GUEST POST from Greg Satell

In the 1990s, a newly minted professor at Harvard Business School named Clayton Christensen began studying why good companies fail. What he found was surprising. They weren’t failing because they lost their way, but rather because they were following time-honored principles, such as listening to their customers, investing in R&D and improving their products.

As he researched further he realized that, under certain circumstances, a market becomes over-served, the basis of competition changes and firms become vulnerable to a new type of competitor. In his 1997 book, The Innovator’s Dilemma, he coined the term disruptive technology.

It was an idea whose time had come. The book became a major bestseller and Christensen the world’s top business guru. Yet many began to see disruption as more than a special case, but a mantra; an end in itself rather than a means to an end. Today, we’ve disrupted ourselves into oblivion and we desperately need to make a shift. It’s time to move toward resilience.

The Disruption Gospel

We like to think of ourselves as living in a fast-moving age, but that’s probably more hype than anything else. Before 1920 most households in America lacked electricity and running water. Even the most basic household tasks, like washing or cooking a meal, took hours of backbreaking labor to haul water and cut firewood. Cars were rare and few people traveled more than 10 miles from home.

That would change in the next few decades as household appliances and motorized transportation transformed American life. The development of penicillin in the 1940s would bring about a “Golden Age” of antibiotics and revolutionize medicine. The 1950s brought a Green Revolution that would help expand overseas markets for American goods.

By the 1970s, innovation began to slow. After half a century of accelerated productivity growth, it would enter a long slump. The rise of Japan and stagflation contributed to an atmosphere of malaise. After years of dominance, the American model seemed to have its best days behind it. For the first time in the post-war era, the future was uncertain.

That began to change in the 1980s. A new president, Ronald Reagan, talked of a “shining city on a hill”, and declared that “Government is not the solution to our problem, government is the problem.” A new “Washington Consensus,” took hold that preached fiscal discipline, free trade, privatization and deregulation.

At the same time a management religion took hold, with Jack Welch as its patron saint. No longer would CEO’s weigh the interests of investors with customers, communities, employees and other stakeholders, everything would be optimized for shareholder value. General Electric, and then broader industry, would embark on a program of layoffs, offshoring and financial engineering in order to trim the fat and streamline their organizations.

The End Of History?

There were early signs that we were on the wrong path. Despite the layoffs that hollowed out America’s industrial base and impoverished many of its communities, productivity growth, which had been depressed since the 1970s, didn’t even budge. Poorly thought out deregulation in the banking industry led to a savings and loan crisis and a recession.

At this point, questions should have been raised, but two events in November 1989 would reinforce the prevailing wisdom. First, The fall of the Berlin Wall would end the Cold War and discredit socialism. Then Tim Berners-Lee would create the World Wide Web and usher in a new technological era of networked computing.

With markets opening across the world, American-trained economists at the IMF and the World Bank traveled the globe preaching the market discipline prescribed by the Washington Consensus, often imposing policies that would never be accepted developed markets back home. Fueled by digital technology, productivity growth in the US finally began to pick up in 1996, creating budget surpluses for the first time in decades.

Finally, it appeared that we had hit upon a model that worked. We would no longer leave ourselves to the mercy of bureaucrats at government agencies or executives at large organizations who had gotten fat and sloppy. The combination of market and technological forces would point the way for us.

The calls for deregulation increased, even if it meant increased disruption. Most notably, Glass-Steagall Act, which was designed to limit risk in the financial system, was repealed in 1999. Times were good and we had unbridled capitalism and innovation to thank for it. The Washington Consensus had been proven out, or so it seemed.

The Silicon Valley Doomsday Machine

By the year 2000, the first signs of trouble began to appear. The money rushing into Silicon Valley created a bubble which bursted and took several notable corporations with it. Massive frauds were uncovered at firms like Enron and WorldCom, which also brought down their auditor, Arthur Anderson. Calls for reform led to the Sarbanes-Oxley Act that increased standards for corporate governance.

Yet the Bush Administration concluded that the problem was too little disruption, not too much, and continued to push for less regulation. By 2005, the increase in productivity growth that began in 1996 dissipated as suddenly as it had appeared. Much like in the late 80s, the lack of oversight led to a banking crisis, except this time it wasn’t just regional savings and loans that got caught up, but the major financial center institutions left exposed.

That’s what led to the Great Recession. To stave off disaster, central banks embarked on an extremely stimulative strategy called quantitative easing. This created a superabundance of capital which, with few places to go, ended up sloshing around in Silicon Valley helping to create a new age of “unicorns,” with over 1000 startups valued at more than $1 billion.

Today, we’re seeing the same kind of scandals we saw in the early 2000’s, except the companies being exposed aren’t established firms like Enron, Worldcom and Arthur Anderson, but would-be disrupters like WeWork, Theranos and FTX. Unlike those earlier failures, there has been no reckoning. If anything, tech billionaires like Marc Andreessen and Elon Musk billionaires seem emboldened.

At the same time, there is growing evidence that hyped-up excesses are crowding out otherwise viable businesses in the real economy. When WeWork “disrupted” other workspaces it wasn’t because of any innovation, technological or otherwise, but rather because huge amounts of venture capital allowed it to undercut competitors. Silicon Valley is beginning to look less like an industry paragon and more like a doomsday machine.

Realigning Prosperity With Security

It’s been roughly 25 years since Clayton Christensen inaugurated the disruptive era and what he initially intended to describe as a special case has been implemented as a general rule. Disruption is increasingly self-referential, used as both premise and conclusion, while the status quo is assumed to be inadequate as an a priori principle.

The results, by just about any metric imaginable, have been tragic. Despite all the hype about innovation, productivity growth remains depressed. Two decades of lax antitrust enforcement have undermined competitive markets in the US. We’ve gone through the worst economic crisis since the 1930s and the worst pandemic since the 1910s.

At the same time, social mobility is declining, while anxiety and depression are rising to epidemic levels. Wages have stagnated, while the cost of healthcare and education has soared. Income inequality is at its highest level in 50 years. The average American is worse off, in almost every way, than before the cult of disruption took hold.

It doesn’t have to be this way. We can change course and invest in resilience. There have been positive moves. The infrastructure legislation and the CHIPS legislation both represent huge investments in our future, while the poorly named Inflation Reduction Act represents the largest investment in climate ever. Businesses have begun reevaluating their supply chains.

Yet the most important shift, that of mindset, has yet to come. Not everything needs to be optimized. Not every cost needs to be cut. We cannot embark on changes just for change’s sake. We need to pursue fewer initiatives that achieve greater impact and, when we feel the urge to disrupt, we need to ask, disruption in the service of what?

— Article courtesy of the Digital Tonto blog
— Image credit: Pixabay

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