Visionary companies do not only try to see into the future – they create the future. The history of innovation is scattered with examples of misjudgments regarding the dynamics of new technology. Less than two years before Polaroid’s bankruptcy, Morgan Stanley made the following statement: “We are upgrading Polaroid to Outperform from Neutral based on the company’s new product performance…
Of course, it is much easier in hindsight to marvel at failed predictions than two make better assessments. At the same time, others have an impressive track record of seeing what the future will bring about. The American author, Michael Hart, stated in 1998: “There’s going to be some gizmo that kids carry around in their back pocket that has everything in it – including our books, if they want.” Intel’s co-founder, Gordon Moore, stated in 1965 that he expected integrated circuits to be used inside of “portable telephones, personal paging systems, and palm-sized TVs”.
Visionary ability is a crucial input to the innovation process as it largely determines how a firm chooses to use its scarce resources. Consider how Nokia was blindsided by the advent of smartphones in 2007 and is now struggling to reinvent itself. A vital question is therefore what separates visionary companies from those who are eventually left behind.
Technological foresight is not enough
Some would argue that technological know-how is a distinguishing feature of such firms. While both Gordon Moore and Michael Hart had been intimately involved with technology, there are many examples of firms which had technological foresight, but still struggled to reinvent themselves. Kodak developed the first digital camera prototype in 1975 and invented the first megapixel sensor in 1986. Yet still, the firm filed for chapter 11 bankruptcy in 2012. Xerox’s Palo Alto Research Centre (PARC) invented some breathtaking innovations in the 1970s, but could not figure out how to commercialize them.
Many companies succeed at seeing what’s around the corner, yet still they struggle to reinvent themselves.
Firms usually have extensive technological knowledge and they are frequently capable of seeing what’s around the corner. I would instead argue that the main distinguishing characteristic of innovative companies is how they relate to markets. Is a market existing and predefined, or is it something that can be created, transformed or re-defined?
When studying a market, economists observe that there is supply and demand. At a certain price point, supply will meet demand and this is commonly referred to as the market price. Basic microeconomics tells us that if supply increases, prices will decline, and vice versa. While such an assessment is not inaccurate, it is misleading because the most interesting questions are not being dealt with at all: where did the market come from? Who created it in the first place and how can this process be explained and understood?
The existence of markets is incorrectly taken for granted
In economics – and business administration – markets are assumed to exist. Yet at the same time, any observant of human history over the last two centuries would agree that the most striking characteristic of the capitalist economy is rather how markets are created, transformed or destroyed.
At a hypothetical fixed point in time, markets exist and can be analyzed in terms of supply and demand. But if you look at your consumption pattern and relate it to the past, you will be struck by how some products have ceased to exist, how others have changed and how new ones have been created. Clothes used to be capital goods, you bought a coat and used it for 20 years. Today, clothes are instead consumed, and they are an integral part of self-expression in the modern world. There is a market for toothpaste for cats – and they come in different flavors as well! Portable music was once upon a time unheard of, over the last six decades this market has been created, destroyed and re-created through several waves of innovation: the transistor radio in the 1950s, the Walkman in the 1980s and the MP3 player in the late 1990s.
Most historical and contemporary examples of revolutionary innovations are in fact related to either the creation of a market or the transformation of an existing market. Henry Ford targeted consumers who did not own cars, Sony sold transistor radios to teenagers who only had access to their parents’ vinyl player and Kodak flourished a century ago by creating amateur photography. Ryanair has redefined the meaning of flying, McDonald’s made eating out affordable and fast, while Elvis Presley merged blues and country music thereby creating rock n’ roll.
Most modern corporations are not designed to create or redefine markets
We often take markets for granted, but over time markets are created, redefined and sometimes destroyed.
True innovation is notabout beating your competitors. Rather, it is about changing the rules of the game, thereby leapfrogging competition. While most people subscribe to this conclusion, it is striking how modern corporations are designed to do the exact opposite. Modern management techniques largely contain the hidden assumption of a stable, predefined market. Let me mention a few examples:
- Most companies employ some form of market segmentation. In doing so, they often categorize a market in terms of the different needs of consumers and also start to adapt passively to the market, rather than trying to redefine it.
- Financial tools such as Net Present Value calculations aim to project future earnings. Those future earnings are usually based on the assumption that the market is stable and will continue to exist. Moreover, when applying a discount rate that mirrors uncertainty, such tools will usually favor status quo as new markets cannot be analyzed. These number crunching techniques also divert attention from small markets and new things (innovations), will by definition always start as something small.
- Stage-gate processes for new product development destroy variation, and thus also innovation. These systems have become the Kellogg’s Corn Flakes of modern corporations – nobody loves them, and nobody hates them, yet everyone uses them.
Masters of administrating business?
Unfortunately, our universities are not much better, neither in terms of research or education:
- The term Business Administration, is in fact very informative. Most of business school education is about learning how to administrate an existing business, rather than creating a new one.
- In economics, education is explicitly concerned with equilibrium and forces that drive the economy towards it. Sources of discontinuity and instability are conveniently regarded as ‘exogenous’, i.e. neglected. No wonder so few saw the financial crisis coming.
- Popular literature in strategic management, such as Michael Porter’s Five Forces framework, explicitly state that profitability comes from a monopoly position where customers and suppliers have little bargaining power while competitors are kept out through high entry barriers. Innovation, or the creation of value for that matter, is – once again – not considered as a way to compete.
Innovative companies have managed to unlearn what academia has taught over the last decades. They have also found ways to ignore so called ‘Best Practice’ in their industries and instead look for ways to transform an industry or build a new market. Innovation is far from only about trying to see into the future, first and foremost it is about finding ways to create the future.
About the author
Christian Sandström holds a PhD in innovation management. His research interests concern disruptive innovation and the challenges they imply for established firms. Dr. Sandström is affiliated with the Center for Business Innovation at Chalmers University of Technology, and the Ratio Institute. Some of his work can be found at disruptiveinnovation.se
Photo: Star field in deep space from shutterstock.com