A delicate balance

Apr 15th 2015 |

‘Disruptive innovation’ is a phrase that has been extensively used in the past year. So much so, it has come to mean many things to many people and has become as conventional as the phrase ‘creative destruction’ popularised by economist Joseph Schumpeter in 1942.

Schumpeter’s argument was that an element of economic growth [both capitalist and communist] should reside in the inevitable evolutionary flow of industries that grow and die. Schumpeter wrote (in Capitalism, Socialism, and Democracy):

“The opening up of new markets, foreign or domestic, and the organisational development from the craft shop to such concerns as US Steel illustrate the same process of industrial mutation – that incessantly revolutionises the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of creative destruction is the essential fact about capitalism.”

Superficial similarities

The similarities with Clayton Christansen’s coining of ‘disruptive innovation’ are, superficially at least, striking (not least as both use the evolution of the steel industry as a core example).

Christansen’s theory holds that disruption sneaks into an incumbent where that company is busy doing something else – chasing the supposed high-value propositions and ignoring the core.

Both have their flaws.
‘Industries’, for one thing, never really existed. They are a statistical grouping/invention of what the real world has to deal with. In fact, they should always have been better defined as global supply chains. It’s impossible to know where the value added lies in today’s world, or indeed, where to tax that added value. The statistics produced by governments fail to recognise the facts of the real world.

Treasurers need to reflect on real things, however, not simply on economic or political trends. Disruption can be positive because nothing is certain. Regulators and taxation authorities, though, act as if they are certain of the future. They behave with an overconfidence which should be contrasted with the pragmatic boldness of the visionaries who created the global international financial institutions at Bretton Woods.

The problem for treasurers is that they must live between the realities of the inexorable march of technology and the inevitable deadening effects of compliance with, often conflicting, regulations. Disruption also affects business in different ways and this where opportunity lies.

Treasury’s response to disruption can be to anticipate or expect the way the business is developing. These words are important. Those who anticipate make the first step, proactive or pre-emptive, as you will. While those who simply expect just have a vague idea of what may happen and call in consultants. The fundamental question becomes how can treasury get the balance right? That choice lies with you.