Efficiency Is the Enemy of Innovation

What It’s About

According to conventional wisdom, innovation disrupts industries. Small, innovative, nimble companies overtake and eventually destroy their dinosaur-like predecessors.

One archetype of “disruptive innovation” is the PC, which disrupted the computer industry that was based around minicomputers and mainframes. Another archetype is the Internet which, well, supposedly disrupted everything.

The underlying assumption behind these archetypes is that innovation creates greater efficiency (“faster, smarter, better”) thus propelling small, innovative companies forward at the expense of their larger, hide-bound competition. 

There’s only one problem: while innovation might (sometimes) create greater efficiency, efficiency itself makes innovation less likely by causing a concentration of profit and power inside one or two companies inside each industry.

Take high tech, for instance. Google, Amazon, and Facebook completely dominate their respective markets to the point that no amount of innovation is likely to disrupt or displace them. Any startup that threatens their dominance is acquired and folded into the monopoly.

It’s not just high tech. 

Martin cites how Waste Management completely dominates the trash collection business, an industry that once enjoyed multiple vendors. WM is efficient; so efficient that it drives competitors out of business, even if they might provide a better service.

The same is now true in virtually every industry, which have conglomerating into a one, two or (occasionally) a handful of market participants who have achieved efficiencies of scale and thus no longer need to innovate to survive. 

The dominance of these mega-corporations is astounding. As author Roger L. Martin points out, “the 100 most profitable U.S. firms earn 84% of the profits of all public firms.” This was emphatically not the case 20 years ago.

Why It Matters

While concentration of power and profit into a handful of huge “efficient” companies can sometimes benefit consumers in the form of lower prices, the quest for efficiency has many highly-negative unintended consequences:

Social unrest. Efficiency through automation and outsourcing result, respectively, in unemployment and slave labor (which is far more common than most people realize). The result is misery and dissatisfaction that can lead to revolutions and dictatorships.

Structural fragility. Efficiency tends to create monolithic structures that easily damaged. A single blight, for example, can eliminate an entire sector of the agricultural industry. Similarly, a hacker penetrating Facebook compromises almost everyone’s data.

Corporate welfare. While Walmart offers low prices, each Walmart employee “costs taxpayers $2,759 annually for benefits necessitated by the low wages, such as food and energy subsidies, housing and health care assistance, and federal tax credits.”

Less entrepreneurism. There is an exact correlation between the rise of these mega-corporation in the past two decades and the decline in the number of startups, which has been steadily shrinking for years.

What We Can Do

Martin suggests that, rather than encouraging efficiency, governments should encourage “resilience.” A resilient market would have multiple players, less concentration of profit and power, and therefore more competition and innovation.

While Martin provides several ideas for creating resilient markets, the most important is to return anti-monopoly laws to their original intent, which was to break up monopolies and thus create a more competitive (i.e. less efficient) marketplace.

That’s not been the case for several decades. Rather than opposing monopolies per se, the government encourages industry consolidation if it results in lower prices, even if that consolidation decreases the tax base and creates more government expense.

As I see it, entrepreneurs have two choices.

The first choice is to continue to pretend that our startups can be successful in an environment where most of the profit available in every market has been sequestered by a small handful of huge companies.

The second choice is to start supporting, and stumping for, political candidates who are serious about breaking the innovation-killing stranglehold that’s resulted from the efficiency-driven monopolization of profit and power.

I realize that this concept–that efficiency is the enemy of innovation–is  difficult to get one’s head around. But it’s one of those “who you gonna to believe: your cherished myths or your own lyin’ eyes?”

The evidence is right in front of all. The era of “disruptive innovation” is now over, if indeed it ever really existed outside a few markets. What we’ve got instead is a “catch and kill” model that’s hostile to entrepreneurs and small business owners.

Carol Humphreys