Book — A History of Corporate Innovation

A selection from…

Winter. 1979. Twenty-four year old Steve Jobs is on a tour of Xerox’s Palo Alto Research Center (PARC) where he’s shown three things: object oriented programming, a networked computer system and the graphical user interface with clickable mouse.

Jobs has just done a deal with Xerox. The office copier company gets a hundred thousand shares of his still fledgling company for one million dollars. In return he wants access to Xerox’s Palo Alto Research Center.

The Xerox executives fail to understand just what they are about to give away.

The mouse and GUI have all Job’s attention as he watches a demonstration on the Xerox Alto computer. He observes for about one minute before jumping around the room, and begins to shout:

“Why aren’t you doing anything with this? This is the greatest thing. This is revolutionary!”

If Xerox is not going to exploit these ideas to their full potential, then Jobs most certainly will — with the upcoming Apple Lisa project and the revolutionary Macintosh.

Jobs does not invent the GUI or the mouse he is so enamored with. Nor does he simply steal the ideas. The Xerox mouse originated from a design by a Stanford Research Institute researcher named Douglas Engelbart, Line up Engelbart’s mouse, Xerox’s mouse, and Apple’s mouse and you will not see one similar, imitated product. You will see the evolution of a concept.

Within the final stages of that evolution you will see innovation.

Entomology:

To really cover the history of innovation, let’s have a look at the history of the word, because even here’s there’s evolution. The first form of the word: “novation” began as a thirteenth Century contractual term and actually meant “newness.” In religious circles the word had a slight negative connotation. New ideas were not welcomed with open arms in the puritan era. It was practically interchangeable with “heretic!”

Invention vs. Innovation:

It wasn’t until the industrial revolution that the prefix was added and “innovation” began to be associated with science and creation. It was therefore less likely to get you burned at the stake, and yet was still interchangeable with “invention.” In 1912 a definition was offered by Austrian-American social scientist Joseph Schumpeter (1883-1950) that contrasted invention as being the creation of something new, while innovation was taking an invention and finding use for it inside a business model.

Schumpeter went on to write about the contemporary view that the economic system was an essentially passive, stationary process: “I felt very strongly that this was wrong, and that there was a source of energy within the economic system which would of itself disrupt any equilibrium that might be attained.”

The “energy” he was discussing back in 1912 that disrupts the status quo, was of course innovation.

Finally a more modern definition from the businessman who became most closely associated with the word:

“Innovation distinguishes between a leader and a follower.”

-Steve Jobs

A history of Corporate Innovation

To tell the story of corporate innovation we must reflect on two parallel stories, that of the Company and the Citizen. Prior to the 1990s life was good for both, life was simple — the Company had all the power. The Company drove innovation and the Citizen or consumer played a passive role within the process. Yet everything evolves, including this dynamic. The advance of information and connection technologies over the last twenty years, but particularly the past ten has created a deep chasm between the two.

The Company

The industrial era came along in the 18th century and everything got a lot bigger. Including business. The modern form of the company really is less than 150 years old. Okay you can dig deep into the history books and find other entities which resembled companies and a few which might have even been termed companies. But most of these companies formed were by royal charter and for defined periods of time. After which they would be dissolved and disappear! Part of the reason for this was they were often project based — to build large expensive infrastructure projects such as bridges or railroads, particularly in the industrial expansion of the United States. The comparison would be a little bit like Microsoft dissolving itself after the completion of Windows 1.0. (Hey we don’t need all this multimedia stuff anyway!)

It’s probably worth noting (while we’re talking history) many writers on the subject offer a three-phase model of the history of the corporation which goes something like this: the Mercantilist/Smithian era from 1600-1800, the Industrial/Schumpeterian era from 1800 – 2000 and finally, the era we are entering, which for want of a better name has been dubbed the Information era.

Very Briefly, The Mercantilist era was (as its name might allude) focused on trade, and was dominated for much of this time by the East India Company. As the name of the East India Company might not allude, the Company was a global trading phenomenon. Some think corporations have too much political power today, but that is nothing compared to the power wielded by this beast. The East India Company had its own army. Its merchant ships had more firepower than many naval fleets. It’s political and economic influence was vast. Imagine a cross between Walmart, the United States Army and the mafia and you begin to get a picture of the East India Company.

But all things change, and even the might of the East India Company finally succumbed to this process.

The following industrial era was much more focused on making products and saw the rise of the more restrained corporations that we would recognize today. Ones focused on production, sales, marketing and innovation. Less involved in putting hits on business opponents.

It’s certainly true that the growth of the United States as a nation, mirroring the growth of the Company was no accident. This was an immense country requiring the construction of vast infrastructure and the Company was the perfect entity to be able to accomplish just that.

In this new environment where physical distance played a part and as productivity levels grew, new forms of management and structure were required to drive these new business engines. Traditional hierarchies and structures were put in place to manage the accelerated production needs of the modern company.

There was a shift in the 1920’s with many companies restructuring from monolithic functional organizations (sales, marketing, manufacturing, purchasing, etc.) and reorganizing into divisions (by product, territory, brand, etc.) that each have their own responsibility for profit and loss.

This is the Company we know today. An organization working within divisions to continuously improve a current business model by the incremental improvement of existing services or the introduction of new ones. It has been a hugely successful model.

But with all the advances made since the beginning of the twentieth century, has evolution of organizational design kept up? I put to you that that it hasn’t. Continuing to improve upon existing business models will no longer be enough in coming years — with many of the great successes of the past five years demonstrating the invention of new business models.

  • The largest travel company owns no real estate; Airbnb
  • The largest transport company own not a single vehicle; Uber
  • The largest context company, doesn’t produce a single piece of content; Facebook
  • The largest retailer, hold zero inventory; Alibaba

Today, almost no industry has escaped the transformational nature of the digital shift as we enter the Information Era, resulting in some Super Powers disappearing, some thriving and others barely limping forward. That transformation hasn’t stopped, and the pressures of the digital enablement of society are only getting deeper. This new world can be scary, particularly when leaders of the business world don’t fully understand the possibilities, nature and risks of the new world. It could be argued that many boardrooms are reminiscent today of Xerox circa 1979, having the future right there, in their hands, but not being able to see it. “Xerox could have owned the entire computer industry today,” said Steve Jobs, commenting on the narrow vision of the then executives. “It could have been ten times its size.”

In 1997, Clayton Christiansen wrote “the Innovator Dilemma.” A now cult book in the innovation community. The powerful message that Clay brought to light was that our past successes limited our future potential, and blinded us from threats we don’t understand, leaving us full of excuses to justify a lack of progress. Almost every single company I meet with today is structured, positioned, and incentivized NOT to transform. Like a blind man, dependent on the support of others, a large majority of industry incumbents seek the escape of weak excuses like; regulation, peer comparison, business cases and risk avoidance. All distancing themselves from the fact that the world around them is changing.

How many times have you been frustrated with the technologies, process or rules of your organization? How many have had an idea on how to improve your company or industry? How far did that idea progress? My guess is not very far. Your idea faces an uphill battle through a deeply diligent process, or faces budget constraints when compared to other projects in the pipeline. Today almost every company I see has collected a pool of frustrated individuals who can see consumer technology start-ups doing exactly things that they know to be great opportunities, but are held back by the structure and culture of their organization.

It should be no great surprise that evolution occurs best in nature in an ideal environment. Far greater bio-diversity exists in a reef system that just a few kilometers away in deep ocean. Why? The reef system has been shown to require greater specialization, and over time in such places the right specialists have indeed evolved to fill the needs of the environment. Innovation, likewise, because of its evolutionary nature, also requires the correct environment.

Creating a culture that suppresses new ideas in the face of uncertainty, risk and status quo threats is not the way forward. Our past successes hold us back from realizing the potential of the future success, and this in turn opens the door, and rolls out the red carpet for disruptive innovators to wipe away market dominators or even entire industries. As was the case for Borders, Blockbuster, Kodak and Encyclopedia Britannica.

Kodak: How past success assured future failure

“Kodachrome
They give us those nice bright colors
They give us the greens of summers
Makes you think all the world’s
A sunny day, oh yeah
I got a Nikon camera
I love to a photograph
So mama, don’t take my Kodachrome away”

Lyrics © Paul Simon

But taken (into bankruptcy) was exactly the fate of Kodak at the hands of management which could not see future opportunities due to vast successes of the past. Let’s make no mistake Kodak’s past success was monumental. In 1996 Kodak was ranked the fourth most valuable brand behind Disney, Coca-Cola and McDonalds. It employed 140,000 people and controlled 90% of the film market. In 2012 Kodak filed for bankruptcy.

So just what happened in those 16 years?

You could say everything and nothing. Kodak did not fail purely because of the unforeseen onslaught of digital technology. Kodak invented the digital camera in 1975. The corporate response at the time according to Steve Sasson — the Kodak engineer who created it: “that’s cute — but don’t tell anyone about it.”

Kodak, like Xerox in the computer market, could have dominated the digital camera market for many years. Instead they failed to see it as a threat to their traditional film business. It was 2005 before Kodak were producing digital cameras as serious consumer products. 30 years after they invented them. Kodak was an old company founded in 1888. It had a much longer history of success to blind it to the challenges of the future.

A series of miss-steps. 1989 was a critical year. A long-serving CEO was about to retire. Phil Samper and Kay R. Whitmore were the options. The former representing a break with tradition, someone who understood the future and wanted to take Kodak in the direction of digital. The later represented the tried and true traditional film business. The board elected Whitmore.

Kodak brought a medical chemical company — on the rationale that film also used chemicals. They soon found it wasn’t really the same thing, and the new acquisition was eventually sold at a huge loss.

They attempted a hybrid camera utilizing digital technology to preview pictures, which still used film. Customers just asked why? In later years as losses mounted, they began producing printers and digital photo software. Customers just weren’t buying it. Literally.

All the time Kodak had staff within the organization who did understand the future of the camera market, and had creative and innovative ideas about what could be done to combat Kodak’s woes. Management never listened to them. Many of these people, Phil Samper included, took their ideas to other companies who could see the future.

What lessons can be learned from the cataclysmic failure of Kodak? Here are a few:

  1. An organization must have a culture that is open to change from the top down. Founder George Eastman was open and adopted disruptive new technology (color film when black and white was the norm); something his successors were unable to do.
  2. Management must be able to see the organization holistically. Kodak, like Xerox, had little appreciation of just how important the technology being created in their own labs really was. They were unable to see the potential of the technology to transform the business and take it into the future.
  3. Listen to what your customers want. One of Kodak’s earliest slogans was “You press the button — we’ll do the rest.” Digital cameras offered consumers just this. Rather than sell the benefit (easy photography) Kodak kept selling the product (physical film).
  4. Make decisions interactively, using all the vast knowledge available within the company. Kodak had people who knew what to do. No one listened to them. Sound familiar?

So here we are on the verge of the next era of business transformation. One that will change the rules of business forever. Change is enviable. We just need to know where to look, and how to respond.

We all have to accept the clear and absolute truth; the advancement of consumer technology and the internet has shifted the balance of power from the Company to the Consumer/Citizen.

Before we take a look at the Citizen’s historical role within innovation, let’s take a look at some key historical business innovations and see just what they tell us about the future.

McDonalds: A history of Innovation

It is 1954 and a fifty-two-year-old milk-shake machine salesman visits his clients at a hamburger restaurant in San Bernardino, California. But he isn’t thinking directly about milk-shake machine sales. His name is Ray Kroc and his clients are Dick and Mac McDonald.

Kroc is thinking about this small chain of franchises who recently purchased five multi-mix milk-shake machines from him — one for each of their stores. He is thinking about their operation: a small menu of simple items, cheaply priced, their assembly line “Speedee Service System” for hamburger preparation, and a consistent approach. They bring efficiency to what has been up to now a fairly slap-dash industry.

He is thinking about a vast chain spread across the United States, perhaps the world. Something far more ambitious that what the McDonalds have in mind. Does he really need this restaurant? Could he do this with any burger joint, or simply create his own? He once worked for room and board at a restaurant in the Midwest simply to learn the business. Does he need this one, he asks himself again?

The McDonald’s brothers serve much the same kinds of food as hundreds of other similar American restaurants. What this particular chain offers is innovation to the fast food business, by asking what added value they can give the customer. It’s this innovation that sets the McDonald’s brothers chain apart. Yes, he knows it’s this chain he wants.

He just doesn’t need the McDonald brothers.

“That night in my motel room I did a lot of heavy thinking about what I’d seen during the day. Visions of McDonald’s restaurants dotting crossroads all over the country paraded through my brain.”— Ray Kroc

Over 40 years earlier Henry Food brought innovation to the car industry by combining quality car parts with an efficient assembly line process. Ray Croc did exactly the same thing. Just with burgers. He invented nothing new. He took a good existing concept and made it better. He began by signing on to sell franchises. The original deal was that Kroc got 1.9 per cent of gross sales from franchises and of that the McDonalds would get 0.5 per cent. Things turned sour in 1961 after the McDonald’s signed an agreement to sell the business to Kroc for two million dollars. Some say the McDonald’s were cheated out of a verbal promise to receive a share of royalties, but nothing was written down. A nod is as good as a wink. Kroc himself may have been an innovative genius; but his business morals possibly needed improvement.

“If any of my competitors were drowning, I’d stick a hose in their mouth and turn on the water.” — Ray Kroc.

Ethics aside Kroc’s empire marched on as he devised unheard of exacting specifications for the burger patties that McDonald’s were to serve “fat content: below 19 percent; weight: 1.6 ounces; diameter: 3.875 inches; onions: 1/4 ounce.” The innovative thinking didn’t stop there. By the late 1950s Kroc had McDonald’s first food laboratory constructed in Chicago. Its initial mission: to devise a method for making the perfect fried potato. Unheard of in the fast-food industry.

Yet innovative behavior was an ingrained part of McDonald’s culture before Ray Kroc came along and it would remain so even after his departure and death. Part of this was that the management molded an environment where innovative thinking could occur, prosper and ideas flow through the organization.

Sure, franchise holders had very strict rules of what they could serve, how they could serve it and even who they could buy supplies from, but this regime of extreme conformity applied to process and product, not to ideas. Kroc knew too that markets can change and local markets can have subtly different needs. The results of allowing this individual creativity are astonishing when you begin listing them. The Big Mac, Ronald McDonald, Filet-o-Fish, Drive-thru’s and Playlands — were all developed by franchisees, then taken on by the McDonalds Corporation. A good idea is a good idea no matter who comes up with it.

Many innovations were more than great product line additions, but actually opened up an entire new area of business that had otherwise been untapped. For example, the creation of a simple product — the Egg McMuffin in 1971 enabled McDonald’s to cater for an entire new market — the breakfast customer.

Innovation permeated everything, including the franchise model. Franchising has existed in the fast food and other industries well before McDonalds came along, and usually consisted of the parent company doing everything it could to fleece the franchisers of their earnings. Kroc realized this wasn’t a model for long term growth. Instead he conceived McDonalds as an equal partnership. A triad between McDonald’s franchisees, suppliers and employees. This enabled franchisees room to innovate, even within a rigid system.

Today McDonalds has its own innovation center. Located in a nondescript warehouse in Romeoville, Illinois, not far from McDonald’s corporate headquarters the center has one goal: to improve service at McDonalds 34,000 outlets around the world. Everything gets tested here, from equipment to food, to drive-thru technology to fragrances for the foyer. Nothing is off limits. There’s a full mock up restaurant where staff from all over the globe come to experiment and learn.

It’s an admission there that a company which began doing business in 1955 is now in a very different landscape. Values have changed dramatically, as have consumer attitudes, especially those to do with nutrition and the environment. The impact of the information era is that customers have a lot more data easily at their fingertips. The appearance in the 2000s of detailed nutritional information on packaging is, I would say a coup for the consumer driving company action. Some other recent changes which show McDonalds are very aware of the volatility of their market include:

  • Committing to source white fish from sustainable fisheries
  • Only sourcing chicken farmed without antibiotics
  • Committing to a target for purchase of verified sustainable beef

What’s next? Well, McDonald’s Next — an re-developed version of the brand that opened in Hong Kong in 2016 and promises to be “modern and progressive.” Gone is the red-and-yellow color scheme and harsh light, replaced by ambient lighting, glass and shiny metal interiors and (gasp!) a full service salad bar. The McDonald’s Next salad bar is filled with around twenty ingredients including choices of salad base greens, and different cheese varieties, three flavors of sauces and — quinoa — you mix and match it yourself.

McDonald’s Next also offers table service after six p.m. along with premium coffee blends. Society is changing, customers’ needs are changing — and McDonalds knows it. The biggest lesson of McDonalds is to keep in touch with your customers and keep evolving. “A laurel rested upon quickly wilts” was a favorite of Kroc’s sayings, and this attitude became ingrained in the company’s culture. The McDonalds of today is a very different beast than when it began, but it didn’t change path overnight. It was a slow process that involved incremental change upon incremental change.

With just one possible exception: the McDonald brothers actually set up their first restaurant to sell hickory-smoked BBQ items but switched very quickly when burgers became menu best sellers.

continued….