Business, Law, and Innovation

March of Innovation

Lecture 1Spring 2011

Professor Adam Dell

The University of Texas School of Law

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- Innovation is ever present in our economy.

- Supportive ecosystem, culture of risk & fair incentives.

- Tools of innovation in the hands of more people than ever.

- Results of innovation are impressive.

- A lot more to come

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Big Themes:

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Science Doesn’t Sleep

• Engineers / Scientists are on an unending march to make things faster, smaller, cheaper, cleaner, simpler.

• Market conditions do not alter this paradigm.• May accelerate investment / risk capital in a new market (alternative

energies, green technologies) but they do not dictate it’s natural progress.

• Engineers (with pocket protectors) had been working the plumbing of the Internet long before you ever heard of Google and they’ll be working on improving it longer after you take Google for granted.

• Alternative energies (thin film solar, micro turbines) may get more attention when oil is $150 a barrel, but they don’t go away when it’s $50.

• Businesses are the most efficient allocators of capital (because they think in terms of ROI). They are always chasing the next pile of $s. As a consequence, you will forever see businesses endeavor to make money through innovation.

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Creative Destruction

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The notion of creative destruction is found in the writings of Friedrich Nietzsche and in Werner Sombart's Krieg und Kapitalismus (War and Capitalism) (1913, p. 207), where he wrote: "again out of destruction a new spirit of creativity arises".

The economist Joseph Schumpeter popularized and used the term to describe the process of transformation that accompanies radical innovation.

In Schumpeter's vision of capitalism, innovative entry by entrepreneurs was the force that sustained long-term economic growth, even as it destroyed the value of established companies that enjoyed some degree of monopoly power.

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Creative Destruction

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Companies that once revolutionized and dominated new industries – for example, Xerox in copiers or Polaroid in instant photography – have seen their profits fall and their dominance vanish as rivals launched improved designs or cut manufacturing costs.

Wal-Mart is a recent example of a company that has achieved a strong position in many markets, through its use of new inventory-management, marketing, and personnel-management techniques, using its resulting lower prices to compete with older or smaller companies in the offering of retail consumer products. Just as older behemoths perceived to be juggernauts by their contemporaries (e.g., Montgomery Ward, Kmart, Sears) were eventually undone by nimbler and more innovative competitors, Wal-Mart faces the same threat.

Just as the cassette tape replaced the 8-track, only to be replaced in turn by the compact disc, itself being undercut by MP3 players, the seemingly dominant Wal-Mart may well find itself an antiquated company of the past. This is the process of creative destruction.

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Creative Destruction

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In fact, successful innovation is normally a source of temporary market power, eroding the profits and position of old firms, yet ultimately succumbing to the pressure of new inventions commercialized by competing entrants. Creative destruction is a powerful economic concept because it can explain many of the dynamics of industrial change: the transition from a competitive to a monopolistic market, and back again. It has been the inspiration of endogenous growth theory and also of evolutionary economics.[2]

Creative destruction can hurt. Layoffs of workers with obsolete working skills can be one price of new innovations valued by consumers. Though a continually innovating economy generates new opportunities for workers to participate in more creative and productive enterprises (provided they can acquire the necessary skills), creative destruction can cause severe hardship in the short term, and in the long term for those who cannot acquire the skills and work experience.

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Creative Destruction

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There are numerous types of innovation-generating creative destruction in an industry:

New markets or products

New equipment

New sources of labor and raw materials

New methods of organization or management

New methods of inventory management

New methods of transportation

New methods of communication (Internet)

New methods of advertising and marketing

New financial instruments

Who Wins?

Who Looses?

Who Cares?

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Ecosystem Supportive of Innovation

• Government & Education Support• ARPANET (Thank the US Gov. for the Internet)

• You have Stanford to thank (in part) for Google

• Technology Transfer Programs (Silicon Valley / Stanford; ? / UT)

• US Patent & Trademark office – protectors of an innovator’s idea.

• Entrepreneurs, Venture Capitalists, Lawyers, Engineers• Clear understanding of the steps / process associated with turning a

technology into a viable business.

• Regional Advantage (AnnaLee Saxenian)

• Cultural Acceptance of Risk / Failure• “Regional advantage”

• Fair Incentives • Big spoils to those whose innovations change industries.

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Tools of Innovation in the Hands of All• Parallelism

• Definition: the independent development of a similar trait in related species or lineages following divergence from a common ancestor.

• Many examples (radio, nuclear bomb) of innovation which were developed roughly at the same time by different people in completely separate locations.

• We stand on the shoulders of those whose innovations came before.

• Collaboration / Open Innovation• Today we have virtually instant access to all information.

• Powerful PCs have made it possible for an individual in a single room in Katy, Tx to work on problems that the engineers at Research Park in Palo Alto are working on.

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Ex. Organized Around “Open Innovation”

• Innocentive

• Reward based problem solving.

• Deep technical problems defined by a corporation.

• Published in an open marketplace, solved globally

• “Solve any of our Challenges to win awards from $5,000 to $1,000,000. Challenges are posted by Seekers (corporations, government agencies, and nonprofit organizations) who are looking for your help with product development and other business and science problems.”

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Results

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Results

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“Technological Forecast”, in Economy & Energy (http://www.ecen.com), nº 30, fev.2002.

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More to Come…Faster

• Because innovation is now a global collaborative prospect….

• Because innovation is not limited to just those employees in your company….

• Because the sheer # of people working on science & engineering problems in much larger….

• Because the size of the market for IT & science innovations is now much larger…

• Because innovation is a solution to environmental, energy and food source issues….

Innovation will happen faster and be even more important in our economy.

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