Innovation Investing: Evolutionary vs. Disruptive

I had a chance to sit on a panel with the author of "The Innovator's Dilemma" and "The Innovator's Solution" years ago. He related how his consulting firm had been retained by a leading company in an industry sector. His firm had undertaken a comprehensive study and charted out a path for his client to disrupt the industry. His client went into Chapter 7 one year later. I had just formed an multi-party, industry alliance in that same sector, and told him I had read his firm's study. He asked me why his method had not worked to properly project the path of disruptive innovation. I told him I thought the underlying concept did not match the conditions of the industry sector: his concept started in the computer industry and my clients were in the aviation industry, and the concept of "disruption" is incompatible with the ongoing safety required to operate in that industry. One concept is "disruptive" innovation and the other is "evolutionary innovation". They require different approaches and capitalization.


The term disruptive innovation is commonly used in announcements and investment documentation to assert that a given research and development outcome will generate high levels of revenue for the short term while major long term gains for the earliest adopter. However, this use of the term neither reflects the originator's intent (Clay Christensen) nor the distinction between evolutionary versus disruptive innovation. The result is that innovation investors allocate resources based on the media statement of "disruption" to avoid missing out on a trend. In reality, investors instead fund development that is not successfully adopted, thereby generating write downs and subsequent re-purchasing at a discount.


Systemic Innovation is Naturally Evolutionary

All innovation is fundamentally evolutionary. Innovation is the outcome of investments in science, research and development that generates new knowledge that takes one of five forms: tangible item (patent), process (copyright), competency (grouping of expertise), organization (how the expertise is organized) and integration (patents, copyrights, expertise and organization together). Investment in science, research and development feeds data as value improvements into existing structures that integrate the existing knowledge. Evolutionary innovation is the adoption of the value improvements so the existing structures can continue to operate, but with more value. If innovation is fed into the existing organizations in a manner that breaks down the capacity to continue, then value is diminished.


Disruptive Innovation Is Not Naturally Evolutionary and Requires Large Amounts of Capital

The term disruptive innovation is based on a study of the disc drive industry by an academic, Clay Christensen. The study was undertaken as part of Dr. Christensen's process to undertake original research that would be published, thereby supporting his application for tenure at his business school. The conclusion of the study was that the constant improvements in disc drives, which responded to the needs of computer companies (which integrated the disc drive with other assembled parts) had resulted in disruption the architecture of the computer designs. This disruption of the architecture resulted in an unintended outcome: the diminishing of the disc drive innovation value, thereby blindsiding corporate managers and confronting them with what Dr. Christensen called "The Innovator's Dilemma". The counter to this dilemma, however, was the potential for companies to "...get to the other side of this dilemma, creating disruptions rather than being destroyed by them". This later phrase is from Dr. Christensen's book "The Innovator's Solution".


This concept of creating disruptions to "...get on the other side" of the dilemma does not readily apply beyond the information systems industry, which is the where his study originated. The reason is because the frameworks of information systems were designed to migrate from existing functions done by manual and mechanical processes and were not subject to architectural regulatory or systemic integration standards. The professionals and staff within the administrative side of all organizations sought out and created the migratory path for information systems processing. In all other sectors, innovation must be adopted and integrated into systems that are more standardized that manual-mechanical data processing and in industries that are regulated for safety with underpinning architectural standards.


Disruptive innovation, which fundamentally changes architectures and structures, can succeed in transforming an industry, if the leading organizations have sufficient capital to lead and control the architectures. This results in high promotion of investments without an understanding of the holistic approach to understanding innovation of complete product, company and industry architectures. The result is a pattern of uninformed investment, followed by write-downs with the closure being investment funds acquiring the assets at a discount.


The solution to disruptive innovation is to invest only in those companies with networks of partners that represent all the architectural elements of the industry that is being innovated. This network is capable of reducing investment risk, increasing adoption rates, and transforming disruptive innovation into evolutionary innovation.



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