How Market Creating Innovations made America great

Anand Laishram *

Last week we took a look at the importance of vertical integration in the context of Market Creating Innovations. This week we will take a look at how Market Creating Innovations created prosperity in the countries that are considered developed today.

In countries like the United States, Japan and South Korea, which rank among the most advanced in the world, investing in Market Creating Innovations had helped create the prosperity they are enjoying today. It was the prosperity created by entrepreneurs who developed Market Creating Innovations, that helped usher in developments in the political & legal dimensions as well.

Today we may look at these countries and think that their superior "systems" helped create their wealth and that if we get the "system" right, we can also achieve similar levels of economic development. We may see their rankings on Transparency International's Corruption Perception Index and surmise that it's their low levels of corruption that allows them to be prosperous.

But that's not how it played out historically. Let's look at the example of the United States first. The United States of America of the 19th Century would be unrecognizable to today's observers. It was beset with rampant corruption. People got civil service jobs because of their connections and not merit.

Average life expectancy was a meagre 45 years, low even for that time. Infant mortality rate was 200 per thousand deaths! The average person spent 52% of their income on food. People had to walk very long distances to collect water. The road network was non-existent.

In short, it was nothing like the superpower we know of today. The murder rate was terribly high. Votes were purchased with cash.
(America was already a democracy, albeit a poorly functioning one. It was after America became economically prosperous that their political systems also improved.)

America began its march towards prosperity starting in the 20th Century, thanks to the efforts of some intrepid entrepreneurs and innovators.

We have already come across the example of Henry Ford & his Model T. Henry Ford democratized cars for the American public, allowing them to move from Point A to Point B easily and quickly. Before cars, the public had to rely on horses and horse carriages, which came with a lot of limitations.

Although cars had already been developed, they were very expensive and were only used by the rich elite as status symbols.

Henry Ford introduced the revolutionary Model T, which was considerably less expensive than all other cars available at the time. The general public began to buy the Model T in huge numbers, as it was a massive improvement as a means of transport.

This also created enormous opportunities for other industries as well. New industries also came into being. A huge number of jobs were created. The American way of life changed as a result of the Ford Model T.

Another important entrepreneur who helped America achieve prosperity was Isaac Singer. Isaac Singer introduced a simpler, less expensive and more reliable version of the sewing machine. His sewing machine allowed even an unskilled person to produce nine hundred stitches a minute, which brought down the time it took to stitch a shirt from fourteen hours, down to just one.

This tremendous leap in efficiency, as well as affordability and ease of use helped usher in a huge boom in the clothing industry, as it now became easier and more feasible to produce clothes on a large scale and at lower costs. Although sewing machines already existed, Singer's mechanical improvements/product innovation made them affordable and usable by the general public.

But equally important to Singer's success were the business model innovations he introduced, which would seem pretty commonplace today, but during Singer's time, were unprecedented. Singer created branch offices and developed a sales network that sold the sewing machines door-to-door. This made sewing machines more accessible to the public. He also offered lessons to customers on how to use the machines.

In order to make his products even more affordable, Singer started selling them on credit, allowing customers to pay for them in monthly instalments. (Thus, we can see how Singer effectively tackled the Affordability, Accessibility and Expertise barriers to consumption.)

These business model innovations, plus complimentary innovations such as Ebenezer Butterick's dress patterns in standard sizes (which made it easy for anyone to copy a dress design) helped make Singer's machines tremendously successful. Millions of them were sold, not just in America, but all over the world. Singer's firm made a billion dollars in revenue in the year 1890.

Singer's sewing machines allowed people to become entrepreneurs themselves. They could now easily produce and sell clothes to make a living. The cost of clothes also reduced thanks to the increased efficiency, thus making them more affordable for customers. People began buying more and more clothes.

Thousands of jobs were created. Other industries such as the wardrobe industry also benefited tremendously due to customers buying more and more clothes. Industries that supplied the raw materials (such as the steel, cotton and wood industries) also benefited. Another important entrepreneur in the American history was Gustavus Franklin Swift. He made meat (especially beef) more affordable and accessible to the American public.

Swift changed the way beef was produced and sold. Prior to Swift, beef was produced and consumed locally. There were no economies of scale. This made the whole operation inefficient and the increased costs passed onto customers, thus making beef less affordable.

First, Swift decided to centralize all the butchering in Kansas City. Therefore, he could process a large amount of beef at a single location, thus allowing him to achieve economies of scale and reduce costs. (Economies of Scale occur when increased output results in lower average costs).

Next, Swift had to find a way to distribute beef (fresh) from Kansas City to reach customers all over America. He decided to introduce railcars equipped with ice cooling, which were the first of its kind. He also sold ice cabinets to retail shops, where his beef would be sold.

Swift's innovations allowed beef to be produced at lower costs and available to customers all over America. The increased affordability and accessibility allowed customers to consume a lot more beef. Swift's firm made hundreds of millions of dollars in the early 20th Century. The last entrepreneur we will be studying is Amadeo Giannini. He revolutionized the banking industry in America. He was the founder of the Bank of America.

During Giannini's time, banks didn't lend to ordinary Americans. They only provided financial services to the wealthy elite. Ordinary Americans were also woefully unequipped when it to financial information. Giannini decided to change that. He created a bank to lend to the "little fellows", as he called the general public. He offered loans of $10 to $300 to anyone who had a job. He charged a low interest rate of just 7 percent (considerably lower than all the other alternatives at the time).

This wasn't enough for his bank to succeed. Therefore, Giannini came up with a number of business model innovations. Giannini invested in providing financial education to his customers and potential customers. He educated them on the benefits of banking. He created branch offices all over America, which was a novel idea at the time.

Thus, Giannini broke the Affordability barrier (by offering cheap credit), Expertise barrier (by educating his customers) and the Accessibility barrier (by opening branch offices). He lent to the immigrant communities (such as the Chinese, Russians, Mexicans, Portuguese etc.) in America, who were also excluded from the existing banking system.

Giannini also lent to undeveloped and nascent industries and companies, some of which became enormous successes. These included Hollywood, the Silicon Valley high-tech industry and the California wine industry. He also lent money to Walt Disney (including for the first ever full-length animated film, Snow White & The Seven Dwarfs) and provided initial funding for Hewlett-Packard (HP).

These entrepreneurs (and many more) who invested in Market Creating Innovations, broke down the barriers to consumption (Affordability, Accessibility, Expertise & Time) and allowed the general public to consume the products & services helped create enormous wealth in America.

The wealth they created also allowed the American democracy to succeed. Adam Przeworski's research concluded that as citizens gain economic independence, political liberties and democratic freedoms follow. Democracy becomes more resilient as per-capita income increases. According to Przeworski's research, democracy becomes immortal when the per-capita income rises above $6055 (at 1990 prices) or $13400 today.

That the American democratic exercise has been successful may have more to do with the work of the entrepreneurs and innovators, rather than just the democratic system alone. Thus, we can see how the entrepreneurs, such as Ford, Giannini and Singer (and many others), who leveraged the power of Market Creating Innovations, helped create the superpower that is the United States of America today.