Platt Perspective on Business and Technology

Innovation, disruptive innovation and market volatility 2: modeling and understanding change and innovation per se 1

Posted in macroeconomics by Timothy Platt on June 10, 2014

This is my second posting to a series on the economics of innovation, and on how change and innovation can be defined and analyzed in economic and related risk management terms (see Part 1: considering businesses and outside investors and their dynamics.)

I began this series in its Part 1 by putting it into perspective with a more comprehensive and wide-ranging discussion of change and innovation that I have been developing in the course of writing this blog. And I suggest reviewing that posting for references related to other aspects and perspectives on change and innovation per se. I then proceeded to at least begin to delve into the issues of this series itself with a starting-point discussion of the dynamics of business and investor relationships, there focusing on outside investors. My primary goal there was to introduce in this context, how business owners and their operational managers, and investors in those businesses can and do pursue very different and sometimes contradictory strategic views, priorities and goals. I continue this series here with a goal of looking more deeply into change and innovation themselves as these concepts would be viewed from a business, a business investment, and an overall economic perspective, and with a brief taxonomy of innovation forms.

Before starting that, however, I add that I only scratched the surface of business and investor relationships per se in Part 1, and certainly as a matter of how investors view investment and profit generation. As noted above, I focused in that first installment on external investors – but even there I only touched upon one type of outside investor out of several distinct types. So I will take a next step in building a foundation for this series’ overall discussion here, with the start of a brief and selective taxonomy of change and innovation. And then after finishing that up I will go back to more fully consider investment approaches, goals and strategies – as they would be applied to differing change and innovation contexts.

I take this approach to organizing this series because I see investment strategy and the nature of the specific investments that might be invested in through them as being inexorably linked. Investors decide when and where to invest on the basis of their understanding of the specific innovation opportunities that are available to invest in, and the specific investment opportunities they would create for them with their particular potential benefit and risk profiles. And specific presented innovation types attract specific types of potential investors who would see potential value to themselves, in buying in on them. And with that noted, I proceed to consider a change and innovation taxonomy that might offer analytical value for this, and both for the businesses that develop change and innovation opportunity, and for potential investors who might wish to back those ventures.

As a starting point for this, at least for now I will only be discussing change and innovation in products and services offered, that would impact upon a real realizable marketplace and its buying customers and end users. So here, I am focusing on innovation in products and services, and not in back office or other behind the scenes business process innovations that might make a business more competitive for the same ongoing marketplace offerings. And I assume that developing, producing and offering these marketplace offerings would directly impact upon that business’ bottom line. That, I add might mean either profit or loss as change and innovation always involve both potential risk and potential benefit. With those here axiomatically assumed points in mind, I begin by parsing change and innovation along a set of qualitative scales. And I begin that by examining where change per se does and does not significantly represent innovation:

• I would argue that more random change that does not reflect shift in perceivable utility or value to consumers or end users is difficult at best to present as being innovative.
• And perceived non-innovative, random and superficial change can mask more fundamental change when that is taking place too, and reduce its perceived value to potential buyers too. As a perhaps somewhat unfair working example, I would cite the automotive industry and how it has been developing and offering real, fundamental change in its vehicles – but also how it makes a great deal of superficial change too, simply to distinguish new model cars and trucks from last year’s. So the major automotive manufacturers develop and offer real innovation but much of their marketing comes across as pushing the perhaps primarily cosmetic changes they use when trying to push new vehicle sales. I will add that the way so many automotive manufacturers have lobbied so actively against strengthened fuel millage requirements for new vehicles has hindered their ability to really represent themselves as being innovative too, where potential customers of their products who see themselves as being environmentally aware – an increasing percentage of all consumers, see this as being anti-environmental and anti-innovation.
• So whether change per se is, or at least is viewed in the marketplace as representing true innovation depends on how potential customers view those changes themselves. And at least as importantly those potential customers look at the complete offering package and its contexts and not just at the individual detail change to evaluate its innovative potential or value to them.

With that in place, I will assume from this point on that an offered change would be seen as more than just superficially cosmetic and that it qualify in marketplace terms as being more fundamental and innovative.

• When people think about innovation, they overtly think for the most part in terms of qualitative and quantitative change from what has come before as standard and expected. But the pace of change, and change and innovation timeframes are just as important here too, and in fact can be the defining point of distinction between evolutionary, and revolutionary and disruptive change.

As a point of analogy, consider taking a walk along a course that overall presents you with a 100 foot (roughly 30 meter) increase in elevation. If this elevation increase is spread out evenly over a course of several miles you are probably going to traverse it without really noticing it. This represents a slow and gradual evolutionary change where every step along the way, you progressively take each minor incremental shift upwards more or less for granted. Now consider a scenario in which you walk along a level path for most of that same distance and suddenly find yourself facing that full vertical shift: that full elevation increase telescoped into one or two horizontal feet forward. Now with that same elevation change you find yourself confronted by a significant vertical cliff. Think of horizontal motion forward as representing time here, and vertical representing change and innovation, and in this second situation that change arrives as a disruptive one, and one that only early adaptors (avid cliff face and mountain climbers?) are going to want to immediately tackle.

• So as a first organizing, conceptualizing axis in this, the nature of innovation is set by the pace of change, and there I mean change as perceived by potential customers and end-users.
• And as a point of potential conflict relevant to this series, an innovation offering business and its potential investors might view the pace and degree of change differently from each other and as such see different levels of potential consumer resistance and buy-in from it. To cite my above analogy one might see a hill and the other more of a likely cliff.
• In more explicitly innovation classifying terms, this draws out a distinction between trending, even if perhaps relatively rapidly changing, and new direction creating novel change (non-trending change.)

I am going to continue developing a basic taxonomic model of innovation in my next series installment. After that I will consider non-trending change in more detail, and cyclical and noncyclical change. I will also more fully discuss short term change and fads, and the marketplaces that grow out of addressing their opportunities. And after that I will consider in turn:

• Long-term change and the progressive introduction of new evolutionary and disruptively novel innovation,
• And how marketplaces and consumer needs and expectations change in co-evolving response with that.
• And throughout this I will discuss these issues in terms of risk and benefits timeframes.
• And then as noted above I will return to consider investment approaches, goals and strategies – as they would be applied to differing change and innovation contexts.

Meanwhile, you can find this and related postings at Macroeconomics and Business.

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