The Importance of Innovation in Business

This article is an excerpt from the Shortform summary of "Zero To One" by Peter Thiel. Shortform has the world's best summaries of books you should be reading.

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What role does technological progress play in society? Will technology ever eliminate the need for human labor?

In Zero to One, entrepreneur Peter Thiel discusses the importance of innovation in business, arguing that technological progress is the way forward—not just for business but for society in general. He also asserts that monopoly—not competition—is healthy for business, and he talks about whether humans and technology are competing with each other.

Read more for Thiel’s insights on innovation.

Business Innovation

Thiel discusses the importance of innovation in business and how it goes beyond business. He argues that social progress requires technological progress, specifically “vertical” technological progress. He differentiates between horizontal and vertical progress as follows:

Vertical progress creates new things: new products, new systems, and new ways of doing things. It involves “going from zero to one” because you’re creating something that’s the first of its kind.
Horizontal progress produces more of something that already exists, perhaps with minor refinements along the way.

(Shortform note: Thiel’s contrast between horizontal and vertical progress parallels other authors’ delineation between sustaining and disruptive innovation. For example, in The Innovator’s Dilemma, Clayton Christensen defines a disruptive innovation as a new product that changes the market landscape. Disruptive innovations correspond to Thiel’s concept of vertical progress because they redefine the market by creating capabilities that didn’t exist before. Meanwhile, Christensen defines a sustaining innovation as one that doesn’t disrupt the market—it’s just more of the same, like Thiel’s concept of horizontal progress.)

To illustrate his point Thiel explains that, from 1914 to 1971, businesses in the United States created a lot of new technologies, many of which improved Americans’ standard of living and had a positive impact on society. But, from the 1970s to the present, he says this vertical progress changed into horizontal progress, which led to greater competition for resources.

Thiel goes on to say that globalization is the ultimate example of horizontal progress. Businesses take products and production methods that worked in the West and replicate them in less-developed countries. As products become more universally available, the standard of living becomes more homogeneous throughout the world.

But, as more people make, buy, and use the same types of products, they also compete for the same types of resources. For example, as automobile usage spread from the United States and Europe to Asia and Africa, more countries began competing for a share of the world’s supply of gasoline. Thiel argues that, if everyone is competing for the same resources, there won’t be enough to go around, leading to conflict instead of progress.

Vertical Progress and Resource Creation

Thiel highlights how horizontal progress results in competition for resources and asserts that vertical progress provides a solution to the problem of resource scarcity, but he doesn’t explicitly describe how vertical progress alleviates competition for resources. In Homo Deus, Yuval Noah Harari suggests that new technologies create new resources. This explains why vertical progress may reduce competition.

Harari highlights the issue of global resource depletion. He points out that although raw materials can be depleted, humans tend to find new resources or develop new ways of making existing resources more useful. He discusses how humans once relied on oil and coal exclusively for energy production, but have since developed new energy sources, such as solar power. Similarly, the invention of the fission reactor made uranium a new source of energy.

The same principle can be seen at work even in antiquity. In the Bronze Age, nobody thought of iron ore as a valuable resource, but then the development of iron-smelting technology made iron a viable substitute for bronze.

This idea of resource creation bolsters Thiel’s argument: When more people adopt the same technology (horizontal progress), there’s more competition for resources, but vertical progress creates new resources, reducing the competition for them.

The Importance of Monopolies

Thiel asserts that horizontal progress and the competition it creates are bad for both business and society.

As a business owner, you want to make a profit. Competition eats into your profits—whether you’re competing with other producers for the same resources from the same suppliers (which drives up your production costs) or competing for customers in a market where there are many equivalent products.

Thiel’s solution to the problem of competition is the technological monopoly. He argues that monopolies are good for society, as well as good for business. When a business has a monopoly (meaning it faces no significant competition in the market where it operates), it has the freedom to consider the welfare of its employees and the broader impact of its products and operations on society because profits are assured. By contrast, competitors locked in a daily struggle for survival have to do everything in their power to minimize expenses and don’t have enough resources left over to consider their impact on their employees or communities.

That said, Thiel concedes that not all monopolies are created equal. When a single company manages to corner the market on the supply of a necessary resource and then arbitrarily raises prices, the company prospers at society’s expense. A few historical examples of this abuse have given monopolies a bad reputation.

However, Thiel contends that this can only happen in a static market. Vertical progress redefines markets and makes new resources available, so monopolies are always temporary. If you create a monopoly by inventing a revolutionary technology, your monopoly will only last until someone else invents a technology that eclipses it.

The knowledge that your monopoly is temporary should motivate you to invest your profits in developing other new technologies. This kind of creative, technological monopoly that both drives and facilitates technological advancement is what Thiel is talking about when he extols the virtues of monopolies. They expand consumers’ choices by creating new categories of things. By adding value, creative monopolies make society better.

Temporary Monopolies and Blue Ocean Strategy

Thiel’s thesis that monopolies are good for both businesses and society while head-to-head competition in the market isn’t good for anybody bears a strong similarity to the premise of W. Chan Kim and Renée Mauborgne’s Blue Ocean Strategy.

Kim and Mauborgne contrast “blue ocean” markets, where your company has room to grow and make a profit, with hotly-contested “red ocean” markets, where the fight for survival consumes your profits and there’s no opportunity for growth. Based on this dichotomy, they observe that the key to profitable growth is to find a “blue ocean” for your company.

If you have no competition in a given market, then for all practical purposes, you have a monopoly. As such, Kim and Mauborgne’s affinity for blue oceans mirrors Thiel’s affinity for monopolies. Yet, the different authors highlight different nuances of the issue.

While Kim and Mauborgne discuss the issue strictly in the context of business strategy, Thiel broadens his analysis to include the impact of monopolies on society. In his discussion of societal impacts, Thiel concedes that monopolies can become destructive if a company corners the market on a necessary product and arbitrarily raises prices. He contrasts these harmful monopolies with the beneficial monopolies that you can create by developing new technology.

Even though Kim and Mauborgne don’t discuss the broader social context of monopolies, they do address the issue of pricing, stressing that even in an uncontested market, your product must be priced to provide good value to customers. Implicitly, this is the case because you created an uncontested market by developing a unique product. If your product is new and fundamentally different from prior offerings, then by definition it’s not an essential good because people were living without it before you introduced it.

In other words, if you create a monopoly through innovation, then your monopoly cannot be of the destructive type, because your product is not essential—just beneficial. As such, Kim and Mauborgne’s discussion reinforces Thiel’s idea that the monopolies you create by developing new technology can only benefit society, even though Kim and Mauborgne don’t discuss social implications explicitly.

One point on which they differ, though, is the subject of technology. Thiel asserts that you must develop new technology to build a constructive monopoly. Kim and Mauborgne insist that you need innovation to establish a monopoly, but that innovation doesn’t necessarily mean new technology. Sometimes the innovation that gains you access to an uncontested market can take the form of addressing customers’ pain points in the purchasing or delivery process, or of providing a unique combination of features that meet their needs better than existing options.

In essence, Kim and Mauborgne’s discussion of innovation suggests that finding innovative ways to deploy the technology we already have is just as important to society as developing new technologies. Though Thiel doesn’t bring it up, he might concede this point because he points out that new technologies reduce competition for resources and developing better ways to use existing resources would have a similar effect of freeing up resources and reducing competition.

Technology in the Future

But if creating new technology is the solution to the problem of competition, could our own creations someday start competing with us? In particular, as computers and artificial intelligence algorithms become increasingly advanced, will there come a time when computers compete with humans for jobs?

(Shortform note: This is arguably already happening. For example, telephone marketing used to be done by humans. Now, most telemarketing calls begin with a computer playing a recording.)

Thiel says this is nothing to worry about. He argues that computers and artificial intelligence will only complement human workers, never replace them. This is because people and computers are good at different things. People excel at making plans and decisions in complicated situations; they’re not as good at analyzing huge amounts of data. In contrast, computers excel at processing data, but can’t make judgments.

As artificial intelligence improves, Thiel advises companies to pair humans with computers so that technology empowers their human employees rather than replaces them.

(Shortform note: Some telemarketing companies appear to be taking Thiel’s advice. A company that uses voice recordings usually still has human salespeople on hand to finish sales if people respond favorably to the initial recording, and to handle more complex calls. Some companies are even taking the integration of people and computers to the next level with call systems that provide branching, non-linear recordings, and allow a human to monitor and control the computer’s calls. In essence, the computerized system does the talking, but a human coaches it through the conversation, teaching it what to say.)

The Importance of Innovation in Business