Saturday, December 27, 2003

More on oligopolies and innovation Does oligopoly crush innovation? That's the opinion of venture capitalist and experienced innovator Lawrence Wilkinson, who is the co-founder of Global Business Network (GBN), and Chairman of Heminge &Condell (H&C), an investment and strategic advisory firm, as well as the producer of a number of film and TV ventures. He sees the post bubble world as a time when real innovation is lying low. As quoted in a Fast Company article by Harriet Rubin ("Power", December 2002), this slowdown in innovation is related to the remarkable growth in oligopolies. "We're headed to a world that's more oligopolylike, a transition from a period of robust change to a period of lock in. All over, there's a settling down, a slowing of the pace of change. Companies aren't really killing innovation -- they're rationalizing it to manage its pace. The definition of oligopolistic economics is three or so players behaving in lockstep with the marketplace. They don't necessarily collude, but they develop ways of signaling pricing and containing innovation." Creative people, he argues, no longer find a place in these tightening oligopolies or even outside in well-funded new ventures. They are marginalized, as the rationalizers are ascendant, where cost cutters, brand extenders, M&A experts are the heroes and not the innovators. The consequences of all the changes of the nineties, in computers, retailing, and medicine, are just now being digested and fully exploited, one might say, so that the system has little time for any other changes. He sees the current situation as a part of a cycle. Back in post-World War II days of big oil, big steel, etc., there was a similar lack of the creative impulse in many sectors of the economy. "Those industries fixed prices, and the pace of innovation slowed. As consumers, we didn't not have choices, but everything was very measured. Oligopolies tend to behave like monopolies: They defy innovation." He sees alternating cycles of innovation and cycle of stasis backed by oligopolies.. But more important, there are swingbacks to oligopoly from the chaos of innovation because of what he identifies as fatigue. People just get tired of change, they want safe choices, predictablity. After time they will want change again, ready for a new round of innovation. By what we've seen of the new oligopoly, Wilkinson has it partly right. There is a sense that the economy is in a period of catching up with itself, that some key segments are in a state of reconsolidating and integrating. Companies are risk-averse, and the fear of failure is strong. Rather than remake the world, many would rather just own a bigger piece of the current one. But is this part of a cycle, as Wilkinson supposes, ready to be reversed in a few years? Or have the oligopolies gotten smarter about suppressing real innovation when it threatens them or buying it out when it does not? Clearly, big companies rise and fall, and no company, however big, has an assured position in the world, not even Microsoft nor Wal-Mart. But these companies, and a number of others, are well aware of their vulnerability - and they are made aware of it every time their growth does not match high Wall Street expectations. As we've argued before, the smartest of these oligopolies, unlike the ones from the the 50's or from the turn of the century, consciously spend lots of time and effort in maintaining their position in several ways: Identifying potential disruptors and finding ways to copy, buy, or crush them Rigging the rules to favor their own interests (through laws, regulations, contracts, and government patronage) Elaborating past innovation (extending and combining them to make desirable 2nd and 3rd generation products that exploit a past breakthrough) Streamlining operations for fast adaptation and passing of risks to others (suppliers, workers) Dramatic innovation will continue to happen, generally outside the oligopolies, But the opportunities for small, innovative companies to grow into giants are getting rarer in most industries. Stumbling companies will continues to self-destruct and some small companies will grow into market dominators. But the power of oligopolies and their control over innovations will be the most powerful trend in the upcoming century. 3:26:47 PM

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