Innovation saturation
Encyclopedia
Innovation Saturation was introduced by American economist and historian Tom Osenton
in his 2004 book The Death of Demand: Finding Growth in a Saturated Global Economy (Financial Times
Prentice Hall
). Innovation Saturation is a business cycle theory that posits that every company experiences two major growth trends during its life: an uptrend and a downtrend. Innovation Saturation represents the point at which growth rates stop increasing and start decreasing.
applies to every product, in every corporation, in every industry, in every sector, in every economy in the world, and states that:
Every product or service has its own natural consumption level. That is to say, there are relative limits to the number of consumers that will engage in an ongoing relationship with a product or service. This is commonly known as The Theory of Natural Limits
. Because there are natural consumption limits, every product or service experiences just two major growth trends during its life cycle:
The point at which the rate of revenue/unit growth shifts from an uptrend to a downtrend is known as Innovation Saturation and is reached when:
All companies are essentially the sum of its portfolio of products and/or services (General Motors
)- all of which occupy an identifable place on the uptrend or downtrend in its own unique life cycle. If a company is made up primarily of products/services that are on the downtrend side of growth, then the rolled-up company will itself be on the downtrend side of growth (Kraft Foods
). According to Osenton, this explains why the U.S. economy has been growing at ever-decreasing rates since the 1960s - with Real GDP growing at an average of 4.44% in the 1960s, 3.26% in the 1970s, 3.07% in the 1980s, 3.11% in the 1990s, and 1.90% for the first decade of the new century. The slight up-tick in the 1990s can be attributed to an epidemic of retail expansion in the U.S. - when, for example, the number of Wal-Mart
stores grew by 162%, Home Depot stores by 644%, and Starbucks
stores by over 4000%.
According to Osenton, we have pushed for and mostly achieved the sale of a record number of products, services and line extensions, to a record number of customers, who consume record quantities, in a record number of countries around the world. In many ways, we are victims of our own success. The Law of large numbers
suggests that the bigger a company grows, the harder it is to grow further. The world’s managers did such a good job of developing and distributing new products and new product categories over the last half century that future growth will be much harder to generate over the next half century and will come at much slower rates, even with expansion into significant markets such as China
and India
.
Osenton’s research confirmed this to be a matter of statistical fact, as a result of a major study conducted at the University of New Hampshire
in 2005 based on the post World War II
revenue growth rates of all the S&P 500 corporations. The study focused on rates of revenue growth rather than actual revenue growth, calculating a corporation’s average rate of revenue growth on a decade-by-decade basis from 1950 to present. By measuring the rate of growth in 10-year increments, Osenton was able to identify growth trends for each corporation, and the results revealed a surprisingly consistent pattern.
Every corporation in the study experienced two major growth trends in its overall business life cycle: an uptrend of ever-increasing rates of growth beginning at launch and lasting about 20 to 25 years, followed by a downtrend of ever-decreasing rates of growth. While almost every company in the study continues to grow today, growth comes at slower and slower rates. And cost-reductions – especially for publicly-traded corporations – play an increasingly significant role in growing earnings during this life stage. Interestingly, it wasn’t until the early 1980s that the word re-engineering even appeared in corporate vocabulary. The reason: post-WWII corporations went through an infrastructure construction in the 1950s, 1960s and 1970s. When revenue rates began to slow after the mid-1970s, earnings increases could no longer be fueled solely revenue growth as consistent double-digit revenue growth waned. Instead, cost-reductions grew in importance in order to deliver a steady flow of earnings increases - effectively deconstructing the infrastructure that had been built up in the 1950s, 1960s and 1970s.
Remarkably, even with the aggressive development of new products and line extensions, expanded domestic and international distribution, and even wholesale revenue growth through Mergers & Acquisitions activities in the 1980s, 1990s, and 2000s, P&G’s rate of revenue growth continued to decline during the period. This pattern was consistent with every corporation in the study and led to the development of the business cycle
theory known as Innovation Saturation.
While many point to the fact that innovation has always created new categories of products and services, it is important to note that unless the net result of the introduction of new categories is accretive to an economy, sector or industry, then it adds nothing to total growth. Joseph Schumpeter
's theory of Creative destruction
suggests that creative entrepreneurs often introduce technology or processes that largely displace other existing innovations that may have even dominated a market previously (the buggy whip). Polaroid
, Xerox
, and the Video Cassette Recorder (VCR) were all examples of discontinuous innovations - fully new to the market at the time of introduction but that were ultimately replaced by newer and even better more efficient and more effective technologies.
The implications of innovation saturation on a product (Cheese Singles) or a collection of products that form a corporation (Kraft Foods
), or a collection of corporations that form an industry (Consumer Packaged Goods) or a collection of industries that form a sector (Consumer Staples) or a collection of sectors that form an economy - is clear. Unless new innovation delivers accretive consumption, and/or an accretive appreciation in price, then the U.S. economy will likely grow at about the rate of population growth over the near term - approximately one percent.
While P & G's revenue growth continues to grow in actual terms today, it does so at an ever-decreasing rate after reaching Innovation Saturation sometime in the mid-1970s after the baby-Boom. After reaching Innovation Saturation, a company's revenue and cost focus must shift in order to deliver expected earnings increases, usually resulting in an ordered progression of new initiatives to combat maturing product lines.
On the revenue-expansion side, the progression might include:
On the cost-reduction side, the progression might concurrently include:
Home-ownership Rates
Another example of Innovation Saturation helps to explain quite clearly the underlying reasons behind the recent sub-prime mortgage debacle in the United States. The following chart shows the average home-ownership rate in the U.S. for each of the last five decades back to the 1960s. The home-ownership rate is defined as the percentage ratio of owner-occupied dwelling units to total occupied dwelling units in a particular area.
Notice that the home-ownership rate was essentially unchanged for four decades - from the 1960s through the 1990s - at around 64 percent. But in the early 2000s, home-ownership rates experienced an unusually high spike of five percentage points at its peak - an event previously unseen in the prior four decades. Driven by the desire to increase home-ownership in the U.S., the U.S. government required mortgage lenders to sell to poorer and poorer consumers, in order to artificially increase the universe of potential homeowners while lenders turned a blind eye to the wholesale slippage in lending standards. The hard lesson learned here: the artificial inflation of a universe of customers beyond natural levels usually results in a return to natural levels after a costly, wasteful and distracting pursuit.
REAL GDP GROWTH IN THE UNITED STATES
Real Gross Domestic Product
(GDP) growth in the United States peaked in 1960s with an average of 4.44 percent for the decade. With the exception of a minor uptick in the 1990s, Real GDP growth in the U.S. has been in decline ever since - evidence of the maturing nature of an economy whose greatest years of growth are well behind it.
FACEBOOK
Perhaps the fastest company to reach Innovation Saturation in history is Facebook. Launched in 2004, it quickly reached one million active users and from 2005 through 2009 grew at 450.0%, 118.2%, 316.7%, 100.0%, and 250.0% respectively. However, in 2010 the juggernaut hit a wall growing at 42.9% to 500,000,000 active users and announced that it reached 750,000,000 by mid-2011 - a 50 percent increase over 2010. Such rapid acquisition leaves little room for future growth of active users - especially considering that the vast majority of the world's population has little or no access to computers. So from a user standpoint, Facebook
has already experienced its greatest period of growth. It's hard to predict the implications of reaching Innovation Saturation in just five years - especially for a company that is expected to produce the largest Initial Public Offering (IPO) in U.S. history.
The new metrics of success for Facebook
will soon shift to their ability to monetize their 750,000,000 active users. Adding new features for existing users is interesting but will fall well short of revenue-generation expectations once this company goes public. How this company bridges the gap from signing up users to creating revenue streams beyond online advertising is its next and ultimate challenge. How it fares in this regard is critical to its commercial success. The jury is still out as to how they will navigate - what is for them uncharted waters - and whether or not their current CEO Mark Zuckerberg
is capable of steering that boat.
Tom Osenton
Thomas George "Tom" Osenton is an American economist, publisher, educator and author. Osenton spent a quarter century in media including stints in television and consumer magazines...
in his 2004 book The Death of Demand: Finding Growth in a Saturated Global Economy (Financial Times
Financial Times
The Financial Times is an international business newspaper. It is a morning daily newspaper published in London and printed in 24 cities around the world. Its primary rival is the Wall Street Journal, published in New York City....
Prentice Hall
Prentice Hall
Prentice Hall is a major educational publisher. It is an imprint of Pearson Education, Inc., based in Upper Saddle River, New Jersey, USA. Prentice Hall publishes print and digital content for the 6-12 and higher-education market. Prentice Hall distributes its technical titles through the Safari...
). Innovation Saturation is a business cycle theory that posits that every company experiences two major growth trends during its life: an uptrend and a downtrend. Innovation Saturation represents the point at which growth rates stop increasing and start decreasing.
The Law of Innovation Saturation
According to Osenton, the law of Innovation saturationInnovation saturation
Innovation Saturation was introduced by American economist and historian Tom Osenton in his 2004 book The Death of Demand: Finding Growth in a Saturated Global Economy . Innovation Saturation is a business cycle theory that posits that every company experiences two major growth trends during its...
applies to every product, in every corporation, in every industry, in every sector, in every economy in the world, and states that:
Every product or service has its own natural consumption level. That is to say, there are relative limits to the number of consumers that will engage in an ongoing relationship with a product or service. This is commonly known as The Theory of Natural Limits
The Theory of Natural Limits
The Theory of Natural limits was introduced by American economist and author Tom Osenton is his 2004 book The Death of Demand: Finding Growth in a Saturated Global Economy and states that every product or service has a natural consumption level that is determined after a number of years of sales...
. Because there are natural consumption limits, every product or service experiences just two major growth trends during its life cycle:
- An Uptrend - A period (usually about 20 to 25 years, but many more decades for older companies such as P&G) during which the rate of revenue or unit growth is ever-increasing; and
- A Downtrend - A period during which the rate of revenue or unit growth is ever-decreasing (this can be decades).
The point at which the rate of revenue/unit growth shifts from an uptrend to a downtrend is known as Innovation Saturation and is reached when:
- The relative universe of customers for a product/company has been essentially established reaching a natural limit to consumption levels within a particular category with net increases roughly equaling the rate of population growth; and
- The relative market shareMarket shareMarket share is the percentage of a market accounted for by a specific entity. In a survey of nearly 200 senior marketing managers, 67 percent responded that they found the "dollar market share" metric very useful, while 61% found "unit market share" very useful.Marketers need to be able to...
levels have been established. Typically when competing corporations spend billions trying to muscle a fraction of a market share point from the competition and this expensive battle can last for decades (CokeCoca-ColaCoca-Cola is a carbonated soft drink sold in stores, restaurants, and vending machines in more than 200 countries. It is produced by The Coca-Cola Company of Atlanta, Georgia, and is often referred to simply as Coke...
vs. PepsiPepsiPepsi is a carbonated soft drink that is produced and manufactured by PepsiCo...
).
- Once the downtrend begins, it cannot be reversed. While actual revenue/unit growth continues, it does so at an ever-decreasing rate. Natural or organic revenue/unit growth is usually supplemented with other ancillary growth efforts such as line extensions, other new products, expanded distribution (domestically and internationally), and finally Mergers & Acquisitions. These efforts can temporarily slow the downtrend in the rate of growth, but will not reverse it. (General ElectricGeneral ElectricGeneral Electric Company , or GE, is an American multinational conglomerate corporation incorporated in Schenectady, New York and headquartered in Fairfield, Connecticut, United States...
in the 1990s)
- As the effectiveness of revenue as an earnings driver begins to diminish and as the downtrend continues, the dependence on cost-reductions increases as the primary earnings driver. In order to deliver earnings increases, cost-reductions must continue and may even need to be accelerated. The first re-engineering efforts of the 1980s appeared as hundreds of burgeoning post-WWII corporations reached Innovation Saturation in the mid to late 1970s. First viewed as a temporary event, re-engineering – or downsizing, rightsizing, productivity gains, off-shoring and more recently aggressive use of unit-pricing tactics that effectively deliver less product for the same price Dial soap, Hershey'sHershey'sHershey's may refer to:* Hershey's, a nickname for The Hershey Company* Hershey's Ice Cream produced by Hershey Creamery Company* Hershey's Chocolate World, a theme-park/visitor-center facility...
chocolate – have become a permanent part of the business landscape.
All companies are essentially the sum of its portfolio of products and/or services (General Motors
General Motors
General Motors Company , commonly known as GM, formerly incorporated as General Motors Corporation, is an American multinational automotive corporation headquartered in Detroit, Michigan and the world's second-largest automaker in 2010...
)- all of which occupy an identifable place on the uptrend or downtrend in its own unique life cycle. If a company is made up primarily of products/services that are on the downtrend side of growth, then the rolled-up company will itself be on the downtrend side of growth (Kraft Foods
Kraft Foods
Kraft Foods Inc. is an American confectionery, food and beverage conglomerate. It markets many brands in more than 170 countries. 12 of its brands annually earn more than $1 billion worldwide: Cadbury, Jacobs, Kraft, LU, Maxwell House, Milka, Nabisco, Oscar Mayer, Philadelphia, Trident, Tang...
). According to Osenton, this explains why the U.S. economy has been growing at ever-decreasing rates since the 1960s - with Real GDP growing at an average of 4.44% in the 1960s, 3.26% in the 1970s, 3.07% in the 1980s, 3.11% in the 1990s, and 1.90% for the first decade of the new century. The slight up-tick in the 1990s can be attributed to an epidemic of retail expansion in the U.S. - when, for example, the number of Wal-Mart
Wal-Mart
Wal-Mart Stores, Inc. , branded as Walmart since 2008 and Wal-Mart before then, is an American public multinational corporation that runs chains of large discount department stores and warehouse stores. The company is the world's 18th largest public corporation, according to the Forbes Global 2000...
stores grew by 162%, Home Depot stores by 644%, and Starbucks
Starbucks
Starbucks Corporation is an international coffee and coffeehouse chain based in Seattle, Washington. Starbucks is the largest coffeehouse company in the world, with 17,009 stores in 55 countries, including over 11,000 in the United States, over 1,000 in Canada, over 700 in the United Kingdom, and...
stores by over 4000%.
According to Osenton, we have pushed for and mostly achieved the sale of a record number of products, services and line extensions, to a record number of customers, who consume record quantities, in a record number of countries around the world. In many ways, we are victims of our own success. The Law of large numbers
Law of large numbers
In probability theory, the law of large numbers is a theorem that describes the result of performing the same experiment a large number of times...
suggests that the bigger a company grows, the harder it is to grow further. The world’s managers did such a good job of developing and distributing new products and new product categories over the last half century that future growth will be much harder to generate over the next half century and will come at much slower rates, even with expansion into significant markets such as China
China
Chinese civilization may refer to:* China for more general discussion of the country.* Chinese culture* Greater China, the transnational community of ethnic Chinese.* History of China* Sinosphere, the area historically affected by Chinese culture...
and India
India
India , officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country with over 1.2 billion people, and the most populous democracy in the world...
.
Osenton’s research confirmed this to be a matter of statistical fact, as a result of a major study conducted at the University of New Hampshire
University of New Hampshire
The University of New Hampshire is a public university in the University System of New Hampshire , United States. The main campus is in Durham, New Hampshire. An additional campus is located in Manchester. With over 15,000 students, UNH is the largest university in New Hampshire. The university is...
in 2005 based on the post World War II
World War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
revenue growth rates of all the S&P 500 corporations. The study focused on rates of revenue growth rather than actual revenue growth, calculating a corporation’s average rate of revenue growth on a decade-by-decade basis from 1950 to present. By measuring the rate of growth in 10-year increments, Osenton was able to identify growth trends for each corporation, and the results revealed a surprisingly consistent pattern.
Every corporation in the study experienced two major growth trends in its overall business life cycle: an uptrend of ever-increasing rates of growth beginning at launch and lasting about 20 to 25 years, followed by a downtrend of ever-decreasing rates of growth. While almost every company in the study continues to grow today, growth comes at slower and slower rates. And cost-reductions – especially for publicly-traded corporations – play an increasingly significant role in growing earnings during this life stage. Interestingly, it wasn’t until the early 1980s that the word re-engineering even appeared in corporate vocabulary. The reason: post-WWII corporations went through an infrastructure construction in the 1950s, 1960s and 1970s. When revenue rates began to slow after the mid-1970s, earnings increases could no longer be fueled solely revenue growth as consistent double-digit revenue growth waned. Instead, cost-reductions grew in importance in order to deliver a steady flow of earnings increases - effectively deconstructing the infrastructure that had been built up in the 1950s, 1960s and 1970s.
Remarkably, even with the aggressive development of new products and line extensions, expanded domestic and international distribution, and even wholesale revenue growth through Mergers & Acquisitions activities in the 1980s, 1990s, and 2000s, P&G’s rate of revenue growth continued to decline during the period. This pattern was consistent with every corporation in the study and led to the development of the business cycle
Business cycle
The term business cycle refers to economy-wide fluctuations in production or economic activity over several months or years...
theory known as Innovation Saturation.
While many point to the fact that innovation has always created new categories of products and services, it is important to note that unless the net result of the introduction of new categories is accretive to an economy, sector or industry, then it adds nothing to total growth. Joseph Schumpeter
Joseph Schumpeter
Joseph Alois Schumpeter was an Austrian-Hungarian-American economist and political scientist. He popularized the term "creative destruction" in economics.-Life:...
's theory of Creative destruction
Creative destruction
Creative destruction is a term originally derived from Marxist economic theory which refers to the linked processes of the accumulation and annihilation of wealth under capitalism. These processes were first described in The Communist Manifesto and were expanded in Marx's Grundrisse and "Volume...
suggests that creative entrepreneurs often introduce technology or processes that largely displace other existing innovations that may have even dominated a market previously (the buggy whip). Polaroid
Polaroid Corporation
Polaroid Corporation is an American-based international consumer electronics and eyewear company, originally founded in 1937 by Edwin H. Land. It is most famous for its instant film cameras, which reached the market in 1948, and continued to be the company's flagship product line until the February...
, Xerox
Xerox
Xerox Corporation is an American multinational document management corporation that produced and sells a range of color and black-and-white printers, multifunction systems, photo copiers, digital production printing presses, and related consulting services and supplies...
, and the Video Cassette Recorder (VCR) were all examples of discontinuous innovations - fully new to the market at the time of introduction but that were ultimately replaced by newer and even better more efficient and more effective technologies.
The implications of innovation saturation on a product (Cheese Singles) or a collection of products that form a corporation (Kraft Foods
Kraft Foods
Kraft Foods Inc. is an American confectionery, food and beverage conglomerate. It markets many brands in more than 170 countries. 12 of its brands annually earn more than $1 billion worldwide: Cadbury, Jacobs, Kraft, LU, Maxwell House, Milka, Nabisco, Oscar Mayer, Philadelphia, Trident, Tang...
), or a collection of corporations that form an industry (Consumer Packaged Goods) or a collection of industries that form a sector (Consumer Staples) or a collection of sectors that form an economy - is clear. Unless new innovation delivers accretive consumption, and/or an accretive appreciation in price, then the U.S. economy will likely grow at about the rate of population growth over the near term - approximately one percent.
Examples of Innovation Saturation
More often than not we are issued and consume revenue growth data in actual terms - that is, actual net sales for a given quarter or year. In most cases, when actual revenue data is charted, it will appear as an ever-increasing line, accurately reflecting the fact that net revenue has increased from one year to the next as shown in the example here. However, when the same revenue data is plotted based on its rate of growth over time a much different trend line will often appear.While P & G's revenue growth continues to grow in actual terms today, it does so at an ever-decreasing rate after reaching Innovation Saturation sometime in the mid-1970s after the baby-Boom. After reaching Innovation Saturation, a company's revenue and cost focus must shift in order to deliver expected earnings increases, usually resulting in an ordered progression of new initiatives to combat maturing product lines.
On the revenue-expansion side, the progression might include:
- Product line-extensions - Crest Extra Whitening with Tartar Protection
- Domestic and global distribution expansion - McDonald's, Wal-Mart, and Starbuck's retail expansion in the 1990s
- Price-reductions, discounts in order to increase volume - the auto industry's Employee Discount Programs
- Unit-pricing strategies - a smaller bar of soap or bag of candy at a higher unit price
- Mergers & Acquisitions - the wholesale acquisition of sales through the purchase of another company
On the cost-reduction side, the progression might concurrently include:
- Re-engineering - the systematic reduction of unnecessary tasks introduced in the 1980s
- Downsizing - the wholesale reduction in staff through layoffs
- Reduction in marketing and Research & Development investments - cuts in conventional development efforts
- Reduction in product quality - less milk in the cheese
- Reduction in wages & benefits - frozen & cut wages, reduction in health care coverage, lost pensions
- Reduction in tax liability - negotiating lower taxes with state and federal governments
- Reduction in the shareholder dividend - reduce the cost of quarterly dividend payments
Home-ownership Rates
Another example of Innovation Saturation helps to explain quite clearly the underlying reasons behind the recent sub-prime mortgage debacle in the United States. The following chart shows the average home-ownership rate in the U.S. for each of the last five decades back to the 1960s. The home-ownership rate is defined as the percentage ratio of owner-occupied dwelling units to total occupied dwelling units in a particular area.
| DECADE | RATE |
|---|---|
| 1960s | 63.7% |
| 1970s | 64.6% |
| 1980s | 64.4% |
| 1990s | 64.9% |
| 2000s | 68.1% |
Notice that the home-ownership rate was essentially unchanged for four decades - from the 1960s through the 1990s - at around 64 percent. But in the early 2000s, home-ownership rates experienced an unusually high spike of five percentage points at its peak - an event previously unseen in the prior four decades. Driven by the desire to increase home-ownership in the U.S., the U.S. government required mortgage lenders to sell to poorer and poorer consumers, in order to artificially increase the universe of potential homeowners while lenders turned a blind eye to the wholesale slippage in lending standards. The hard lesson learned here: the artificial inflation of a universe of customers beyond natural levels usually results in a return to natural levels after a costly, wasteful and distracting pursuit.
REAL GDP GROWTH IN THE UNITED STATES
Real Gross Domestic Product
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
(GDP) growth in the United States peaked in 1960s with an average of 4.44 percent for the decade. With the exception of a minor uptick in the 1990s, Real GDP growth in the U.S. has been in decline ever since - evidence of the maturing nature of an economy whose greatest years of growth are well behind it.
| DECADE | AVE GROWTH RATE |
|---|---|
| 1950s | 4.17% |
| 1960s | 4.44% |
| 1970s | 3.26% |
| 1980s | 3.05% |
| 1990s | 3.20% |
| 2000s | 1.82% |
Perhaps the fastest company to reach Innovation Saturation in history is Facebook. Launched in 2004, it quickly reached one million active users and from 2005 through 2009 grew at 450.0%, 118.2%, 316.7%, 100.0%, and 250.0% respectively. However, in 2010 the juggernaut hit a wall growing at 42.9% to 500,000,000 active users and announced that it reached 750,000,000 by mid-2011 - a 50 percent increase over 2010. Such rapid acquisition leaves little room for future growth of active users - especially considering that the vast majority of the world's population has little or no access to computers. So from a user standpoint, Facebook
Facebook
Facebook is a social networking service and website launched in February 2004, operated and privately owned by Facebook, Inc. , Facebook has more than 800 million active users. Users must register before using the site, after which they may create a personal profile, add other users as...
has already experienced its greatest period of growth. It's hard to predict the implications of reaching Innovation Saturation in just five years - especially for a company that is expected to produce the largest Initial Public Offering (IPO) in U.S. history.
The new metrics of success for Facebook
Facebook
Facebook is a social networking service and website launched in February 2004, operated and privately owned by Facebook, Inc. , Facebook has more than 800 million active users. Users must register before using the site, after which they may create a personal profile, add other users as...
will soon shift to their ability to monetize their 750,000,000 active users. Adding new features for existing users is interesting but will fall well short of revenue-generation expectations once this company goes public. How this company bridges the gap from signing up users to creating revenue streams beyond online advertising is its next and ultimate challenge. How it fares in this regard is critical to its commercial success. The jury is still out as to how they will navigate - what is for them uncharted waters - and whether or not their current CEO Mark Zuckerberg
Mark Zuckerberg
Mark Elliot Zuckerberg is an American computer programmer and Internet entrepreneur. He is best known for co-creating the social networking site Facebook, of which he is chief executive and president...
is capable of steering that boat.