Saturday, May 5, 2012

Against Incumbancy

Over at HBR, Philip Auerswald has a good guest post on innovation and the role of entrepreneurs as change agents. He writes (HBR):
As the editor of the journal Innovations, I'm asked with some regularity, "So, what is innovation anyhow? How would you..."? (eyebrows usually furrow here) "... define it?" Since I don't particularly enjoy debating definitions, I usually respond by saying: "That's a difficult question. But one thing is for sure: If you're not pissing someone off, it's probably not innovation."
I like this response because, if it doesn't end the conversation, it usually shifts it from definitions to dynamics — which is what innovation is all about, after all. But I also like it because it captures one fundamental obstacle to innovation that all would-be disruptors must be prepared to face: the potentially hostile response of incumbents who don't want to see their market advantages threatened.
And then he ties this back to Schumpeter's writing. Here's Schumpeter, from Capitalism, Socialism, and Democracy (p. 132):
To undertake such new things is difficult and constitutes a distinct economic function, first because they lie outside the routine tasks which everyone understands and, secondly, because the environment resists in many ways that will vary, according to social conditions, from simple refusal either to finance or buy a new thing, to physical attack on the man who tries to produce it.
This doesn't, of course, have to apply to a lone individual working to change the world. Apple, at least in its current iteration, is clearly an innovative company. By that I am alluding to Auerswald's definition of an innovator as one who pisses people off. On the same day that Phil wrote his piece, there was a great example of the sometimes antagonistic relationship between Apple and AT&T, this despite the fact that around 60% of AT&T's phone sales in Q1 2012 were iPhones. Check out a few of the great quotes from AT&T's CEO, Randall Stephenson (i.e. the evil incumbent) at a recent conference (NYT):
Mr. Stephenson said he worried about services that could replace the company’s own offerings. For example, free Internet-based messaging services like Apple’s iMessage are eating into the company’s revenue from text messages.

“You lie awake at night worrying about what is that which will disrupt your business model,” he said. “Apple iMessage is a classic example. If you’re using iMessage, you’re not using one of our messaging services, right? That’s disruptive to our messaging revenue stream.”
Now, if you're a shareholder of AT&T, you'd probably be pretty happy knowing that the company is actively looking for ways to retain their core profit streams. On the other hand, if you're a consumer, you're pretty happy that Apple is doing what it can to improve its customers' experience. Along the way, innovators like Apple improve consumer surplus by challenging the status quo. The lesson is that incumbents worry about potential disruption while innovators (entrepreneurs/social entrepreneurs/change agents...) lie awake at night worrying about how they can create value and change the world.

The gains to consumer surplus from increased competition are far higher than the gains to incumbents, but we spend most of our precious political capital protecting incumbents. It's time to move beyond left and right - the real debates of the 21st century revolve around how we can better enable entrepreneurs to create value and find solutions to global problems.