In the 15th century, British noblemen decided that they needed brighter colors for their coats of arms to help their armies more easily distinguish them on muddy battlefields. They naturally approached suppliers in their own nation. But when British tradesmen refused to accept this innovative approach to their traditional ways, the noblemen turned to Germany, where tradesmen were more than willing. This in turn helped spawn the German chemical industry, then the German petrochemical industry, then the German pharmaceutical industry. The British were left on the competitive sidelines.
Five centuries later, Otis Elevator, which had dominated its business until the 1970’s, found itself in a war with GE, Westinghouse, Hitachi and Fujitsu. The challenge was how to respond. After all, weren’t elevators just motors and bent metal? Then a member of Otis’s internal IT department made a breakthrough: Otis developed software that could automatically configure elevators and gave it to architects so that they could conform to local building codes, thus gaining market share for Otis. By putting computer chips in elevators, Otis could also send repair crews before systems broke down. Since the real money in elevators is maintenance, those who win the installation battle end up with a cash flow that will continue for as long as the building is standing.
Though separated by a half millennium, these examples show how innovation has always driven new technology, which drives new companies, which create economic growth and jobs. But innovation does not just happen. It requires far more than just inventors: it needs the entire organization. The messianic belief held by many organizations that they can lead in innovation by increasing research and development spending is simply not true. Apple, for example, trails its industry in R&D spending yet it leads in innovation. And large companies that brag about their research departments by day often end up having to make large acquisitions because their own R&D departments continue to fail them.
America cannot maintain its dominance in some sectors and regain it in others without innovation, the importance of which has been hailed by everyone from the President to the local manager. But innovation does not occur automatically. To produce workers, managers, investors and others who recognize and reward innovation requires making innovation a state of mind. Innovation should be taught, beginning in kindergarten. Properly run business schools combine management education with the disciplines of engineering and science. Within organizations, executives must do more than just honor this or that breakthrough: they must insist that the implementation and execution of good ideas is just as important as the inventions themselves.
Indeed, as well-regarded business professor Clay Christensen has elegantly noted, one of the problems of industry is not that it is poorly managed – it is that it is too well managed. Technological innovation counts in the early days of a company’s life cycle, but then it becomes part of marketing; eventually, every company seems run by financial masters. The great companies have balance — manufacturing, marketing, finance, distribution. But the companies that succeed are those that use innovation to build agility everywhere. While no company has true sustainable competitive advantage, the only way to even achieve temporary advantage is a reward system that meaningfully honors innovation.
While General Motors, Ford, IBM, Microsoft and AT&T were all the innovators of their day, the business world is comprised of Attackers and Defenders. Defenders have a brand, a strong balance sheet and customers and the odds are in their favor. Attackers may lack these advantages, but they have innovation on their side. Indeed, today’s Defenders were themselves once Attackers.
Which brings us back to Great Britain. That nation once led the world in textiles, only to lose its lead as competitors innovated with better products and production. The same was true with its automobile industry. Despite its first-rate universities, lots of capital and other advantages, the progeny of those British tradesmen are standing around while Germany remains the power of all Europe.
Georges Doriot, who founded American Research and Development, this nation’s first real venture firm, stressed that innovation must be more than episodic – it must be ingrained in the culture and institutionalized in organizations. “Somewhere, someone is building a better system than yours,” he cautioned. “Don’t let them get there first.”
Howard Anderson is the founder of The Yankee Group and co-founder of Battery Ventures. He currently holds the William Porter Chair of Entrepreneurship at the MIT Sloan School of Management