Thoughts from the trenches: being long on innovation

• By ssyc1
• January 4, 2016
• 1 Comment

Why I am long on innovation – 5 considerations:

#1. A big, digital and disruptive change is underway.  We are going through a second wave of internet transformation: the first internet wave mainly involved the desktop; today’s wave (variously called Internet of Things, Internet of Everything, Industry 4.0, etc.) involves many things including mobile ones (such as the phone, on a personal level, a GE jet engine fitted with sensors, at the industry level).  This ubiquity will mean almost all industries will be impacted, across many functional areas (McKinsey’s estimate is that 70% of the value impact will be in B2B and not B2C applications), while the scale of the change will probably mean each industry will have its own adaptation(s) and platform(s).  We are still going through the beginning 20% of this wave.

#2. Established, incumbent companies are not adapting fast enough.  A comprehensive IMD survey on digital disruption in 2015 shows most business leaders expect ~ 40% of today’s top 10 incumbents (by market share) in each industry to be displaced by digital disruption in the next 5 years: Respondents also believe the average time to disruption across industries will be 3.1 years – a dramatic escalation from historical levels.  Yet the same survey shows 45% of corporate boards give the issue little focused attention, with a further 33% taking a “wait and see” approach and only 25% describing themselves as “proactive”.

#3. From the longer-term and broader perspective, there has been a slowing down of innovation-driven productivity growth and a parallel decline in corporate R&D spending in the US.  The cycle will swing back as corporates reach the limit of other drivers of productivity growth.

#4. Speed of change.  An increasingly higher % of Fortune 1000 companies fell out of the list within the following 10 years of entry (a 2x from 1970s to today).  Could this also be because the cost of starting a business (though not that of scaling up) has fallen so much?

#5.  The China factor – competition for innovation will be intensified by China’s “innovation imperative”.  Despite spending US$200b on R&D, the 2^nd largest investment by any country in absolute terms (and ~2% of GDP), the impact of innovation on China’s GDP (measured by multi-factor productivity) has declined in recent years.  Many Chinese corporates are going overseas to make technology acquisitions (although making these work may well prove to be the part that is even more difficult).