The peanut butter Pop-Tart is not an innovation

Today’s Wall Street Journal has an article about the use, overuse, and misuse of the word “innovation” in modern business, particularly with respect to consumer products. The number of instances of S&P 500 CEOs using the word in their earnings calls has doubled since 2007. Sadly, this misuse and overuse threatens to remove all meaning from the word. Witness the example offered in the article’s title: Kellogg’s new peanut butter Pop-Tart, which Kellogg executives tout as one of the most important innovations of 2013. Peanut butter filling instead of cherry or strawberry or chocolate, an innovation? Really?

Next time your boss starts droning on about innovation, it might be helpful to stop and analyze: Is she talking about building the next iPod or the next Pop-Tart? Does “innovate” mean just “stay competitive”? And if so, where is the innovation in that? …

In this context, to innovate can often mean falling short of the word’s Latin roots (of “new creation”). It’s more modest: simply keeping pace with rivals.

They used to call it competitiveness—a word fraught with the implication that others might win. Now it has been elevated to innovation, a more regal way to describe what business has always done: Adapt.

That’s a great point, and it’s a point that Schumpeter and Austrian economists have made for over a century — there are many different ways that firms adapt to the effects of rivalry in markets, and one of them is innovation. But, you might reply, Schumpeter emphasized the role of product differentiation in lessening the effects of rivalry, by making your new product less substitutable for the existing competitor products, and isn’t a peanut butter Pop-Tart an example of product differentiation? (Technically speaking, my answer to that question is no, but that may be me being pedantic, which is what I do …)

That’s where an old post from Roger Pielke Jr. is helpful:

In recent comments I was asked about what I mean when I use the term “innovation.”  I use the term as Peter Drucker did:

Innovation is change that creates a new dimension of performance.

Roger tweeted the link to that old post in response to the WSJ peanut butter Pop-Tart article today. Does Drucker’s definition help; is it “operationalizable”? Only if you define “sell more peanut butter Pop-Tarts” as the new dimension of performance!

New Chicago mall and Schumpeterian disruptive innovation

Today a new mall is opening in Rosemont, near O’Hare Airport and the Rosemont Convention Center. The Fashion Outlets of Chicago will have a range of familiar factory outlet stores and restaurants, conveniently located near the airport and public transportation (I could even take the el there from KP Chicago HQ!).

So what? According to its developer, Arthur Weiner, this mall breaks a bunch of retail factory outlet rules that were just begging to be broken:

“The rules that this center broke were rules that needed to be broken. They were begging to be broken,” said Arthur Weiner. So, just what’s bonkers about the place? “It’s fully enclosed, two levels — never been done before. It is next to the third largest airport in the world, never been done before anywhere in the world.”

“It’s wrapped around a seven-deck, structured parking garage, never been done before,” he continued. “It is never more than 75 feet from the entrance to a shop, never been done before. You go to an outlying outlet center, you’re walking 700 yards after you park your car.”

That does sound pretty neat, and novel. And there will be baggage concierge service for the airport, and an airport shuttle. Another novel aspect is the partnership with a group called The Arts Initiative, which will install large pieces of public art from Chicago artists in the mall. Thus the space will be part mall, part gallery.

Of course, this rang my Schumpeter bell. Rules broken, new configuration, new location, new set of customer services, new arts partnership. Perennial gale of creative destruction. Bring it, baby.

The ephemeral Schumpeterian monopoly

Lynne Kiesling

The Atlantic’s Derek Thompson parses Mary Meeker’s annual state of the Internet presentation, which includes some nifty and insightful analyses of data. Here’s my favorite:

mm pres os market share

Note that this is in percentage terms, so it doesn’t show the overall increase in the number and variety of digital devices used — the number of devices using Windows OS hasn’t necessarily declined, but the growth in the past five years of mobile devices using Apple and Android OS is truly striking in terms of its effect on the WinOS overall market share.

The decade-long (1995-2005) Windows OS dominance and its subsequent decline is interesting to those of use who study the economic history of technology. To me it indicates Schumpeter’s point about the ephemeral nature of monopoly and how innovation is the process that generates the new products and platforms that compete with the existing ones.

Perennial gale of creative destruction indeed.

Schumpeterian tablet competition

Lynne Kiesling

If you want good examples of Schumpeterian competition, it doesn’t get much better than this: Amazon to take on Apple this summer with a Samsung-built tablet? The Engadget folks make

… a very reasoned argument that paints Amazon, not Samsung or the rest of the traditional consumer electronics industry, as Apple’s chief competition in the near-term tablet space. An idea that’ll be tough to argue against if Amazon — with its combined music (downloadable and streaming), video, book, and app ecosystem — can actually launch a dirt-cheap, highly-customized, 7-inch Android tablet this summer as Pete predicts.

This evolution is Schumpeterian in several ways, the most obvious of which is the process of creative destruction that disrupts equilibration by entrepreneurs creating a new product that will make some old products less valuable and ultimately obsolete. Note, interestingly, that one of the products likely to be made obsolete is Amazon’s own Kindle.

But the essential product, the tablet computer, is not actually new, which gets to the second, and in some ways more meaningful, Schumpterian aspects of this evolution: this is a good example of competition for the platform. This is not just about coming up with some new gadget that consumers might like; this is about integration of the various applications and services that might create value for consumers into an elegant platform. Given Apple’s announcement this week of iCloud and Amazon’s existing cloud services, this Amazon tablet is part of that platform competition.

Perennial gale of creative destruction, personal wireless division

Lynne Kiesling

Even if it doesn’t end up being the disruptive innovation that these articles suggest, Verizon’s MiFI personal wifi hotspot device makes my little Schumpeterian heart go pitter-pat. Released yesterday, the Verizon MiFi (device by Novatel) is a credit-card sized 3G wireless router that can provide wireless Internet connection for up to 5 devices. Battery powered, 4 hours of service when not plugged in, reviews suggest that it’s interoperable and easy to set up. Good reviews of the product are at Engadget Mobile and the New York Times.

There are two aspects to the potential commercial success of this product: the technical features of the device, and the service contract under which Verizon is willing to offer it. For now Verizon is offering it at two different capacity levels (250 MB and 5GB per month), and pricing it at somewhat more than contracts for other air card wireless services.

But for my part Derek Thompson at the Atlantic made what is the most intellectually interesting point in this new development:

It could signal the end of cell phones.

That’s a big statement, so let’s back up a second. Three weeks ago, I cited an argument that VoIP (“voice over internet protocol”) could replace cell phones because dialing over the internet is much cheaper than dialing through a national cell phone network. The problem was, if you need the Internet to make calls, you’re going rely on Cosi shops and other hotspots for service. Three weeks ago, you couldn’t live in a permanent wifi cloud. Two weeks from now, you can.

That means that you won’t need a cell phone — or at least a cell phone plan. As long as you have a device with a speaker and audio that can connect to the Internet, like an iPod Touch, you can use Skype to make all your calls because the service provider (the Internet) is always in your pocket. Verizon plans to charge $40 a month for basic service. Not a bad deal for all-you-can-eat browsing and calling over the Internet.

It’s interesting to think about whether or not Verizon’s got a long-run strategy here relating to whether or not this kind of device will make their mobile phone business obsolete. I don’t have a particular answer, but raising the question is important. One potential future path involves the growth of their MiFi contracts while their phone contracts fall, implying that the MiFi and the phone are substitutes. Another potential future path would be if their MiFi contracts grow while they sell devices for browsing and calling over the Internet; in this case their phone business could morph into a device business. And I’m sure there are other options beyond my imagination.

But here’s why I think that Verizon possibly sowing the seeds of their own creative destruction is interesting — the convergence of all different communication platforms to the Internet. Over the past 25 years we’ve been moving from an analog telephony platform based on copper wires to a combination of wires/wireless digital telephony separate from the Internet, and now we may be seeing the beginning of the convergence of our formerly separate communication platforms into an Internet-based digital platform. Verizon has been installing fiber optic cable for digital backbone and for consumer applications (such as their FIOS offerings in the mid-Atlantic). Thus I see Verizon’s long-term strategy as one based on their investment in fiber optic to create a single digital communication platform using Internet protocol, on which voice becomes just another application.

So if they are sowing the seeds of the creative destruction of their mobile phone business, I think it’s because they’ve already got another business model in their sights, in which their phone business transitions over to being another application on their fiber optic platform.

Edmund Phelps explains “knowledge problem”

Michael Giberson

Occasionally we hear from readers curious about the blog name, “knowledge problem.” Edmund Phelps explains the knowledge problem in an excellent essay that appeared in the Financial Times. (Registration may be required for; the essay is also posted in full at the FT‘s Capitalism blog.)

Joseph Schumpeter’s early theory proposed that a capitalist economy is quicker to seize sudden opportunities and thus has higher productivity, thanks to capitalist culture: the zeal of capable entrepreneurs and diligence of expert bankers. But … most growth in knowledge is not science-driven. Schumpeterian ­economics – Adam Smith plus sociology – captures very little.

Friedrich Hayek offered another view in the 1930s. Any modern economy, capitalist or state-run, is a great soup of private “know-how” dispersed among the specialised participants. No one, he said, not even a state agency, could amass all the knowledge that each participant “on the spot” inevitably acquires. The state would have no idea where to invest. Only capitalism solves this “knowledge problem”.

There is much more in the essay than this brief clip reveals. In fact, the very next paragraph provides the one of the best brief explanations of Hayek’s central insight into capitalism. In addition to a little Schumpeter and a lot of Hayek, Phelps nods to David Hume and invokes some Frank Knight on uncertainty.

The whole thing is worth reading.

(HT to Greg Ransom at Taking Hayek Seriously.)