Companies short on innovation won’t be able to adapt to changing markets and thus are imperiled.
If economist Joseph Schumpeter (1883-1950) were alive today, he’d be amazed by how right he was about the potential impacts of business innovation.
The renowned Austrian economist, who spent his later years at Harvard University, coined the now-familiar phrase “creative destruction” to describe how innovation by entrepreneurs can lead to overwhelming competitive advantages that redefine industries. We now call this disruption.
Schumpeter believed that creative destruction from innovating new technologies or processes would always have far more economic impact than competition between businesses using existing innovations. Today we view this as obvious, but that wasn’t the case in the early 20th century.
The economic impact of waves of innovation since 1785 are depicted in this graphic on the website of a project called The Geography of Transport Systems, adapted/updated from “The Natural Advantage of Nations: Business Opportunities, Innovation and Governance for the 21st Century,” a book published in 2005. Explaining waves of innovation which ultimately led to today’s global uber-innovation business culture, the graphic shows that Schumpeter was more than right; he was downright prescient.
In discussing these historical waves of innovation, authors Karlson Hargroves and Michael Harrington Smith identified a trend that was only beginning when Schumpeter was in graduate school. The waves were starting to get shorter or, viewed when another way, they were speeding up.
The graphic shows that the first wave, which included the innovations in waterpower, textiles, iron, and mechanization, started in 1785 and lasted 60 years. Schumpeter came of age toward the end of the second wave--steam power, railways, steel, and cotton--which lasted 55 years. As he developed his theory of creative destruction, Schumpeter witnessed the revolutionary developments of the third wave—electricity, chemicals, and the internal combustion engine. This wave lasted 50 years.
The fourth wave—petrochemicals, electronics, and aviation—started in 1950 (the year of Schumpeter’s death) and lasted 40 years. The fifth—digital networks, software, biotech, and new media, started in 1990 and ran for only 30 years. We’re now on the cusp of the sixth wave—artificial intelligence, robotics, and _____(?). This wave is projected to last 25 years, but who knows how short it will be?
If Schumpeter could see the world of technological innovation today, it would probably blow even his mind because we now have creative destruction (disruption) on steroids. Innovation is begetting innovation and resultant disruption, disruption apace. The economic impacts are huge. Huge tech companies have created entirely new industries. Thus, Schumpeter was more right than he probably knew about the potential commercial and economic impacts of creative destruction, aka disruption.
Each historical wave of technological innovation has brought substantial disruptions amounting to industrial revolutions. Now that the pace of innovation is accelerating so rapidly, the potential for economic growth may be arithmetically or even exponentially greater than many thought possible only a decade or so ago.
Most of today’s sixth-wave disruption, of course, is digitally based and derived from innovations of the fifth wave, when the digital industrial revolution began. The roots of this revolution were taking hold when Bill Gates was skipping class at Harvard in the 1970s to build kit computers in his dorm, no doubt pondering the software that would be needed to run the small computers consumers would soon have in their homes. Most if not all of the innovations currently considered highly promising for near-term growth—blockchain, quantum computing, artificial intelligence and robotics among them—are ensuing directly or indirectly from the fifth-wave innovation in which Gates was so instrumental: software driven by binary code.
The impacts of the current digital revolution, which goes way beyond tech products and services to industrial processes in non-tech industries, are the foundation to why I’ve been saying the Dow Jones Industrial Average will reach 50,0000 by 2027. Economic and business growth driven by the increasing pace of innovation and disruption may make this happen sooner.
Regardless of whether you view current tech innovation as the beginning of the fifth wave or as part of a digital continuum that began in the fourth, it nonetheless has profound implications for business and investment markets in the next few years.
As innovation has become everything at tech companies, it’s become far more important to all industries. The premium put on innovation by a broad range of industries has never been higher. Entire departments at companies in all market sectors are dedicated to innovation, and courses in innovation are proliferating at university executive education programs.
The quickening global pace of innovation across all industries has profound implications for all market sectors:
Forget brave new world comparisons. Rampant innovation and disruption mean that we’re headed for a world of the incessant new, so much so that even Schumpeter would be astonished.
Dave Sheaff Gilreath, a certified financial planner, is a 40-year veteran of the financial services industry. He is a partner and chief investment officer of Sheaff Brock Investment Advisors LLC, a portfolio management company for individual investors, and Innovative Porthfolios, an institutional money management firm. Based in Indianapolis, the firms manage about $1.4 billion in assets nationwide.