Invoking Schumpeter



In the last couple of days I have been involved in meetings
with two fairly substantial companies on behalf of a client.

Both publicly listed, one is a manufacturing company that
has a large slice of the market in Australia for its products (Company 1). The
other is a company that is a relatively new company where the business model is
driven very strongly by R&D (Company 2).

But both are interested in clean tech energy solutions as a
key future driver for their business models. Company 1 is essentially an old
technology company and Company 2 is a disrupter.

At the meeting with Company 2 I found out that one of the
executives had previously been an engineer at Company 1. Consequently he had
some insights into Company 1’s systems and underlying philosophies. Having been
exposed to some of those earlier in the day, it was interesting to get a view
through a different lens.

His view was that Company 1 was so wedded to its production
line and the investment in it to create a high level of efficiency and quality
that management was unable to reconcile the concept of significant change. A
product of the kind that they knew that they needed actually required a total
rethink in terms of production line technology inputs and expectations as to
volume outputs of their product.

In effect Company 2 appears to be owned by its production
capabilities rather than the other way round, and ironically shackled by its
own success.

This puts Company 1 into an interesting and not necessarily
good position. As a result of the GFC its order book went from 120% of
manufacturing capacity down to 75% of manufacturing capacity over a year and a
half. Over the same period the spot price for the key raw materials for its
manufacturing doubled. Even with the lay off of staff that was undertaken,
margin shrinkage meant that the company is now only marginally profitable.

Company 1 has a problem. Even with a highly efficient
production line and continuing market leadership, the kind of investment into
R&D that is required to maintain momentum has to be looking somewhat risky.

Disruptive technologies are at the heart of the concept of
Creative Disruption. Company 1 appears to me to be in the early stages of
experiencing a major disruption.

But if you were on the inside of the company you might see
it differently. That is certainly the case in many businesses in Australia that
have weathered the storm of the GFC and who are optimistically looking at a
return to normal growth patterns in the near future. Many of them think that
disruption happened and it was just a blip on the radar. They couldn’t be more
wrong.

How does a company that has been around for a long, long
time alter its thinking to encompass the concept that the disruptive forces of
innovation are not about incremental productivity gains. They challenge the
model holistically. The only solution is to rethink the whole.

Company 1 recognizes that it needs to introduce products
that meet the needs of a new dynamic in customer demand, and a new set of regulatory
constraints as carbon becomes more front of mind. I can imagine that the board
of the company sees the picture from a quite different perspective to mine.
Their view would be that they are undertaking a significant amount of R&D.
The problem though is that the company appears to have established a set of
specifications for that R&D that are driven by their sunken cost into an
efficient production line, and a belief that they have thought through the
problems fully and understand them fully.

Their R&D partners have quite pragmatically accepted
that they need to work to the company’s agenda, in order to unleash the funding
from the relevant authorities. So even if they understand that Company 1
doesn’t get it, they agree to do the work, with the belief that they can change
the philosophy over time. And that may happen.

But this approach, while quite pragmatic may consolidate and
deepens the problem, like the king’s new clothes.

There is an answer, and it isn’t the one that businesses
like to hear. Companies actually need to drive parallel R&D programs. These
need to operate independently and competitively and need to address the
problems within a clearly understood and shared strategic intent.

They need to be prepared to embrace ideas that challenge the
concepts of the existing production line or business model. They need to
consider openly ideas that are contrarian by nature. They don’t need to
immediately jump into rolling those out to market. But they do need to consider
that there may be a greater risk to a business as a going concern by having a
group of internal managers and decision makers whose recommendations and
decision-making is driven by a rusted-on corporate culture that may owe more to
rhetoric at the end of the day, than to reality.

Revolutionary thinking is what drives innovation. Innovation
drives disruption. And as Schumpeter says, wealth is destroyed as wealth is
created. We continue to sail into waters that are unpredictable, where even
giants can be humbled. Gaining insight into how to navigate the storm is the
trick if you want to avoid being on wealth destruction side of the equation.

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