Many of us believe the ability to innovate is the preserve of a select few. We commonly recognise innovators as individuals who see things the rest of us simply do not; people who spend time dedicated to solving problems which the world has given up on a long time ago, or the vast majority of us had not recognised existed in the first place. Over the past few decades, research conducted into innovation across a range of disciplines has shown there are recurrent patterns in innovation and these patterns separate themselves into four different types; incremental; disruptive, architectural and radical. Each of these solve different problems depending on the market, the technology and the resources of a firm.
To illustrate this assessment further, an example of incremental innovation would be the iPhone. The form and function of the device is relatively unchanged since 2007, however, periodic upgrades have improved the product and its utility. Disruptive innovation is typified by the arrival of a new entrant to a sector, which successfully challenges an incumbent firm – think Netflix versus Blockbuster. Multi-core processors that power our computers, tablets and smart phones are examples of architectural innovations. Finally, radical innovation is consistent with the picture painted in our first paragraph; more often than not triggered by the creation of new knowledge or technology and the commercialisation of novel ideas. This type of innovation requires both human and organisational ingenuity, and successfully harnessing both can create the products and services which go on to ‘change the world’.
This latter type of innovation is, of course, rare and few of us will see this in the businesses that we work in. If, however, we consider innovation to be the practical implementation of ideas that result in new goods or services – or improvement in offering goods or services – then innovation should be an ever-present in successful firms. Let’s suppose a new product has been launched; a brand ‘refresh’ generated an uptick in enquiries or a slick recruitment film attracted more talent, that business can consider itself innovative – at least at the incremental level.
So, is constantly striving to innovate a good thing?
As investors, our task is to find those businesses that are successful innovators, particularly those that sit in the radical quadrant. Technology and innovation have been closely associated with each other through the 21st century and we are all familiar with the big tech names which have generated millions of jobs, billions of dollars of profits and proved a successful investment for many. Society’s willingness to adopt new technologies, however, has periodically been tempered by fears of rising unemployment as ‘the machines’ takeover. Throughout the 19th and 20th centuries, automation tended to replace human labour in “routine” tasks without destroying entire occupations. Even when certain professions were eliminated, new ones were created. This said, the Oxford-based economics scholar, Daniel Susskind, argues the fears first expressed by the luddites in 1811 could now prove true. In his book ‘A world without work’, he argues we have entered a new relationship with technology and innovation, with Artificial Intelligence the game-changing catalyst for this. It used to be claimed that workers who lost their low-skilled jobs should retrain for more challenging roles, but what happens when the robots, or drones, or driverless cars, come for those occupations as well? According to Susskind, the work ethic, is a modern religion that purports to be the only source of meaning and purpose. It is not uncommon to revert to the question “What do you do for a living?”, when meeting someone for the first time. Our work typically defines us, but is relying on work to provide self-worth and social status an inevitable human truth or the product of this work ethic?
Rising prosperity – yes; but at what cost to societies?
Through modern history, innovation has been a key contributor to rising prosperity around the world. Despite this – and at a time when technological innovation has accelerated – economic growth is elusive. According to McKinsey & Co, across the mature G7 economies, GDP growth has halved to an average of just 1% per year since the 2008 Global Financial Crisis. The same story applies in emerging economies. Despite some exceptions, such as China and India, growth in emerging economies, overall, has been lower recently than in the early 2000s. Poverty also remains endemic. More than 600 million people lived in extreme poverty, as of 2017. In 2020, it is estimated another c.100 million people joined them, as a result of the Covid pandemic.
The most startling statistic of all from McKinsey makes reference to the rise of technology-driven changes in the ways we work. Their conclusion is more than 100 million people will need to make occupational transitions by 2030 – i.e. be re-trained – in a set of eight advanced and emerging economies they studied. This, or run the risk of losing their jobs entirely. A world without work could well become the reality for many.
Implications for portfolios
Delivering inclusive and sustainable growth is a constant priority for responsible governments and policymakers alike. Transitioning to a decarbonised world and taking advantage of innovation in all its forms, whilst providing a social safety net for those workers which are displaced, should be top of the to-do list for all our leaders. However, we acknowledge there is no road map to follow in order to successfully deliver this. Consequently, we will need radical creativity and have to leverage the best minds from around the world. Understanding what this will mean for society – and therefore financial markets – will require us to rethink long held assumptions. To help with the process, we will need to draw on the opinions and expertise of specialists. Whilst we can’t always meet them in person, we do have access to their thought leadership through their publications. Indeed, our Christmas list always includes a book or two and this year the following titles caught our eye:
- The Genetic lottery – why DNA matters for social equality – by Kathryn Paige Harden. For anyone interested in the science of genetics, Kathryn presents an argument about how we should think about equality, in light of our differences.
- Machines behaving badly – the morality of AI by Toby Walsh.
- The Right to Sex - Feminism in the 21st Century – by Amia Srinivasan. A collection of connected essays about the politics and ethics of sex.
- The Story of Work by Jan Lucassen. Beginning in the hunting-and-gathering past, this long view of work shows how little has changed over millennia. Progressing through the rise of cities, wages and markets for labour, it traces a perennial cycle of injustice and resistance—and the age-old desire for more
We have yet to decide which one to read first!
Please do contact us with any questions.
