WHAT HAPPENED TO INNOVATION?
It’s no longer about long-term excellence but rather short-term profits. What’s it? Manufacturing, entertainment, government? Pick an industry. America is content, satisfied with improvements on the familiar. Innovation has been replaced by incrementalism. Even the recent electric revolution in automotive is an improved sequel (prompted by environmental crisis) to the internal combustion engine and a far cry from the flying car imagined last century.
In a recent article in The Atlantic, Derek Thompson argues that America is out of new ideas. In science and technology, researchers opt for safe subjects with a higher likelihood of receiving funding. New business formation has been slowly declining since the 70’s (albeit a recent spike due to the COVID-19 pandemic). The creation of new institutions, agencies, and universities has also come to a halt. Thompson offers three theories to answer why.
Attention Audiences prefer familiarity, particularly in entertainment. “ As the biggest movie studios got more strategic about thriving in a competitive global market, they doubled down on established franchises. As the music industry learned more about audience preferences, radio airplay became more repetitive and the Billboard Hot 100 became more static. Across entertainment, industries now naturally gravitate toward familiar surprises rather than zany originality.” As well, the scientific research industry deals with familiarity bias that prompts researchers to write papers that will resonate with fellow researchers. A focus on the familiar means innovation and new ideas are stifled.
Gerontocracy Power in government, finance, business, and science is centralized to an aging demographic of decision-makers. “The average age in Congress has hovered near its all-time high for the past decade… The average age of Nobel Prize laureates has steadily increased in almost every discipline, and so has the average age of NIH grant recipients. Among S&P 500 companies, the average age of incoming CEOs has increased by more than a decade in the past 20 years.”Why is this a bad thing? Young people have a ‘useful naivete’ that lends itself to innovation. More likely to take a risk and less indoctrinated in the status quo, younger generations are open to adopting new paradigms and challenging the way things have been.
Vetocracy Today, new ideas are more likely to be vetoed than embraced, nurtured, and grown. A habit formed over the last 40 years that requires a new idea to pass an insurmountable number of bureaucratic hoops. “Vetocracy blocks new construction too, especially through endless environmental and safety-impact analyses that stop new projects before they can begin. ‘Since the 1970s, even as progressives have championed Big Government, they’ve worked tirelessly to put new checks on its power,’ the historian Marc Dunkelman wrote. ‘The new protections [have] condemned new generations to live in civic infrastructure that is frozen in time.’”
With so many stakeholders at the table with veto power, how can we expect any kind of innovative breakthrough?
There are a handful of plausible theories as to why innovation is waning, including Derek Thompson’s above. At MMR, we posit a short-term focus on profits driven by dividends and stock prices as another theory to consider. The problems of risk avoidance are greatly exacerbated by being publicly traded. The requirement for “predictability and consistency” greatly trumps the value of increased growth in a public company.
Over the last 30 years, there has been ample research into the impact of capital markets on R&D expenditures. Often, stakeholders perceive R&D and innovation as a luxury expense opting for risk-averse activities and investments. Innovation is inherently risky, of course. As noted in the Journal of Managerial Issues, “increased levels of R&D expenditures are akin to gambling on ambiguous outcomes, with the only certainty that the investments will detract from short-term profitability.”
This aligns with rigidity theory; decreasing stock valuations will lead to reduced R&D investment while increasing valuations will lead to increased spending. Alternatively, some researchers argue that decision-makers act in reverse, funding innovation when stock prices are falling in an effort to improve declining market performance and reducing spending and risky investment when there is positive short-term stock performance. This is known as prospect theory. An analysis of S&P 500 companies from 1990-2003 supports the hypothesis that rigidity theory guides investment decision-making, and, thus, innovation.
A prime example of how short-term focus impacts long-term innovation is the Boeing 737 Max crisis (see New York Times, PBS, Netflix, and other media outlets.) In 1996, Boeing and McDonnell Douglas were not faring well in the stock market. Rising costs at Boeing led to shifting priorities. Management was looking for ways to improve the bottom line by reducing costs, embracing digitization, and outsourcing operations. It was the first step towards a seismic shift from an engineering-first company to a profits-first company. Meanwhile, McDonnell Douglas lost a lucrative government contract and found itself on the ropes in the aircraft industry dominated by Boeing and Airbus. Boeing moved to acquire McDonnell Douglas, and the ensuing merger received minimal pushback from regulators considering McDonnell Douglas’ slim market share.
The result of the merger was a complete departure from Boeing’s decades-long approach to aircraft manufacturing. Their risk-averse mentality and focus on short-term profits led to the repurposing of an aging workhorse in the 737 and a short-sighted software fix to a critical design flaw. Boeing decision-makers decided to spend $2B to support mismatched engines to keep up with public demand for flying over a $20B investment in a new aircraft designed for modern flying. Claiming software fixes would overcome structural flying differences, Boeing opted for the $2B option. The ensuing problems created by the MCAS software system 20 years after its adoption aren’t only impacting Boeing’s short-term profitability (the 737 Max was grounded for two years) but also led to the loss of life, a factor that should never be considered when balancing short-term profits and long-term innovation.
Innovation is risky. Scientists and researchers opt for safe subjects. Manufacturers look to upgrade aging equipment and designs. Media producers repurpose old content with sequel after sequel. This risk-averse mentality might be a manifestation of the last 20 years of global volatility: the war in Iraq, the 2008 Housing Crisis, Brexit, COVID-19, and most recently the war in Ukraine. Safe means success tomorrow, but what does it mean for the next 50 years? If Boeing is any evidence, it can take two decades for profit-focused decisions to show their true value, and hopefully not at the expense of life. Moreover, an ever-present focus on quarterly earnings rather than long-term growth combined with the short life spans of leadership who take chances and aren’t immediately successful results in a strong preference for ‘safe’ choices by companies.
So what’s the takeaway for market research? New ideas might be stifled by our inattention, our aging government officials, the emerging vetocracy, or our short-term focus on profits. But one thing is certain, we must strive for more innovation where we can.
Ask the extra questions, challenge the shelf life of what we’re investigating, read, absorb - and most importantly - pay attention to the 25-year-olds and the 12-year-olds in the room. They bring a new perspective to the conversation and are the stewards of our future. Ever optimistic, we believe people recognize the need for new ideas. In the next few years, we’ll start to see more long-term incentive structures in place as well as more public/private partnerships. While the move to electric cars is a harbinger, bigger new ideas will prove critical to a brighter future. So, to paraphrase a song, The Kids (Will Be) Alright.
Growth and innovation projects have a higher likelihood of success when backed by meaningful data that supports your hypothesis. We help our clients develop the basis of their market understanding and allow them to refine their ideas based on insights, not assumptions. Identify gaps and opportunities in your space that reduce risk in innovation and create offerings that will help you grow.