Friday, October 09, 2015

Reading :: The Innovator's Dilemma

The Innovator's Dilemma
By Clayton M. Christensen

The Innovator's Dilemma is a "classic bestseller," according to the cover. And it's a classic business book in the sense that it makes the whole of its argument in the first chapter. The rest of the book consists of elaboration and proof.

Here's the key insight: "in the cases of well-managed firms ... good management was the reason they failed to stay atop their industries. Precisely because these firms listened to their customers, invested aggressively in new technologies that would provide their customers more and better products of the sort they wanted, and because they carefully studied market trends and systematically allocated investment capital to innovations that promised the best returns, they lost their positions of leadership" (p.xv).

That's the innovator's dilemma: "the logical, competent decisions of management that are critical to the success of these companies are also the reasons why they lose their positions of leadership." It's difficult to balance the demands of innovating with the demands of current customers.

If that sounds familiar, perhaps you have read Peter F. Drucker's Innovation and Entrepreneurship, which warns of the same issue. But Christensen makes at least two other contributions.

The first is the "theory of resource dependence," in which he claims that "in the end it is really customers and investors who dictate how money will be spent because companies with investment patterns that don't satisfy their customers and investors don't survive" -- and that fact means that "these companies find it very difficult to invest adequate resources in disruptive technologies .... until their customers want them. And by then it is too late" (p. xxiii).

The second is the author's research into the question. The author examined business data on the disk drive manufacturer industry, which was characterized by extremely rapid innovation, to look for indicators of how this industry developed disruptive innovations. That's the bulk of the remaining chapters, and they do a good job of supporting the author's points.

Should you read The Innovator's Dilemma? Yes, if you're trying to sustain innovation in a company. But, as the above suggests, you don't actually have to finish the book in order to get the main points.

Reading :: Risk, Uncertainty, and Profit

Risk, Uncertainty, and Profit
By Frank H. Knight

This 1921 classic argues that to understand profit, we must recognize the roles of risk and uncertainty. The difference, he proposes, is that risk is quantifiable (think in terms of actuarial tables); uncertainty is qualitative and unmeasurable (pp.19-20). "It is this 'true' uncertainty, and not risk, as has been argued, which forms the basis of a valid theory of profit and accounts for the divergence between actual and theoretical competition" (p.20).

In Ch. 2, Knight reviews theories of profit. Of special interest to me is his assessment of Marx's contribution, which he dismisses: Marx's understanding of profit was "narrowly literal... wholly uncritical and superficial" (p.27). Thus "they derive a simple classification of income in which all that is not wages is a profit which represents exploitation of the working classes" (p.28).

Knight lists five ways to deal with uncertainty:
1. Consolidation
2. Specialization (including speculation)
3. Control of the future
4. Increased power of prediction (p.239)
5. Directing industry to areas of less uncertainty (p.240).

Knight concludes: "Profit arises out of the inherent, absolute unpredictability of things, out of the sheer brute fact that the results of human activity cannot be anticipated and then only in so far as even a probability calculation in regard to them is impossible and meaningless" (p.311).

Should you read this book? I'm no economist, but I found it easy enough to follow, and for me, the thesis was provocative. Naturally, I like the idea of profit emerging from unquantifiable uncertainty, and the criticism of Marx seems plausible to me. If you're interested in the question of profit, take a look.