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Innovation and Growth are coming to an end… or are they?

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Organisations are now evolving in an economic and competitive environment to which they seem to have a hard time adapting to in the face of markets globalization, increased competition and diminished growth. As the equation for success is becoming more and more complex, how are they supposed to project themselves into the future?

Our capitalist model depends on sustained growth, tamed inflation and a stable financial system. Such sustained growth is only possible through productivity gains – hence the need for constant innovation.

However, the futuristic world we have been picturing for years is still very much in the making – having us wondering whether the innovation engine is broken. What are, then, the factors of growth that will push our economy ahead?

Some economists like Robert Gordon, Larry Summers, and James Galbraith argue that our society has already lived through its most amazing innovations (see Robert Gordon’s TED Talk for his demonstration). According to these theories, a form of secular stagnation only accompanied by incremental innovations is ineluctable. Effects of these innovations on the economy would be far less than those of the 19th or 20th centuries. As Robert Gordon rightly puts it, everybody would rather live without the internet than without running water. This “secular stagnation” theory is far from new and mostly derives from the fact that innovations are more and more complicated and costly to implement.

What is indeed the last innovation that truly changed our lives like the washing machine, electricity or the steam engine before it? Is the 2007 smartphone really the latest widespread innovative disruption? Have innovations only had a small added value to the economy ever since?

While we are twice as rich as we were the 1970s, nothing indicates that we live “better”.

The disappearance of growth: The result of the weakness of innovations?

An almost religious schism exists when it comes to the future of growth. On the one hand are the pessimists predicting secular stagnation; on the other hand, are those (much more numerous) asserting that we are on the edge of an unprecedented industrial revolution.

It is true that what makes today’s innovation so different from that of the past is its deflationist consequences – driving prices to the floor and sometimes reducing economic activity.

It is true that digital innovation and transformation of our organisations create destructive forces that can wipe out completely some industry sectors.

Should we conclude, then, that innovation does not have an effect on the economy anymore? Of course not. It simply shows that the way we measure our economy is wrong.

GDP, for example, merely measures economic production and is not a good indicator. It ignores, among other things, all the knowledge to which we now have free access thanks to digital media and services. HDI would appear as more appropriate in the sense that it grasps the notion of education – however narrowly understood as literacy and schooling.

These two indicators do not measure levels of intermediation, mutualisation, and sharing. They fail to measure the increase in human interactions and the wealth induced by the creation of communities. On the other hand, they do account for the fact that AirBnb is destroying jobs in the hospitality industry or that Encyclopaedia Universalis went bankrupt – without internalising that Wikipedia has allowed us to access the content of this encyclopedia freely from the comfort of our homes and on our smartphones.

We are undergoing a digital revolution – illustrated daily by the evolution of the way we behave and consume. However, this revolution is not accompanied by growth, or rather apparent productivity gains. What we are experimenting is a wave of Schumpeterian creative destruction, a deflationist innovation characteristic of the digital economy. Make no mistake, though: Innovation does exist. It is everywhere although it does not necessarily translate into a measurable increase in productivity.

As of today, the challenge faced by digital innovation is two-fold. It must bring wellbeing to the end-consumer while ensuring that this is done is a way that is both more efficient and productive in a circular, collaborative and sustainable economy.

What new model for the organisations being challenged?

In some sectors, digital innovations have lowered entry barriers, allowing new players to compete and disrupt existing markets (this is often referred to as “Uberisation”).

Within those sectors, organisations interact in disputed or highly competitive environments which often make them giants with feet of clay.

In such a context, organisations have no choice but to spread the product of their innovation as quickly and broadly as possible in order to federate a critical portion of consumers into their ecosystems. It is this community of end-users that grant organisations the sustainable dominance they are looking for.

Their challenge is therefore that of defining an economic model in which the gratuity of innovation for the consumer – allowing the federation of a community – must be balanced with the valorisation of the community itself and the profitability of high added-value niches.

Tesla Motors, recently sharing its knowledge through the release of its patents, is an interesting example of this approach. What other automotive players consider as an essential and strategic element is used by Tesla as a way to catalyse an ecosystem of stakeholders – including consumers – around it. The ultimate goal here being to promote the future creation of a more competitive electric transportation market with the ability to reach a broader set of customers – obviously hoping that Tesla will be able to dominate the high-end of such a new market.

Beyond means of production: The capacity for change as a new strategic asset

In digital, knowledge-oriented economic models, a new key criteria has appeared in the valuation of organisations. More than their fixed assets (means of production, patents…), what now determines their intrinsic value is their capacity to quickly adapt to change and to engage in innovative journeys with high added-value. This is made possible when an organisation possesses both the data it requires and the human capital that’s able to turn it into knowledge.

As a result, there is a necessity for organisations to invest in human capital (formation and/or recruitment of high-quality, atypical profiles) and to make sure that they are able to thrive in an organisational and structural framework that encourages and favours value creation.

Except for the web giants (Google, Apple, Facebook and Amazon – or “GAFA”) and a few organisations, most enterprises still have a long way to go in the transformation of their governance and management practices before they can implement such measures. However, organisations have no choice but to embrace that path if they do not want to see their competitiveness disappear ineluctably in constantly evolving industry sectors. Therein lies the dramatically high stakes of their digital transformation.
Maxime du Teil, Digital Transformation Consultant – ARSIA MONS

ARSIA MONS is a leading consulting firm based in Paris, France and specialising in the architecture and delivery of transformative IT solutions.

This article was originally published in French on the ARSIA MONS blog on 29th June 2016 – Copyright © 2016 Corix Partners for the English translation in collaboration with Vincent Viers.

The opinions expressed by guest bloggers are their views and do not necessarily reflect the opinions of Corix Partners.