Efficiency kills innovation. Efficient markets, efficient companies, and efficient employees are good for many things, but not for innovation. Efficiency is created by scaling, standardizing, and routinizing labor. While each of these efforts in itself can be an innovation effort, the relentless focus on efficiency will in the end kill society’s, organizations, and employee’s ability to innovate.
Efficient markets kill innovation
Innovation might create greater efficiency. However, efficiency itself makes innovation less likely by causing a concentration of profit and power for one or two companies inside each industry.
Geoffrey James gives as an example the high tech industry. Google, Amazon, and Facebook completely dominate their respective markets to the point that no amount of innovation is likely to disrupt or displace them. Any startup that threatens their dominance is acquired and folded into the monopoly.
The Late Clayton Christensen also foresaw this problem. He argued that there are three types of innovating. Empowering innovations, which transform expensive products into affordable ones, sustaining innovations, which replace older models with new ones, and efficiency innovations, which reduce or simplify the delivery of something.
As Christensen said: "In our traditional economic cycles, all three kinds of innovations occurred within a natural and repeatable sequence. Our current economy, however, has gone off of the rails in large part because we are focused almost entirely on efficiency innovations—on streamlining and wringing bottom-line savings and additional profits out of our existing organizations.
...We are focused on the wrong metrics. Our universities are training entrepreneurs—and investors — to focus on fast and efficient return on capital investment. Efficiency innovations provide return on investment in 12-18 months. Empowering innovations take 5-10 years to yield a return.We have ample capital — oceans of capital — that is being reinvested into efficiency innovation. As long as this continues to happen, we will continue to experience the tremendous chasm between capital investment and the creation of meaningful numbers of new jobs and especially of highly specialized jobs."
In other words, our businesses and economy are focused entirely on the short term. That hurts us in the long run because the lack of jobs keeps the economy weak, and the lack of real innovation keeps us from making leaps forward.
Efficiency kills innovation in firms
What is happening in markets, is also happening in firms.
For a long time, focusing on efficiency served firms well. It was the engine behind the industrial age, and as we have been shifting to the post-industrial one, it has helped us get the most out of any manufacturing facility.
But with top-line growth becoming paramount for most businesses, it is time to acknowledge that efficiency alone is producing diminishing returns. In management research, the ability to be efficient (exploit your current assets) and to remain effective (explore and build new assets) is called ambidexterity.
Drawing on longitudinal data of the Belgian Community Innovation Survey and the bel-first database, Geerts, Blindenbach-Driessen, and Gemmel examined 532 firms. Their results suggest that you can explore and exploit simultaneously and sequentially. Both have a positive effect on firm performance growth. So a firm does not necessarily need to do all both at the same time. It can also alternate between periods in which it focuses on efficiency, with a period in which it focuses on innovation. The most important takeaway from this research is that a firm needs to be able to do both, be efficient and innovate.
Letting go of a 100% focus on efficiency
Letting go of your focus on efficiency can be scary, especially in a very uncertain time like now during the pandemic.
However, by taking a moment to reflect on the limitations of efficiency, you may find a window for innovation.
As Tim Leberecht wrote:
- Efficiency is machine’s turf. Simply put, machines are unbeatable when it comes to efficiency. Conversely, we humans must become better at everything not centered on efficiency; in fact, we must become masters at inefficiency. It is our one remaining competitive advantage.
- Efficiency kills innovation. Leaders often demand actionable outcomes. They ask, “What problem is this going to solve?” By trying to be efficient in the innovation efforts, you narrow the space for exploration, for wandering, and discovery. There is no innovation without at least some ‘waste’. That is, if you are too afraid of exploring dead end, you will only go for me-too innovations that result in incremental changes at best.
- Efficiency hinders learning. The focus on actionable insights and generating short-term returns prevent creating the learning circumstances that yield profound insights that can truly transform us (and the systems we operate in).
- Efficiency hurts customer and employer care. Online retailer Zappos famously rewards its customer service reps for spending more and not less time with customers–at their discretion.
There’s been a lot of discussion lately about the re-humanization of work, that is, putting the human at the center of all company operations, as customers and employees. If that is true, though, efficiency can’t be the guard rail.
Showing our humanity means exercising discretion. Whether in hospitals, retail stores, or enterprise sales, companies whose care for people is more than just lip service must move beyond efficiency.
So next time when you are pressing the organization to become more efficient, don’t forget to also press your team to be more innovative. Don't let your focus on efficiency kill your ability to innovate.