Innovation is a Moral Good

November 20, 2011 – 9:54 am

Pondering the New Zealand fishing industry, I had an insight today. Forgive me if it’s old news to you.

You have three options to make more money:

  1. Lower costs.
  2. Sell more of the same stuff.
  3. Make new types of stuff to sell.

In quota-limited systems such as fishing, you can’t catch more fish because you don’t have the quota to do so. So option 2 is out. All you can do to make more money is lower costs or find something new to sell.

These are FUNDAMENTALLY DIFFERENT propositions.

If you lower costs, you don’t increase the overall size of the market. If there’s $5B in sales, you can make more of that $5B by lowering your costs. This isn’t entirely true: elasticity of demand might increase revenue because lowering costs means you can lower the price, so more people may be able to afford it, and perhaps this new number * new price means more revenue than old number * old price.

Competing by lowering costs starts a race to the bottom on prices, turning your product into a commodity where different manufacturers compete to sell it for the lowest price. This fundamentally threatens the overall sustainability of the product because down that path lies short-sighted cost-cutting, offshoring of labour and environmental hazards, and all sorts of not just morally dubious but also legally and long-term-financially dubious actions.

If you innovate to improve quality or produce entirely new products, then you can increase the market size. So you could take fish sales from $5B to $7B without triggering that race to the bottom. You didn’t have to take more fish from the sea, but instead sold the fish you did catch for more money. This route encompasses higher-value uses (sushi vs fish food) and out-of-the-box thinking like fish oil supplements.

  1. One Response to “Innovation is a Moral Good”

  2. I think if you swap out “NZ Dairy Industry” for fishing and “environmental limits to growth” for quota, your points are still entirely valid (or apply to any of our primary industries in all probability).

    The drive for increased returns through incremental increases in production in our primary industries doesn’t encourage or reward serious innovation or game-changing developments.

    If we could multiply our margin on dairy by exporting finished products like infant formula vs milk powder we could either, a) make 10x as much profit, or b) make the same profit from a tenth of the cow population, leaving ample landscape in good shape.

    But these things always seem simpler when you haven’t got a vested interest in maintaining the status quo.

    By FarmGeek on Dec 6, 2011

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