The Capitalist’s Dilemma

Posted on May 23, 2014 ยท Posted in Uncategorized

Clayton M. Christensen and Derek van Bever have a potent article in the June 2014 Harvard Business Review. The U.S. economy is not taking off because the wrong kind if investments are being made. Performance-improving innovation, which replaces old products with better models, and efficiency innovations which lower costs, don’t produce many jobs. They suggest “market-creating innovation,” which transform products so radically they create a new class of consumer, do generate jobs.

Doing the right thing for long term prosperity is typically the wrong thing for investors according to the tools that guide investments which place efficiency ahead of effectiveness. Scarce capital is driven by efficiency. But just how scarce is it today considering the billions of dollars on the sidelines.

Private equity is now flowing into the home building industry and banking debt is following. Interestingly very little of this is focused on entity investment but rather projects. Although individual projects are a great place to “experiment” with “market-creating innovation,” once again discounted cash flow forces efficiency rather than understanding the the importance of the necessary product changes to reach for long term prosperity. Ultimately the means for such experiments to produce remarkable value is through entity investment where the ongoing knowledge of experimentation has a chance of producing longer term value.