Innovation is at the core of the market economy for offering us continued prosperity. Waves of innovation transform products, jobs, skills, firms, industries, countries, and our way of getting jobs done. Despite its immense importance, the emergence of innovation waves appears as a magical outcome. Of course, innovation creates a blue ocean opportunity. But it’s transient, and the process of creation is often messy transformation. Its successes and failures to some of us are mystical. For increasing our ability to interpret, comprehend, and predict the dynamics of waves of innovation, several theories have emerged. Notable ones are Carl Marx’s praxis, Schumpeter’s creative destruction, Christensen’s disruptive innovation, and Paul Romer’s ideas and objects. Related terminologies are radical, incremental, sustaining, and process innovation. Of course, these concepts are helpful. Nevertheless, they often create confusion and lead to misinterpretation. Hence, there is a need for a unified theory of innovation and transformation.
The unified theory presented here combines eight distinct perspectives of innovation. The first three are incremental, process, and sustaining innovation. The radical step by changing the technology core and/or business model leads to the formation and growth of new waves of innovation. Often, they grow as a creative wave of destruction. Apart from causing destruction to existing products, some of them also cause disruption to existing firms. Particularly, if startups or new entrants pursue the radical move in the growing creative wave of destruction, incumbent firms often fail to switch to the next waves. Consequentially, it leads to suffering from disruption. This transformation is at the core of the market economy for offering us continued prosperity.
Carl Marx and Praxis–the core of the unified theory of innovation and transformation
In ancient philosophical writings, Carl Marx observed a reoccurring observation, related to human beings’ inherent characteristics of creativity. He termed it as Praxis. It refers to the free, universal, creative, and self-creative activity. Through which human beings invent and change the historical world and themselves. In creating the foundation of the market economy, he and others focused on taking advantage of praxis. Leveraging praxis has been at the core to offer us increasingly better products at a lower cost. Hence, they adopted principles for freedom of entrepreneurship and ownership of capital to profit from the generation and trading of ideas.
The market economy, innovation, transformation, and prosperity
Economic value creation depends on three basic ingredients: i. Natural resources, ii. Labor and iii. Ideas. These three vital inputs are complementary, and also substitutable by one another, to a certain aspect. We need increasingly better-quality products, preferably at decreasing cost, to get our purposes served or jobs are done better for continued prosperity. The living standard depends on the supply and consumption of quality goods and services. To address the conflicting agenda of increasing quality at decreasing cost from depleting natural resources, while paying more to labor, producers are after ideas. They are in profit-making competition in the production and trading of ideas, whether as product or process features.
In this journey, they often pursue radical ideas of changing mature technology core with emerging ones. The innovation around new technology core often grows and leads to destruction to existing products, jobs, and industries. This messy transformation is at the core of the market economy for offering us increasing prosperity out of technological innovation.
Incremental and process advancement for sustaining innovation
Once innovation shows the potential of generating profitable revenue, it invariably faces externality effects and competitive forces. Externality effects in the form of complementary goods and services, reduction of information and experience gap, network effects, the advancement of industry standards, and infrastructure lead to increased willingness to pay. On the other hand, the same innovation also faces a competitive force. It shows up in the form of replication, imitation, innovation, and substitution. Invariably, competition response keeps decreasing the willingness to pay. The resultant implication of these two effects perpetually keeps drifting the willingness to pay for the innovation downward.
To sustain innovation in the market, innovators need to keep adding new features and improving existing features, which we call incremental innovation. Innovators also focus on process innovation. It lowers defects, reduces wastage, and improves precision, leading to higher quality and lower cost. The purpose is to leverage the externality effect and counter competition response by releasing subsequent better versions, preferably at a lower cost. Or, the marginal quality should be far higher than the additional cost. This strategy of succeeding in profiting from ideas in the market, by capitalizing incremental and process innovation through releasing better versions, is known as sustaining innovation.
Radical move with the change of technology core, and business model
The scope of benefiting from incremental advancement keeps saturating due to the maturity of the technology core and also the business model. To overcome this limitation or for taking advantage of it, innovators take radical steps. They proceed to change the technology core and/or business model. Sometimes, both of them happen simultaneously. However, the change of technology core often leads to an inferior version of incumbent products. For example, Sony took a step to change the camera’s technology core with an electronic image sensor.
Similarly, innovators pursued a radical step by changing the electric bulb’s technology core with an LED. Often both producers and consumers of incumbent products offered around mature technology core, do not show interest in the emergence of substitutes. On one hand, radical step takers experience significant difficulty in creating demand for substitution. On the other hand, incumbent firms often suffer from the dilemma of switching to this new technology core.
It does not mean that incumbent firms always face a decision dilemma to switch to the next technology core. Sometimes, they take bold steps of changing the technology core and pursue the substitution to cause destruction to their incumbent profit-making products. For example, existing software firms like Microsoft or SAP changed the business model from software licensing to cloud-based delivery of software as a service. However, often startups or new entrants take the lead of taking the radical step of changing technology core or pursuing a new business model.
Unfolding of blue ocean and a creative wave of destruction
Sometimes, alternate technology and/or business model show a high degree of amenability of growth. Radical step takers, whether startups, new entrants, or incumbent firms, start investing in R&D for making the substitution a better, and also often cheaper alternative. Such a journey leads to blue ocean opportunity creation, as it avoids head-on competition with incumbent firms offering products based on mature technology core. But to create the blue ocean opportunity, the innovation, promising substitution, must succeed to overtake incumbent products, both in terms of quality and cost. Invariably, this journey is daunting.
For example, Sony took fifteen years to make digital cameras a better substitute for film based incumbent ones. Similarly, Tesla has been struggling over the last 17 years to make electric vehicles a better substitute for incumbent gasoline ones. On the other hand, LED light bulbs took 30 years to be a better substitute for filament and fluorescent ones.
The long journey of growing the next wave of innovation, around the new technology core, takes a huge amount of risk capital. But the offering of just subsidies to maintain the loss-making operation is not sufficient to reach the inflection point. The critical success factor depends on the progression of the underlying technology core. Competence about existing technologies, and having the know-how of integrating them are not often sufficient. Invariably, it needs scientific discoveries leading to invention. For example, the radical journeys of creating success stories by changing vacuum tubes with transistors, replacing filament with LED, or swapping gasoline engines with electric batteries even led to Nobel prize-winning scientific discoveries in each of them.
However, once substitution matures to reach the inflection point, the creative wave of destruction unfolds. Existing products, manufacturing capacities, and other related facilities or capacities suffer from destruction.
Disruptive consequences due to errors in switching decision
In certain situations, radical steps of changing technology core are pursued by startups or new entrants. For example, Sony pursued the bold step of changing the vacuum tube technology core of Radio and TV. Sony also pursued the step of changing the technology core of the camera with an electronic image sensor. Similarly, Apple was a forerunner in changing the user interface technology core of both computers and smartphones. But that does not necessarily mean that incumbent firms never take a radical step to change the technology core. For example, both Honda and Toyota are at the forefront in pursuing fuel cells to change the technology core of automobiles. Similarly, GM is one of the forerunners in autonomous vehicles. Being a lead hard disk maker, Toshiba also led the idea of flash memory to change the technology core of computer storage.
However, if the radical journey of changing technology core is pursued by startups or new entrants, incumbent firms, often, overlook or take too long to switch to the next waves of innovation. As a result, sometimes, the uprising of the creative wave of destruction also disrupts incumbents, often dominant firms. For example, Kodak, DEC, and Nokia, among many others, suffered from disruption due to the uprising of creative waves of destruction. Hopefully, this unified theory of innovation and transformation will reduce painful experiences caused by waves of innovation.
The unified theory of innovation and transformation will lead to greater clarity
This unified presentation of innovation dynamics in the market economy offers clarity in linking several highly pertinent, concepts, and theories. Unfolding dynamics of major innovations and events like computers, mobile phones, or the uprising of Sony or the downfall of Kodak appear to be comprehendible within this unified theory. Hopefully, this unified theory will ease the complexity of interpreting the past, comprehending the present, and predicting the unfolding future of innovation dynamics. Consequentially, the human race will take smarter steps to make productive investments and reduce wasteful ones.
Hence, it will lead to leveraging ideas for greater prosperity by decreasing the need for natural resources, labor, and other objects. Moreover, greater clarity will also lead to a less messy or painful journey of transformation. Moreover, this unified theory of innovation and transformation will also offer higher clarity to startups and VC funds. Furthermore, policymakers will also have guidance in taking facilitatory measures.