Investing, Philosophizing, triberr, Uncategorized

Externalizing value in the pursuit of profits kills innovation and the economy

Steve Denning has written a great piece in Forbes on Clayton Christensen and how business school number crunchers are killing innovation by abstracting and reducing profitability to mere accounting tricks. (See Clayton Christensen: How Pursuit of Profits Kills Innovation and the U.S. Economy.)

Clayton Christensen coined the term “disruptive innovation” – a concept we are all experiencing through the transformation of business at the hands of social technologies.

Christensen’s argument targets profitability calculations like IRR (Internal Rate of Return) and RONA (Return on Net Assets) which have been excessively relied upon to rationalize the outsourcing of manufacturing.

These calculations ultimately fail for the same reasons that we pursue unlimited economic growth at the expense of fouling our own ecological nests: externalization of key costs.

Businesses that excessively focus on profits overlook:

1. Cost of lost manufacturing knowledge, possibly forever;
2. Cost of lost ability to innovate (see #1);
3. Consequent cost of current business being lost to competitors who can make better products cheaper.

Externalization of essential values is becoming the meme of our time. It is at the root of vast ecological destruction and now significant economic decline among the wealthiest of societies.

This way of thinking cannot go on forever. The question is: is there too much water under the bridge for developed economies to turn back the tide?

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