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.
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According to Osenton, the law of Innovation saturation 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.
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:
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.
| 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 (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 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.