One of the Harvard Business School Professors has thought and done work on where does growth come from in the economy? It is an very interesting question given the state of the economy and the election cycle – where promises of growth are given easily. The professor is Clayton Christensen and some of his talks are available on You Tube. There are 4 general methods which you can think about products:

1. Potential Products –  new ones to answer the question which job does it do?
2. Sustaining Products – make good products better
3. Disruptive Products – transform complicated expensive products into simple and more affordable one  (products move from very expensive to affordable by the majority of consumers)
4. Efficiency Products – same product with same customers but made less expensive or improve gross margins.

 

Disruptive                                Sustaining                              Efficiency

Jobs                               creates                                     little growth                           eliminates

Capital                         uses                                          little                                          frees

Now you begin to see what Mr. Christensen is seeing. There is a problem in the economic system. For years, there was a balance between the companies doing all three products and jobs were being created. When the cost of capital was high, it is an easy and good decision by management to focus on sustaining and efficiency. It makes the process of bring the products to market less and the Internal Rate of Returns is higher. It also frees up capital which allows for more options, sometimes the seemingly best option is do more efficiency. From the companies financial point of view, that is good – for adding more employees not good.

Linking to dividend paying stocks, while these companies should have a longer term outlook, the reality is similar to other public companies they like short term payoffs. The sustaining and efficiency products typically show results in 1 or 2 years or relatively short term investments; the disruptive process may take 5 years. The danger without the investment into disruptive products the company may not exist in the long term. In the next blog some examples will be given.

There are more questions than answers, till the next time – to raising questions.