Three Types on Innovation in Business; How Healthcare Fits into This Model

Clayton Christensen described three types of business innovations in a recent article in the NYT (see: A Capitalist’s Dilemma, Whoever Wins on Tuesday). Below is an excerpt from the article:

Executives and investors might finance three types of innovations with their capital. I’ll call the first type “empowering” innovations. These transform complicated and costly products available to a few into simpler, cheaper products available to the many.....A more recent example is cloud computing. It transformed information technology that was previously accessible only to big companies into something that even small companies could afford. Empowering innovations create jobs, because they require more and more people who can build, distribute, sell and service these products. Empowering investments also use capital — to expand capacity and to finance receivables and inventory. The second type are “sustaining” innovations. These replace old products with new models. For example, the Toyota Prius hybrid is a marvelous product....There is a zero-sum aspect to sustaining innovations: They replace yesterday’s products with today’s products and create few jobs. They keep our economy vibrant — and, in dollars, they account for the most innovation. But they have a neutral effect on economic activity and on capital. The third type are “efficiency” innovations. These reduce the cost of making and distributing existing products and services. Examples are minimills in steel and Geico in online insurance underwriting. Taken together in an industry, such innovations almost always reduce the net number of jobs, because they streamline processes. But they also preserve many of the remaining jobs — because without them entire companies and industries would disappear in competition against companies abroad that have innovated more efficiently.

Turning to the types of innovation that we can deploy in healthcare, the most common is the deployment of new technology and science which Christensen would probably categorize as empowering. For examples, we need look no further in the diagnostic world than new imaging modalities and the astonishing advances in genomics/proteomics. In terms of the cost of this type of innovation in healthcare, most new tests and procedures, unfortunately, seem to increase the cost of care.

Given the financial urgency we are facing in healthcare, we must now also look to what Christensen calls efficiency innovations that, according to him, "almost always reduce the net number of jobs, because they streamline processes." The lion's share of most healthcare delivery costs relate to labor so we can reduce costs by streamlining clinical work processes. Who is going to initiate these changes? Certainly not most healthcare executives. They generally have a business background. Their expertise lies in their ability to manage reimbursement, facilities, and personnel rather than to the optimization of clinical work processes. 

The answer to this question was provided in a recent note that referenced an article by Atul Gawande (see: The Transition to "Big Med": Need for Emphasis on Standardization and Cost). He talks about how we will need to standardize various types of medical procedures such as total hip replacement. Such standardization can only be developed by the orthopedic surgeons in the case of total hip replacement who work for the "super regional" health systems. These now standardized orthopedic operations can then be performed less expensively because some of the labor costs have been squeezed out. The "super-regionals" will then be able to compete for patient referrals on the basis of both quality and cost, prompting business from large corporations seeking to reduce the cost of care. 

Comments

[Scheerer Kovach]

Fresh ideas indeed for businessmen and to all who want to start a business. Very worth to consider in business planning and decision-making. Your post is truly helping enrich businessmen's knowledge.

[Ohl Bice]

The newer the business innovation made, the higher is the cost to be made.

[Lauritzen Montemayor]

So comprehensive and inspiring. Thanks for the link.

[spinning video]

Really impressed! Whatever are the explanation very open and very clearly the issues?

[mre]

almost always reduce the net number of jobs, because they streamline processes today.