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Process Model Innovation as a Neglected Solution To Disruption

Evidence from three studies

The November 28 edition of the Economist had a strong take down of traditional disruption thinking. It managed to do so without hitting the really important buttons in this debate. I have argued elsewhere that the key to disruption is process model innovation. For the Economist the main point was to say that the basic thrust of work done by Clayton Christensen, the originator of modern business disruption theory, was wrong in many respects. 
The terms of this debate must sound a little vague to many of the people who read the Economist - I imagine them nodding their heads at the Christensen piece - he had defended his theory in the Harvard Business Review by saying Uber is not disruptive, according to the theory. It is so easy to object to that, and many people did. But what's really going on behind this debate? What do the key terms mean? I want to clarify that and point to the important missing ingredient - the idea of process model innovation - that I mentioned just now.
Not surprisingly, the Economist plumped for Joseph Schumpeter as an earlier and better version of what disruption means. As the Economist likes to say, they are both wrong and right in this!
Schumpeter is less well known than his most popular concept - creative destruction.  The idea of creative destruction is now pretty widespread. We all have a sense that the entrepreneur community can destroy cosy incumbent companies. But what did Schumpeter mean by it and how does it compare with Christensen's views?
To understand Schumpeter you need a sense of the times he was writing in. Schumpeter's work on creative destruction arises in the context of the 1940s - crisis and literal destruction as Europe headed towards war and drew the whole world in with it.
Schumpeter was surveying also the turbulence of the 1930s as well as the destructiveness of the 1940s.
In this content he tried to understand two things. The first was the vision of Karl Marx that capitalism sows the seeds of its own destruction. There was an overt fear in the 1930s and 1940s that Marx's prediction was coming true. But the second element that interested Schumpeter was that by the 1940s it was clear that there were distinct business cycles. So perhaps society was not in some kind of terminal self-destruct. Perhaps there was a cyclical element and if so that meant capitalism could still come good.
If you think of Karl Marx's work then you don't think of business cycles. Marx believed capitalism was on the way to self-destruction as a prelude to socialism.
But he hardly had the last work in these issues. Economists like Nikolai Kondratiev had identified a fluctuating and recurrent "long wave" of economic rise and fall, roughly every 60 years. Kondratiev had explained disruption in terms of these 60 year cycles (or waves) - it cost him his life as the Russian dictator Joseph Stalin preferred not to taint Marxist theory with the idea of cycles.
Kontratiev identified commodity prices as a key indicator of a cycle's upswing. Typically, existing production investments (plant, machinery, transportation) in an economy trend towards full capacity utilization. That means commodity prices rise and become too high for existing enterprises to sustain their "business as usual". Typically the whole sequence of economic activity from what we make to what we consumer is constrained by the technology and production capacity built with it. At this point society needs radical innovation.
For Kondratiev disruption was a periodic renewal that took an economy into a different set of relationships around commodity utilization. Technological innovation typically does that by changing the relationship between labour, machinery and capital - if you can innovate, you can free up resources trapped in old production systems.
The rise of global supply chain management through computing technology would be a good example. It has allowed the global economy to grow through specialization and trade.
Schumpeter was very aware of these long wave trends but felt that there was a more sociological activity at work. Quite apart from the fact that production systems run up against the limits of a given paradigm, as factory assembly did before supply chain management, companies trend towards monopoly. Instead of competing, they become cartel like (Germany's path to the second world war was funded by large industrial cartels!). Cartels charge monopoly prices and become too comfortable, even too cynical. They become counter-productive.
The antidote is the entrepreneurial community. Entrepreneurs loathe monopolies and typically will seize the opportunity to new technology to attack it.
This process has been very evident over the past 10 years or so. It has been enabled by Cloud computing, which reduces the cost of innovation; by digital goods, which cost so little to transport; and by the rise of apps, which allow the repackaging of digital products as small pieces of software that can often be given away.
These are not the only drivers of innovation but they are important ones because they free up human ingenuity and endeavour. As I pointed out in the Elastic Enterprise, and again in Shift, many of the most significant changes in today's economy arise from large enterprises building a new enterprise operating system - I called it the platform business.
While a very low cost of innovation facilitates entrepreneurs as creative destroyers, large enterprises have taken advantage of this by organizing innovation on new business platforms.
In the Schumpeterian worldview entrepreneurs are ideologists pursuing a different moral agenda from incumbents. Despite this being only one explanation for disruption it is an important one,
In the modern age that is partly true and partly false. It is difficult to think of Uber as ideologically different from any large company - it is pursuing a global monopoly opportunity. But it is easy to think of many financial services startups as ideologically driven, at least by a desire to do things more for the customer than an incumbent would.
That leads to a very big lesson for incumbents. If the orientation of the startup is to change the world, then how can a bank successfully incorporate that morality? The answer is it can't. The bank has to change.
To begin the transformation journey the bank has to think about its customers differently, as allies and as a community; but it also needs to think about its working practices. It needs to meet the challenge of process model innovation.
However, banks avoid this if they can. They see a quicker route to change through buying into startups or the blockchain, the distributed ledger technology launched by BitCoin. There are many challenges in this approach - not just incorporating new companies into an outdated process model but also understanding where the risks lie in not taking on the challenge of transformation.
We need to address the issue of how to renew business process models in large enterprises. Growth companies have done exactly that. Where Christenen's work has helped in this is by allowing us to see the disruption process as being fundamentally about the creation of new markets.
In the Adaptive Innovation Index we have shown that companies with strong KCIs, grow even when the economy is flatlining. They help structure new markets, a key missing ingredient in modern economic thinking. We know what qualities are needed in order to do this. Now we need to describe the pathways. 
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