each and every item in the world. For mankind there are not only specific things in the world but these things also represent a specific value. In fact, novelties also occur in natural ways; however, these are generally considered to be free of value and cost. Man’s appreciation alone gives them a certain value. Unlike natural developments, an innovation implies a conscious action with intended results.
Historically, this idea-consciousness of mankind can be attached to the Axial Age as described by Karl Jaspers [3]. Between 800 and 200 BC early communities—cities and/ or states—appeared on earth that were conscious of the worth of their activities. And those communities began to cultivate, reflect, and develop their common values and virtues. Surprisingly, those cultures appeared almost at the same time, although at different places and obviously independently of one another, with various masterminds, such as Laozi and Confucius in China, Buddha in India, Zoroaster in Persia, the prophets of Israel and the philosophers of Greece—just to name those whose ideas have been passed on to us today (see Figure 1.1).
The apparent changes are also related to a new understanding of determination and novelties. Prior to the Jaspers’ Axial Age all novelties were explained as a result of destiny, fate, fortune or of the action of supernatural forces and gods. Later it became more and more accepted that the future can be established by the actions of man and human labor, intelligence, and decision. Today, on the other hand, we are experiencing increasing discomfort in accepting any change as given and we tend to explain all occurrences as the consequence of intentional actions. Thus, if we consider modern changes, we generally presume a certain kind of innovation.
Thales from Miletus lived about 624–546 BC and is considered to be the first philosopher in Western culture. He is accredited with some talent for innovation, because when accused that philosophy does not earn a living, it is reported that he applied his reflections to an innovative investment: in winter he made long-term reservations for oil presses at a convenient low price. And when the harvesting came and turned out to be abundant, he sublet the presses at an arbitrary price and became wealthy.
By this original example the basic character of an innovator becomes obvious, namely, the market development by creation of a unique selling proposition. Aristotle took this as proof of how easy it is to become wealthy through philosophy—if one just sets out to do so [4]. Accordingly, philosophers can be seen as an early version of innovation managers.
However, until the Industrial Age, most innovations were related to items beyond the trade of goods and services. Initially, it was poets who were the creators of innovative ideas, because they were at liberty to describe the holy rules of nature in a novel way. The fulfillment of other human needs and wishes was exclusively considered to be in the power of spiritual beings, like fairies or demons. The peak in this restriction of innovations to artwork was reached in Medieval Ages, when each technical achievement had to face an inquiry about its relation to witchcraft and Satanism.
It was not until the Renaissance—and the rediscovery of ancient philosophy in the 16th century—when technical improvements become socially acceptable, even though they were still outside of entrepreneurial interests. During this period Leonardo da Vinci (1452–1519) is considered to be outstanding for his innovative talents, for his technical findings as well as his artistic abilities. However, in his lifetime his inventions, such as a mechanical knight, a steam cannon, a mortar shell, a rotor helicopter, a parachute, and a reversible crank mechanism, were all in the interest of his sovereigns and were mostly conceived as military equipment. Apparently, it was almost unthinkable at that time to create new products with an economic benefit for the public.
This kind of beneficial use of knowledge was first described about one hundred years later during the Age of Discovery. Sir Francis Bacon, the Lord Chancellor of England, published around 1620 his programmatic oeuvre Instauratio Magna, where he described the grand renovation of science [5]. In this work, he projected concepts for a systematic exploration of the earth and its principles for the purpose of creating public wealth. An economic interest through targeted application of scientific understanding had become thinkable.
Nevertheless, another century elapsed before the first institution for research on applied sciences was established in London, in 1754: the RSA (Royal Society for the Encouragement of Arts, Manufacturers and Commerce). Admittedly, this development was limited to England, with its progressive liberalism and emerging middle class, but its influence was not widespread and had only a minor impact on public life in general.
Figure 1.2: Diffusion of engineering institutions ● during the French period and ○ after the onset of the Industrial Revolution.
But then, in the context of the French Revolution, the national relevance of technical progress was seen and led to the foundation of the Ecole Polytechnique—referred to as l’X—in 1794 for the education of Ingénieurs, which literally means a creatively skilled academic mind. The prefix “in” indicates again, that an engineer is concerned with the introduction of things “in-to” the world, whereas other scientists generally are attempting to discover and to understand the nature of given things.
When Napoleon Bonaparte successfully employed these technical skills during his military campaigns, this new type of profession also became acknowledged by his enemies. Many European principalities instituted engineering schools as a result, first, to produce novel a means of warfare and later, also to build public buildings (see Figure 1.2).
Subsequently, the entrepreneurs of the Industrial Revolution came to realize the advantages of engineering for economic success. The tremendous industrial development during the 19th century can be attributed to engineering innovations (see Figure 1.3). This development was the result of technical and economic activities of both individuals and enterprises. This new function was then analyzed and described by Joseph Schumpeter.
Lesson 1
Innovations are consciously introduced on purpose!
1.1Economy
Necessity relieves us from the embarrassment of choice.
Reflections et Maxims #592 by Luc de Clapiers, Marquis de Vauvenargues 1746
Wealth and prosperity are respectable intentions for decent human living and only saints or other holy people can dedicate themselves to poverty or modesty. Literally, the word “economy” stands for housekeeping, indicating the permanent balance of existence: Each item spent has to be replaced with another item fulfilling a similar need. Otherwise, the household will gradually lose substance, then deplete itself, and finally fail. Thus, if commodities change ownership or if services are supplied, an equivalent compensation has to be rendered, or the exchange is not fair, the balance is a deficit, and the economy will crash.
All scientific theories have basically to deal with static and dynamic conditions, that is, the status of a steady state and the change of that status to another. The status of an economy is determined by a balanced exchange of commodities, called arbitrage, because the agreed value is subject of the arbitrary estimations and needs of the traders, respectively. Apart from theft, imposture, damage, or loss, a reasonable exchange of arbitrage goods allows for the sustenance of a viable economy.
The dynamics of an economy are characterized by investments—and here again the prefix “in” indicates the forced introduction of changes into the economy. Investments may generally have the goal of restoration of a running business in order to maintain further viability of the status. But Karl Marx already identified a surplus value by investments due to the introduction of machines or other means to rationalize the workflow [6]. Schumpeter recognized a further surplus, if novel commodities are introduced.
To explain this, one may examine the actions on a so-called open market. Any arbitrary good obtains its value through a reasonable settlement of interests— generally known as the law of supply and demand. By comparative negotiation a mutual agreement has to be achieved, whereby the sale and purchase price match. In addition, a professional trader tries to obtain a certain margin for a compensation of his negotiation efforts and his market knowledge.
However, if the trader can offer something uniquely new, he may demand another surcharge or bonus, because there is no competitor for this proposition. The created monopoly position allows a special recognition: the innovation reward. Therefore, the difference between an arbitrary and an innovative good is economically perceptible through a special reward and consequently by a special entrepreneurial rate of return.
In fact, innovative creations are granted particular intellectual property rights. This seems to be economically justifiable in order to remunerate the investments for development and to recompense for the entrepreneurial risks taken. By means of patents an official monopoly position is granted for the economic exploitation of an invention for a limited period of time in the respective market area. Thus, patents certify the right to commercial capitalization of intellectual property with a unique selling proposition—but they do not guarantee economic success.
A first approach to establishing the economic value of innovations is the degree of uniqueness. A rather marginal difference to the arbitrage goods already on the market is called incremental. A large difference of the achieved development is called radical. The pricing and the innovation reward are due to the performed difference, whereby the efforts and development investments can be hopefully regained—as well as a surplus for further investments in other promising innovations.
Basically, the focus of an enterprise seems to be to pursue something extremely unique, that is, radical, for the market. For a high degree of uniqueness a respectively high rate of return can be expected for an extent of time. In fact, many prestigious innovations of the past are exemplary for their outstanding originality and exclusivity for a long period of time, for example, dynamite by Alfred Nobel in 1867; the semiconductor transistor by Shockley, Bardeen and Brattain from AT&T in 1947; or sildenafil citrate (Viagra) by Bell, Brown, and Terrett from Pfizer in 1996.
Yet, at the same time there is proof of some extremely successful innovations completed in many small steps, that is, incremental innovation, for example the ever increasing implementation of cars, computers, and communication devices in our modern life. In the long run, a progression can be expected, because each improvement is based on the level accomplished previously (see Figure 1.4). The frequent update of the status is generally less risky due to an already established position on which to fall back. Therefore, the incremental increase of the curve progression can turn out significantly higher in later steps and become disproportionate compared to the average of single trials. It is mathematically proven that every sequence of rated ascents beats somewhere along the way of each linear incline.
Figure 1.4: Innovation rewards by radical uniqueness or incremental progression.
The second approach for the economy of innovations is the classification due to business operations. Primarily, a unique selling proposition applies to new products on the market, like a new material for construction, a new substance for medical treatment, a new component for machines, or any new mechanical or electrical device with novel functions. In fact, the novelty of a product frequently plays an important role in the perception of customers and their purchase decision. Exclusiveness and uniqueness in particular often seem to be sufficient reason to pay the innovation reward.
To classify the degree of uniqueness for a product innovation a distinct grading can be found. A fairly small innovation is often named a facelift, that is, the new look or new furnishings of a serial model such as an automobile. A rather significant innovation is called a blockbuster, that is, a breakthrough in what an existing product has to offer, with really new features, for example, a novel therapeutic agent. On the other hand, the notion of exclusivity is often used in advertising as a special claim and an expensive trait, sometimes without being necessarily connected to radical uniqueness.
Instead of a new product it can be equally profitable for a creative entrepreneur to introduce a new process in the production of a product, like a new course of action, a new finish, or a new procedure in assembly. The innovation reward, however, is then realized more indirectly by reduced production costs or improved quality in comparison to competitors, giving raise to higher number of sales and/ or earnings.
Such process innovations have also a distinct discrimination for their degree of economic advantage. A very small innovation is known as kaizen or continuous improvement process CIP, for example, in the assembly of complex vehicles like cars, trucks, airplanes, or their various modules within the supply chain. A rather fundamental change of a process is known as kaikaku, or reengineering, that is, the introduction of and the changeover to faster, cheaper, or more reliable processes, for example for painting or for cleaning processes [7].
Further sales can be obtained through innovative marketing, for example, in advertising, in market development, or in product placement. Especially in our time of globalization the advantages seem very promising, although the reward for marketing innovations is not easily correlatable to the sales of products or services, but can be inferred from the overall economic performance of an enterprise. Thereby, the original idea of an innovation is considerably extended.
So it might happen that an increased business volume is achieved by a rather small innovation of a catchy slogan in an advertising message, for example, a jingle as a distinctive mark in broadcasting, television, or telecommunications. Yet, a great breakthrough is also possible by opening of a new market, for example, a strategic commercial partnership with emerging opportunities in China, Brazil, or India.
Furthermore, there seem to be innumerable opportunities to create surplus value by innovations within the business organization in general, for example, for the workflow or for collaboration, both internally and/ or with external business partners. As before, the reward for such an organizational innovation is difficult to estimate by studying the financial reports, but it can be mainly a result of the experience and the convictions of the executives or their consultants that an innovative organization leads to an enhancement of the whole enterprise.
Again, the degree of innovation can be fairly small for an improvement in instruction, training, teambuilding, or by other job qualifications, for example, for engineers, craftsmen, or salesmen. And it can reach really dramatic dimensions in a restructuring of an entire enterprise, which is mostly supported by consulting.
Nowadays, it sometimes seems that the growth of an enterprise is mainly due to suitable innovations. For companies on the stock market this occasionally leads to the almost incomprehensible situation, that a projected fantasy of a business plays a more important role than the actual financial achievements of a corporation. This can eventually lead to dramatic bubbles on the stock market, which have recently become more and more frequent—probably due to our modern belief in innovations. The opportunities for economic innovation—as well as their respective profits—seem to be (almost) without any limits.
Lesson 2
The benefit of an innovation is a reward for uniqueness!
1.2Improvement
The better is the enemy of the good.
from: The Prude—moral conte by Voltaire 1772
In our original understanding, new things emerge from already existing ones through combination. The printing press combined the previously existing stamping of documents with the traditional way of straining wine; the steam engine united the gear drive of previous windmills with an evaporation vessel; the automobile integrated the four-tact engine into the common carriage; the computer merged the mechanical floating point calculator with electronic relays—and the Internet connected computers via communications engineering. Unification, integration, merging, joining, and the like are just different expressions for some kinds of combination.
The word combination can even apply to quite abstract items such as mechanics and electronics fusing to mechatronics. Sherlock Holmes used combination to conclude a new understanding of a crime scene. In his book about The Act of Creation Arthur Koestler identified virtually all kinds of progress as some sort of combination, for which he coined the term “bisociation” [8].
Thus, the general understanding of innovation is some sort of evolutionary improvement, similar to the process described by Charles Darwin in his famous book about The Origin of Species [9]. A typical innovation evolves from the existing goods and services on the market, just as new life forms have their origin in the existing gene pool. The purpose in both cases is an improved adaptation to the market or to the living conditions, respectively. Darwin described for this the complementary action of random mutations of existing features, on the one hand, and the harsh selection between the good and the better by the environment, on the other. Schumpeter considered combination as the thriving mechanism for new viable goods and services. In both cases the survival of the fittest is the basic mechanism of economic viability or biological survival, respectively.
Correspondingly, an innovation can be attached to a certain family tree or a bloodline, that is, previous products, processes, markets, or organizations that were the origin of a business. And principally, the systematic biological classification of species can be applied to innovations in order to identify the degree of descent. Hence, a new species or a respective new merchandize is part of a genus and family, being itself part of an order and class, which belongs to a kingdom and domain of life or of the market.
Within a single biological genus—or an economic article, respectively—there is already a broad variability of size, color, form, and composition, so that almost each and every creature or commodity features some specific distinction and uniqueness. Everything in the real world consists of its own particular matter, even if built of the same material with the same properties as others—the basic matter itself always has to be different. And each creature or any product is generated at a different time and different place, with different intentions.
In spite of the fact that modern mass production or overpopulation does convey the idea of reproducibility and replaceability, discrepancy to the standard is more regular than compliancy. For example, the body length of humans ranges from about one meter for growth-restricted to about two meters for giants. Additionally, there are different colors of human eyes, hair, and skin. There are also different builds and proportions, for example, muscular, slender, or stocky. And finally, one may even distinguish different hereditary disposition, for example in metabolism or the immune system. Taking all those variations into account, it turns out that each individual person is more or less unique—which is literally the meaning of “individual”.
A similar difference can be shown for commodities. It seems to be relatively easy to change the size, and most animals—monkeys, cats, fish, bears, snakes, or spiders— are seen in vastly different sizes. Similarly, there are obviously various dimensions for wheels, motors, computers, vehicles, and other machines on the market in order to achieve as much economic benefit as possible for these products.
The variety of colors, too, is large. In Great Britain the moth species Biston bistularia is known to have changed in just a few decades from bright to dark—because of the progressive darkening of the birch crust by exhaust soot at the end of the 19th century—and back from dark to bright, as the air pollution decreased by the 1960s [10]. Quite similarly, the coloring of products in various shades is a current means to comply with customer requests. Occasionally, all it takes is a white band to give a tire, a car, clothes, or buildings a particular racy appearance.
Then, if the form of an object is modified, one may face certain complications. Incidentally, the robustness of an animal gets lost if a desired trait is amplified by breed selection, for example, milk cows, pets, or racing animals have lost their previous ability to survive in nature due to less mobility, inferior strength, delayed reactions, bad health, or fewer instinctive reactions. Accordingly, a suitable caution seems advisable in regard to commercial goods if the construction of a product is altered, for example, a decrease in wall thickness or the profile of a tire, the equipment of a compact car with a roof girder or a trailer. For instance, a new automation of a production line can influence the construction in such a way that the initial output or the previous quality will not be achieved for a considerable time.
Also, a very serious incompatibility may arise, if the material composition of an item is changed. Even members of the same family have to take into account several incompatible characteristics for blood donations, such as the blood type and Rhesus factor—and there are forms of hereditary diseases that only occur if both parents dispose of the required disposition. Likewise, it is advisable not to substitute the material or the components of a product or within a process, without at least considering the operational feasibility or the official permission for operation. For example, the replacement of metal parts by plastics is oftenly envisaged to reduce weight and cost in a feasible way; however, the changes in solidity, aging, and wear also have to be considered. It may already be detrimental to change the recommended air pressure of tires, because of traction loss and of inferior rolling characteristics.
These progressive adaptations can be so numerous that the diversity in equipment of complex products, such as cars, computers, or machinery, has meanwhile achieved some sort of individualization, that is, the rate of identical products is lower than two. For buses and trucks it is nowadays quite seldom the case that two or even three entirely identical items are delivered. On the contrary, it is rather probable that each and every item has a particular uniqueness. Accordingly, this unique proposition justifies a special reward. And an item built on purpose sometimes legitimates some sort of award, though not being a real novelty in the sense of an innovation. The choice of extras can be assumed as some sort of usual promotion and merchandizing.
On first glance, the main difference between evolution in biology and in economics seems to be fitness for life and profit on the market, respectively. However, even this discrepancy is increasingly vanishing. Other than an expectable surplus value, today’s innovations follow more and more the purpose of sustainability, that is, conservation, maintenance, or stabilization of the price level. As modern customers expect a certain gradual reduction in price, an evolutionary improvement stands rather for the conservation of value than for a surplus. And the innovation reward is hidden by the absence of the actual upcoming markdown (see Figure 1.5).
Figure 1.5: Innovation reward by sustainment in spite of a decreasing arbitrage.
Evolution is full of novelties whose value can hardly be calculated—or even estimated, as the basic acquirements of the human life include an undeniable worth. Furthermore, these accomplishments are achieved in a most natural way, and therefore an innovation reward seems an inappropriate reward for the workers’ efforts.
For example, the mastering of fire, transportation on wheels, the cultivation of land, or an artificial irrigation have been quite radical novelties in the evolution of humanity. And it is obviously extremely difficult to assign a reasonable value for these achievements. For, how much is it worth to know how to heat something or to be able to convey heavy loads or to grow your own food or to obtain sufficient water supply? Obviously a great deal!
But how much are you willing to pay for the knowledge of handling fire or for the freedom of movement on wheels or for the permission to plant crops or to provide water? In general, reasonably little! For, many things and terms are considered to be a product of nature and hence free of charge—and equally indefeasible and infinitely precious at the same time.
This econometrical paradox for price formation applies similarly to innovations. If a novelty has become a common part of our lives, it loses its particular value. It does not become completely worthless, but the surplus value is not realizable. Accordingly, even patent rights expire after a certain time, that is, when the innovation is no longer new enough for uniqueness.
If an innovation is well established, an economic value can hardly be estimated. And surely, it seems rather late to speak of an innovation reward when the invention is already widespread and commonly accepted. To exemplify this, a great many former novelties can be cited that today are available without any innovation surplus, for example, the wheel, the hammer, the chair, or even the modern communication tools such as telephones, radios, and televisions. Surely, you have to pay extra for innovative features but not anymore for the original application itself.
Then again, there are also examples for common goods without any arbitrage but with a pricing made up of fees, charges, dues, tolls, taxes, commissions, or royalties. In the original meaning, they should never exhibit a reasonable surplus, and therefore the related changes can hardly be called innovations. But they might achieve a redistribution of value as subjected to a monopoly position by authorities, which is sometimes also called “innovative”.
For instance, social innovations seem peculiar, since community and humaneness are inestimable values in a human life. Social provisions for healthcare, accident compensation, retirement, or unemployment have meanwhile become a common feature in advanced countries. And likewise it seems absurd to talk about innovation, if only the support of the insurances is reduced or ordered by decree. The reward for these activities is rather an economization of social funds than an advancement of the support. And the profit is then just due to a monopoly of the governmental framework and not an achievement of performance, which would justify an innovation reward.
In a similar way, good education is invaluable, as the saying goes, and therefore there is virtually no reward for an educational innovation. Education has become a common feature of human life, without any liquidable monetary value, similar to our hands, language, culture, and civilization. If someone is not “in-structed” today, he or she is practically handicapped. Please note again the prefix “in” indicating the need of an intention. As a consequence, elementary schooling should be a human right and free of charge for everybody. But the reward for educational innovation is a saving in public funding rather than advances in qualification. The profit is due to the monopolizing position of the governmental authority. Obviously, there is no real market for education and hence it is questionable to speak of innovation in this context.
Furthermore, the value of public services is difficult to measure in general. Hence, an institutional innovation seems pointless, if this means that public services just become private. In many countries public services were privatized for various services such as mail, telephones, garbage collection and disposal and electricity, as well as partially for water, road maintenance, and even the police and some military operations. Since there is no real choice, if your property is attached to a certain network or belongs to a certain community, these private services have to be expensively regulated by another public agency to avoid abuse of the created monopoly position. And the innovation reward is often negative for the citizen customer, in terms of less service, more quarrels, and higher expenses for the new institutions.
Finally, the arts and culture need to be mentioned as indispensable parts of civilization. Hence, a surplus value seems to be a somewhat doubtful concept for a cultural innovation. Internet services, public viewing, and music castings are examples of how the appearance of consumers, athletes, or artists have changed in their actions. If proposals, sport events, or music are monopolized by media and thereby conveyed merchandizing, the appreciation of performances is rather limited to those who govern these media. Somehow “novel” seems just the new commercialization of the event, not of the particular achievements.
Lesson 3
Some innovations do not provide a perceptible surplus value!
1.3Disruption
Unless you expect the unexpected, you will not find it,
for it is hidden and thickly tangled.
fragment #18 by Heraclitus about 500 BC
Some things cannot be explained by a continuous improvement of things passed down. The motor did not evolve from better breeding of horses, neither was electric light derived from improved candles, nor do photographs and paintings have a common origin. Thus sometimes an innovation is, so to speak, part of a different “blood line” and replaces the previous heritage. Obviously, there is likely to be another mechanism at work.
Such discontinuous jumps or disruptions are also known in nature by the term “exaptation” [11]. As some features of biological species can hardly be explained by a smooth transformation, one is tempted to take that as proof for the action of a supernatural creator. But it can also be explained by mere application of an already existing feature to an occasional purpose. For example, the human wrist is a wonder of flexibility, which makes crafts and all kind of manual techniques possible. Its origin, however, was a long evolution of the climbing abilities of our primate ancestors. Leaving aside the climbing purpose, this ability proved to be also highly advantageous for crafts.
In a similar way, the evolution of products, processes, sales, and organizations may be disrupted by substitutes that already existed in other applications (see Figure 1.6). For instance, the photochemical film in photography was replaced by light-sensitive semiconductor sensors known since long, but then applied on a microchip. And electricity was primarily generated by charge separation until Siemens applied the effect of displacement current by magnets, the principle of which had been known more than three decades ago. Retail sale by mail order was available long ago, but the disruption of shop sales began with Internet commerce. And organizational disruption of enterprises is mostly based on a new structure, where neglected divisions become prominent and top positions are rationalized.
Figure 1.6: Innovation reward by disrupting a sustained business case.
Thus, disruptions are obviously always revolutionary. No one will give up using his or her hands voluntarily, and if forced to do so, it is called handicapped. Almost all modern photography and electricity are based on digital cameras and dynamos with only some scientific or artistic exceptions. Horses have lost their predominant role for transportation and are mostly restricted to sports and hobbies. Paintings and drawings are now used to explain or are for enjoyment but have ceased to document events. And candles are now only burned by rich people ever since electric light became so cheap, as Edison put it.
Although a disruption is always somewhat revolutionary, it can still be either incremental or radical. Mounting a four-stroke engine onto a carriage might be a comparatively small step for an inventor, yet a big step for human transport. Introducing cellphone communication to millions of people requires heavy investment and research in broadcasting technology, which obviously is not a slight incremented curve. Other than an evolutionary improvement, a disruption crosses the expected development path. Whether this is incrementally light or radically hard to achieve is another question.
A comparison between mere improvements and disrupting innovations can never be fair. At first glance, improvements have the unbeatable advantage of already being fit for market. The risks are considerably lower if you can count on a fallback position when the presumed achievements fail. At the least, one can learn and understand better why one has failed and apply that acquired knowledge as an investment for all kinds of further improvements. Probably one might experience some difficult—and laborious—time, as well. But if one is clever enough, careful, and vigilant, they will not lose at all. Thus, if one is doing the “right” thing, they will never fail.
But “right” is not a qualification that is available in reality. On a second glance, mere improvements have the inherent disadvantage of focusing activity on what is already known. And there may be a completely different understanding of products, processes, sales, or organizations of “your” market. For instance, tape cassettes were promoted with the slogan “damned close to CDs”—while being replaced on the market. And for sure, film photography was at its best at the very moment when it was being replaced by CCD cameras. Thus, even if one does all the right things, one can be outsmarted by something unexpected. Any way you look at it, one can discover advantages and disadvantages for improvements and for their disruption.
Thus, there is always some sort of dilemma, as Christensen put it [12]. The ambiguity consists of a sustaining innovation, on the one hand, and substituting innovation, on the other. And obviously, you cannot promote both at the same time. If one attempts to cross the evolutionary path, it will be detrimental to pursue any evolutionary improvement, and vice versa. As long as it is not entirely certain that improvement or disruption will succeed or fail, there is a need to decide and then get under way.
The genuine difference is that disruptions face a multitude of problems and need countless solutions to overcome unknown challenges, whereas improvements can pursue just one new solution in general. For example, modern transportation was not just the result of the introduction of motor cars by Benz in 1885 but also of suitable roadways, as introduced by McAdam in 1815, and of reliable tires engineered by Michelin in 1889. Benz could only experience his new product in the framework of the then available road network, and Michelin had to adapt the new loads and speeds of automobiles on bad road conditions. It is reported, that on a long-distance drive from Bordeaux to Paris in 1895 about 50 flat tires had to be mended—and 22 entirely replaced—on a traveling distance of about 1200 km or 750 miles.
This is why disruptions are somewhat harder to achieve. In an investigation of about 200,000 Russian originator certificates between 1946 and 1971 Altshuller classified some 32% of them as rather trivial solutions and another 45% as insignificant improvements; he counted 18% as inventive and just 4% as truly novel; less than 1% were based on new discoveries. Although this deployment during a particular period in a limited market with particular restrictions can hardly be seen as representative, it might give us an idea of the range between improvements and disruptions.
In order to enhance disruptions, it turns out to be helpful to always keep a certain record of other parallel achievements. For instance, if you know about the progress of electronic sensors and you know about the progress of electric actuators and you know about progress in data handling, in processing, in computing and in embedded systems—as well as particular knowledge in a certain industrial field—thus, if you know all about these emerging aspects, you can perhaps imagine a new age of cyber physical systems CPS disrupting industrial engineering business in a most revolutionary way.
This mechanism is known in modern evolution theory under the term “epigenetics”. Apparently the major part of the genetic code is deactivated and works like a tacit memory card. If stressed by hunger, injury, disease, or other life events, certain codes can be activated and/ or others blocked, in order to furnish a more suitable genetic disposition. And apparently, in case of success, this new code can also be passed on. In this way, even larger adaptations can be achieved within a lifetime if required. This may explain some extraordinary features of humankind, such as the ability to survive with different nourishment and under diverse climate conditions. Thus it becomes plausible that even detrimental changes can evolve if the benefits exceed the losses. For example, the human ability to pronounce distinctly requires a broader throat and provokes a new threat of choking and suffocation when swallowing, as one may experience when speaking at mealtimes. But apparently this risk is negligible on the evolutionary scale in regard to all the advantages of human communication.
Correspondingly, disruptions cause a drastic change of the existing economic concept and can hardly ever be removed afterwards. Virtually no one today will insist on producing clothing only from fiber plants, on transporting heavy loads by bare muscle force, or doing complex calculations solely with his brain. In this way, disruptive innovations cause a creative destruction, as Schumpeter put it.
As already explained for evolutionary improvements, innovations cause a certain compulsion of adaptation that cannot really be avoided. If any novelty is sufficiently well established, there appears to be a certain necessity of its use, despite the fact that the previous condition was basically adequate. For instance, music recordings on gramophone disks or magnetic tapes were quite convenient for a long time, but are hardly available at all anymore. Public phone booths are hard to find nowadays, if one does not happen to have a cell phone. While evolutionary improvements change the lead role within a given business, disruptions change the rules of previous business.
Thus the impact of a disruption can be examined by a STEP analysis, acronym for sociological, technological, economic, and political impacts. For instance, the introduction of social networks via mobile Internet disrupted former communication business with revolutionary effects on advertising and personal rights. Even if you do not participate in a certain platform, information about you may be shared by others. In general, modern technologies disrupted the way of earlier business investment with revolutionary effects on pricing and stock markets. Every once in a while the “fantasy” of a new technology causes venture bubbles with drastic influence on the “real” business. Ecologically the production of energy disrupted the previous footprint of humanity with inestimable effects on oceans, shores, and the climate; while disasters of nuclear power plants or deep-sea drilling seem to be somewhat restricted to a certain region, air pollution spreads all over the world. And political innovations are disrupting the habit of living with unavoidable effects even to those who oppose them: if new means for disease treatment, weapons, or international transfer become available, virtually no one can continue without new medication, armament, or international regulations.
As those disruptive innovations reveal, it is no longer a special pricing or yield that characterizes them. In spite of the fact that social networks, technology investments, energy supply, and globalization have become a considerable business for banking and other services, this somehow cannot just be explained by novelty but more by exploitation of the uniqueness of a newly created situation. Here again, innovation does not exhibit a perceptible valuable asset.
The very word “innovation” has itself become a synonym for value, success, and maybe even happiness. And it is voluntarily implied as an argument for all sorts of changes, in order to prevent criticism—or put other options in a worthless, failed, and unfortunate position. This aspect of language disruption becomes discernible when discoveries are propagated as being innovative, for example, a new finding in history like a missing link for the evolution of the species. Those discoveries may be revolutionary because they change and perhaps disrupt the way we were previously thinking. They also destroy the previous agenda and force everyone to take this new sight into consideration. But it should not be confused with the requirements for an innovation within the economic framework.
Lesson 4
Some innovations cause a creative destruction!
1.4Technology
Following the industrial principle
to split each production process into its constituting elements
[industrialists] created the quite modern science of technology.
from: Capital, Volume 1, Part 1, by Karl Marx 1867
The word “technique” literally means an artful execution and related artistic opportunities, in contrast to natural conditions and occurring constraints. And due to the claimed purpose of an intentionally pursued target, an innovation is always some what artificial and therefore technical.
In this broad understanding it is not necessarily required that an innovation be due to a technical improvement, like the achievements of the Industrial Revolution, as depicted in Figure 1.3. It can simply be business-minded cleverness, as in the story of Thales of Miletus and his oil press monopoly as an innovative investment. One might mention here that the origin of the term “technique” is reported in the dialogue “Protagoras” by Plato in the sense of an oration technique.
In today’s application of the word, in general, an engineered item is implied. The word “technical” stands for an assemblage of objects, operations, and factual systems with a practical usability, in contrast to artistic objects, operations, and performances with an appreciated impact. In particular, a technical innovation requires a certain economic advantage by users: just a demonstration, a pleasure, some verve, or amusement is not sufficient.
As for technology, there are two slightly different connotations: One is the concerted action of all kinds of techniques to run a certain business, that is, the technical logic of an enterprise. The other is a collection of tools, machinery, arrangements, and procedures used to generate a desired effect. However, if the business model of an enterprise has to fulfill a certain desire of its clients, both definitions actually merge. A particular distinction can be made between a crafts and an industrial enterprise, since crafters usually employ certain techniques, whereas industry depends on appropriate technologies.
Furthermore, one may distinguish that academic instruction in engineering is mainly about scientific techniques, whereas the industrial pursuit is about technology. This is one reason why alumni often complain that their education does not completely match their later job qualification requirements. The majority of schooling concerns general technical skills, whereas a job profile only requires those lessons that are used within the technological focus of the employer.
Historically, a widespread implementation of technologies in business took place in the period between the American Civil War and World War I, which in the United States is called Gilded Age, in France the Belle Epoque, and in Germany the Gründerzeit, meaning a period of promoterism. Industrial engineers like Andrew Carnegie, Thomas Edison, or Nicolas Tesla in the United States; Ernest Solvay, Gustave Eiffel, or Ferdinand de Lesseps in France; or Werner Siemens, Gottlieb Daimler, and Robert Bosch in Germany were not only outstanding engineers but also skillful businessmen who understood and managed their enterprises in a technological way.
In particular, technology is the framework with which innovations are created. Improvements happen by an evolution of the given technology of an enterprise, and disruptions happen by the revolution of a technology of a business and its substitution. Inherently, technological innovations are therefore always somewhat disruptive. For example, the technology of semiconductors did not just lead to new products like transistors, but subsequently enabled innumerable innovations, such as radios, televisions, clocks, computers, smartphones, informatics, the Internet, and many other electronic devices.
These technological innovations often mark the beginning of a new era, for example, the steam engine, steel production, electronics, plastics, or radio broadcasting. In retroperspective it appears that a novel technology has determined the entire economic world, like the new Internet economy in regard to the old industrial economy. In 1926 Nikolai Kondratiev already discerned a Theory of Long Waves of the world economy based on the change of technologies [13] (see Figure 1.7).
In particular, his investigation suggests an almost regular cycle of some fifty years beginning with the mechanization due to the steam engine from about 1780, which disrupted the mechanical processes in mining, cloth production, and subsequently in all kinds of physical labor. From about 1840 Bessemer steel production disrupted the building of propulsion machines for railroads, steamboats, and finally automobiles, and enabled the first kind of global economy. From about 1870 the period of electrification and chemical technologies disrupted mechanical engineering during the Gilded Age as previously mentioned. From about 1940 semiconductor switches disrupted process engineering by electronic automation of machines and data handling by computers. And since about 1990 we are experiencing a second period of globalization by technological means of information networks and ubiquitous electronic communications.
Figure 1.7: Kondratieff’s long wave cycles of the economy by technological innovation.
This is obviously just a rough sketch in regard to the times and topics mentioned above. For example, there had already been some sort of chemical industry before 1890, for example the production of sulfuric acid since 1746, of soda since 1791, and of fertilizers since 1857. Also, automation was known before 1940, for example, by the famous assembly-line production of the Ford Model T from 1908 to 1927. The Internet also had its precursor between 1969 and 1982, the ARPANET of the US Air Force. Thus, several suggestions have been put forward to group the relevant technologies and their related periods in different or broader terms, such as a pre-cycle in England, or the inclusion of fundamental techniques such as the hand ax, the wheel, fire, the plough, the boat, or navigation and mathematics. Apparently the concept of regular economic waves of new technologies is contestable and does not provide a simplified message.
Without any doubt, however, technological innovations have always impacted the world market and the global economy. For example, the steam engine substituted muscle work of animals and of men, Bessemer steel put carpenters out of work, electrical appliances replaced many services for households, automation reduced human control and the Internet supplanted many intermediary traders. One recent suggestion is the concept of a fourth industrial revolution, where the first is attributed to the replacement of labor by engines, the second to a reduction of mechanical processes due to electricity and chemistry, and the third to the substitution of human oversight by stored program control SPC. Now, the merging of sensors, actuators, and artificial intelligence is likely to disrupt a fourth time the way industrial business is done and will supplant several current procedures.
This also might be the reason to study technology for innovation purposes: Since technology is the framework for every innovation, technological change has an enormous impact on innovative disruptions. The future heavily interferes with the present value system, as Schumpeter already stated back in 1911. And technological development is the key to future value systems.
A modern entrepreneur should therefore not only know and screen the technological portfolio of the enterprise but also monitor the relevant indicators for technological development. He or she should scout out and forecast possible scenarios, as well as assess and match these to his own strategic management decisions. Technological transfer options should also be elaborated in comprehensive programs on developmental roadmaps. Just as the road of technological development is paved with innovations, technology management is also required to ensure innovation.
In the stock markets corporations with a modern technology business are named “tech-shares”, such as for electronic communications and bio- or web- technology and listed in the “technology index” NASDAQ. And by “innovative shares” we mean corporations with activities in the field of the probable next technological disruption.
Technological innovations correspond to the second-order solutions, as described by Watzlawick et al. [14]. A first-order solution is established by clever application of known principles. But a second-order solution includes an ingenious change of the premises. For instance, telegraphic data transmission was accelerated by the Morse code but was still rather slow until frequency modulation enabled a completely different way of data compression. Also, dishwashing detergents for doing dishes by hand rely on suds rinsing agents, whereas with a dishwasher the adhering fat and grease is used to produce a rinsing effect without suds. Depending on the case, new technologies are of a different order.
Such second-order solutions are based on a particular projection of ideas, that is, they consider what would be possible under other premises. This sometimes misleads to rather strange fictional illusions, such as space travel at speeds faster than light to other planets and personal encounters with aliens. At first glance, this does not seem really helpful for an innovation manager because even the scientific premises for such a technology are beyond reach. Yet, sometimes even the strangest concepts of technology have the potential to inspire realistic possibilities, when stripped to the essential idea. For example, the fictional flight to the moon as conceived by Jules Verne in 1865 was achieved by means of a cannon, since an effective onboard propulsion technology was unimaginable in his time. Yet, Verne’s lunar module, which was supposed to weigh some 10 tons, was close to the real 15 tons of NASA’s Eagle in 1969. And both departed from Florida.
It may be economically quite useful to prepare for new technologies, for example, to fund public support or to introduce competence in an early stage. With respect to the evolutionary pressure of creative destruction it appears even mandatory to be prepared for new markets, so as not to suffer later on from the detrimental effects of a substitution. Accordingly, The Sixth Kondratieff by Nefiodow in 1996 is a further outline of future technologies, highlighting in particular the necessity for sustainable technologies, such as renewable energy resources, biological nanotechnologies, and psychosocial healthcare [15].
Another futuristic scenario is the merging of technology and humanity into some sort of Transhumanism. In particular, information technology might drastically increase the hereditary abilities of the human species. In fact, recent examples of that sort of innovations support this vision: functional garments enhance the natural abilities of human performance in sport activities that are not innate to humans, such as swimming, skiing, or cycling. Or they extend the range of human activities to incredible water depths, outer space, or places of intense heat. Furthermore, prostheses or other artificial limbs can be linked to the human nervous system to accomplish a high level of movement and feeling. Powerful machines or miniaturized appliances can be directly controlled and operated by human brain activity. And human organs can be replaced by organ transplantation, by technical substitutes, or even by generation of new organs from stem cells.
By “singularity” we mean an envisioned event where natural evolution is outperformed by technology. A related inquiry by Kurzweil predicts this event to happen by about the year 2045 [16]. In preparation for that, together with Diamandis, he founded in 2008 the Singularity University, situated at the NASA Research Park in California, to gradually overcome the limits of human life.
Lesson 5
Technology is the framework for innovations!