The Wrong Type of Innovation and ‘The Capitalist’s Dilemma’: MBA News

Clayton Christensen, the influential Harvard Business School (HBS) professor who coined the term 'disruptive innovation' and authored The Innovator’s Dilemma, has laid down a new challenge for companies and business education institutions.

In a new article, entitled ‘The Capitalist’s Dilemma’, featured in June’s Harvard Business Review and penned with fellow HBS lecturer Derek van Bever, Clayton Christensen attributes sluggish economic growth and underwhelming job creation to the choices companies make when looking to invest in innovation.

Too often, the article claims, the wrong type of innovation for long-term growth and job creation is pursued because of a perceived need to focus on making quick returns and a subsequent aversion to projects that are deemed too ‘risky’. It is argued that senior executives are afraid of depleting monetary resources – especially for something long-term – as they may be replaced by the time a project can be realized.

The long-term and ‘risky’ projects come from market-creating and potentially disruptive innovations – one of three innovation categories labeled in ‘The Capitalist’s Dilemma’ - the type of innovation that creates new customers and can boost a company’s prospects as well as increase its job opportunities.

However, the authors argue that the realities of capital have changed and that, “the ability to attract talent, and the processes and resolve to deploy it against growth opportunities, are far harder to come by than cash.” They cite a Bain & Company analysis talking about today’s environment of ‘capital superabundance’ in support of Clayton Christensen’s view that too much concentration on the efficient use of capital among corporations is stopping companies from investing in a market-creating type of disruptive innovation.  

That companies are yet to wake up to this new reality is the fault of strictly adhering to sets of ratios for calculating return on assets that may now be outdated – with the article concluding that, “we have regressed from the decades when Drucker and Levitt urged us not to define the boundaries of our businesses by products or SIC codes but to remember that the point of a business is to create a customer.”

The crux of the capitalist’s dilemma therefore hinges on a belief that the path to long-term prosperity is, “the wrong thing for most investors, according to the tools used to guide investments.”

But, the authors also lay the blame at the doors of the world’s leading business schools.

Clayton Christensen: a lot of the blame rests with business schools

“Much as it pains us to say it, a lot of the blame for the capitalist’s dilemma rests with our great schools of business,” write Clayton Christensen and Derek van Bever in the Harvard Business Review article.

According to them, promoting investment tools and return ratios that are no longer in keeping with modern markets will find business schools, and their graduates, trailing behind industry needs. Companies will therefore continue neglecting the type of innovation that can create new customers and drive long-term growth unless new approaches are considered.

In addition, separating subjects, such as finance and strategy - that can only be fully understood from the way in which they overlap and interact with one another - has been doing MBA students a gross disservice.

The article urges business schools to start paying proper attention to resource allocation processes so that MBAs get a sense of, “how decisions in one part of the enterprise relate to or reflect priorities in other parts.”

‘The Capitalist’s Dilemma’, which drew on the opinions of 150 Harvard Business School students and alumni, has already been challenged in some quarters for overlooking important features of a modern economy but the issues the article raises seem set to be a continued talking point in business education and management thought, alongside discussions over which type of innovation will best serve a company's long-term interests.