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The Hidden Costs of Innovation

By Andrew White | July 28, 2020 | 0 Comments

InnovationEconomy

In last weekends US print edition of the Financial Times there was an interesting article I would like to review. It was titled, “We fall for the new, but not all things old are obsolete” written by the FTs undercover economist Tim Hartford. In a nutshell the article compares the use and success of two kinds of technologies – brand new and old – and refers to a book I have not read, The Shock of the Old, by David Edgerton:

  • Technological frontier, that is, cutting-edge innovation and new technology
  • Workhorse technologies, that is, previously cutting-edge but now perhaps mundane, taken for granted, or widely available or adopted, or old technologies

The story is that many people often fall for the shiny new object (or silver bullet) and at the same time forget that there is still value to be had in old technologies.  Several examples are explored, such as Concorde (a technological marvel at the time but economic failure) versus a Boeing 747) and the horse (used in huge numbers by the German Army in WWII) compared to the innovation of motorized infantry.  Perhaps Concorde was not really an innovation since it never was economically viable: maybe it was an excellent invention. In the case of the famed German Army, they would have preferred motorized divisions, but they didn’t have enough money, material or time to build out what they needed, so they used what was viable and available.

But what the article calls about is something else: the new or additional costs that come with an invention when it transitions to innovation and how these change over time. To be effective an innovation must be cost effective and economically viable. A technology invention is not assured of success or wide adoption it if is not economically viable.  Economists (and I include OECD) have suggested several other factors are important, namely:

  • Knowledge capital or workforce skills
  • Organizational capital or management capability

Knowledge capital needs investment such that users of the new innovation have the skills and capabilities they need to be able to understand and use the new technology. Dropping a computer into the laps of Victorian students might have led to a Concorde-situation. Organizational capital needs to be increased in such that the organizations and its resources are re-organized and available in such a way that a new innovation can be used sustainably. This is the failure of the motorized and Panzer innovation: alone it was a great idea but there were many ancillary investments needed to sustain them that were not sufficiently developed.

So, the bottom line is that those firms operating at the technological frontier need to take account of more than just technology. They need to concern themselves with investing in needed training and education and the management and organization support infrastructure that can use the new technology invention in a sustainable way, thus making it an innovation.

There is a third component here too: what I call process innovation. The technological innovation, when it first arrives, will have a cost of production measured in money or hours or some other currency. If economically viable it could replace a previous technological marvel and so attract competitive or copy-cat solutions. Over time the cost of delivery declines. During this cycle the very processes used to develop the technological innovation itself may evolve and innovate, dramatically changing the cost to serve equation. This leads to a given technically innovation to seemingly continue long beyond it’s expected due date.

In the article the Boeing 747 is also cited. British Airways just announced it is retiring its fleet of 747s. It so happens that over time the methods used to produce the 747 were streamlined and made more efficient. Process innovation was pushed by Boeing and its supply chain such that the economic viability of the original innovation (747) extended for many years; and no technological innovation offered sufficient savings or value to make the combination redundant.

I put workforce skills, management capability, and process innovation all together in a proposed concept for how they may interest in Where You Spend Your Firms’ Capital Matters.

COVID-19, an externality when it comes to these examples, changed the accounting model. Something we always need to be wary of.

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