By Professor Owen Skae, Associate Professor and Director of Rhodes 老虎机游戏_pt老虎机-平台*官网 Business School

 

The factory has two brick-making plants.

Plant 1 dates back to the mid-1990s, when the CEO founded the business, and has 117 employees. It is based on the more traditional brick-making approach, is labour-intensive, and can produce about 24-million bricks a year.

Plant 2 is very capital-intensive, with up-to-the-minute machinery, and a capacity to produce 32-million bricks per annum. It employs 104 people.

Plant 1 was losing business to Plant 2 and the shareholders duly put pressure on the CEO to close down Plant 1, as its return on assets could not compete with Plant 2. The efficiency measures for Plant 2 left Plant 1 trailing in the dust. Their idea was to duplicate Plant 2.

Conscious of the effect a shutdown of Plant 1 would have on his staff, with many jobs lost, the CEO requested that the shareholders give him six months to come up with an alternative plan. They granted him this.

His approach was to get together with all the staff from Plant 1 — including the brick-makers, sales staff, distributors and union representatives — and share the problem with them. Within a fairly short time, they came up with a solution — to make bricks for a totally different market and totally different purpose to Plant 2.

Both had been supplying the construction industry. The plan for Plant 1 was to focus on other markets, such as customised paving, because Plant 1 has the ability to make different shapes and sizes of bricks. Plant 2, albeit strikingly fast, does not have the same flexibility.

The shareholders bought into the new plan, and Plant 1 is now thriving. It will never make as much money as Plant 2, but it is making a very decent profit, no jobs have been lost, and the goodwill among the staff of Plant 1 is noticeable. They treat it as their business that they saved.

This simple example reminded me of Harvard Business School Professor Clayton Christensen’s words. He says that common thought processes in business are: “We need a new product that we can sell for higher prices and greater profits”, or “We need a new production plant that produces our product faster so that we can sell more product for greater profits.”

However, he has been warning for decades that businesses cannot rely on profits and return on assets as the sole measure of success. It creates an environment in which people are incentivised to think in the short term, which can lead to poor decisions, job losses, and profit losses.

As one of the most influential business theorists in the past 50 years, Christensen emphasises this repeatedly, and he has witnessed many a disaster including the 2008 financial crash, when short-term thinking led to extremely poor decisions and widespread misery. Relying solely on profits and return on assets, Christensen explains, is not necessarily conducive to innovation and growth. His preferred approach is one of market-creating innovation, with job creation and job sustainability coming from market innovation.

The brick factory CEO applied Christensen’s approach. Some companies would consider this the harder road to go down, because while machines have higher-level fixed costs, they don’t have human problems, and they don’t strike.

However, SA needs jobs and market innovation for real growth. It is easier to retrench people and argue for greater efficiency, but where will this lead our society: to further unemployment, deeper poverty, more unrest, and less hope?

Stop and think for a moment. Assuming Plant 1 had been closed down, gross domestic product would have gone up. But with the loss of 100 jobs or more, social progress would have gone down. The outcome is greater inequality.

This is a CEO with vision and SA needs more like this.

The thing about market-creating innovation is that it is not always about developing new products or new approaches; it is about using what already exists innovatively.

We have plenty of sunlight, for example, and not just any old sunlight — we have precisely the kind of sunlight that is ideal for solar energy. Yet what does the government do? It decides to invest in nuclear plants that cost an unbelievable amount and will not produce energy for many years.

Solar energy can produce electricity very quickly. It can also create plenty of jobs — a wide range of small, medium and large solar manufacturing and technology businesses can start up.

Why is it that a country such as SA with abundant natural resources is unable to apply market-creating innovation using the natural resources for the greater benefit of greater numbers of citizens?

We need to stop making the wrong choices and start thinking about what we have and what we do well.

We also need to pursue another important form of market-creating innovation: the art of the lean start-up. SA has significant leaders in the lean start-up field, such as Paul Smith and Justin Coetsee, co-founders of the Ignitor Startup Acceleration model. Research conducted by the Startup Genome project showed that companies that apply lean start-up have been shown to grow 20 times faster than those that don’t — and remain sustainable if they do it right.

First published in Business Day on Wednesday, 2 March 2016.