Wednesday, December 14, 2016

Understanding innovation's past leads to incredible insight

We tend to be very short sighted, we corporate executives.  Our lifespans are relatively brief, all things considered.  There are over 240 years since the founding of the United States, and using a 20 year cycle for generations that suggests approximately 12 generations of people during that brief window.  Most of us work for approximately 40 years, but we rarely consider the events or recent history before we started working.  In fact there's very little rationale to think about history in many cases, except for some hoary old stories about the founding of a company and its emergent culture.  Most of our waking, productive time is focused on the now, the current quarter, the next quarter, because that's what we are evaluated on, compensated for.  There's little time to worry about what might happen in the future, and even less time to worry about what happened in the recent past.

It's this lack of context and historical appreciation that makes innovation so interesting, because our short term focus convinces us that the way things are right now is a permanent condition, when in reality it's a fleeting experience that will change again shortly.

A brief innovation history lesson of the US

From its founding in the early 17th century until well after the US Civil War, the vast majority of people lived in small, rural settlements.  Many of the people who lived in that period grew the food they ate, raised the beef or chicken they consumed and had little financial resources.  Very few companies existed and most "innovation" was in the realm of transportation - primarily moving goods and/or people on waterways (canals, steamships) or rail.  Other than the military and the emerging railroad business, there were few large organizations and even fewer models for how to build and manage a business.

After the Civil War and up to the Great Depression there was a significant flowering of major industries, building on the transportation infrastructure built earlier and on the idea of mass production.  Oil, steel, railroads and other monopolies emerged, and banking and financial services grew alongside these emerging industries.  Yet still the vast majority of people lived hand to mouth in rural settings.  Innovation in these days was often focused on communication - Marconi, the "wireless", radio and other devices reduced the distances and built common stories for the American public.

World War Two changed everything.  Washington DC, formerly a very small, sleepy city, grew dramatically during the war, and the federal government grew in importance.  As we entered the Cold War, the growth that the World War created was sustained by fears of Russia and a new emerging Cold war.  Innovation during this time was focused on technology - especially weaponry.  The nuclear bomb, the ability to deliver weapons at a distance, the space race. 

The 1960s through the 1990s were boom years (discounting the Oil embargo) mostly due to dividends we reaped from the investments in technology and the space race.  The US emerged as the sole large economy undamaged by the Second World War and grew to dominate its allies.  The space race with Russia and military investments created a range of new technologies that were quickly converted into consumer technologies.

The 2000s and onward are less about product innovation and more about business model innovation and financial engineering.  Increasingly the US is becoming a high cost country in terms of labor and manufacturing, and outsourcing jobs to less costly locations.  We are focused on changing the terms of compensation and payment for services (Google funded by ads rather than licenses) and financial engineering in banking, financial services and other industries.  GM for a long time was profitable not because it built cars but because it financed them. 

Up until the 1880s the vast majority of people were farmers, mechanics, craftsmen.  They worked with their hands, with deep, innate knowledge about their services and skills.  This model changed as Henry Ford and others created the mass production line, which has in many cases reached its logical conclusion, at least as far as human workers on the line are concerned.  We retain many of the measures and metrics of an agrarian economy - taking vacations in the summer, planning and budgeting around an annual cycle, reporting on a quarterly basis - that have no real meaning in today's knowledge based economy that competes on a global basis.

What emerges about innovation from this review of history?
  1. In the past, a lot of innovation was driven by the most important impediment or challenge in a specific timeframe:  transportation of goods and people in the colonial era, banking and communications during the dawn of larger enterprises, communication technologies as the country grew, defense and technology as the country fought and was threatened with a cold war, business models and financial engineering as the technology investment petered out.
  2. Innovation comes in waves and as one wave is peaking, another wave is just starting to emerge.Innovations take time to proliferate but almost always proliferate faster than we might expect.
  3. There is a cyclical, repetitive nature to innovation, which we ignore at our peril.  Take for example the nature of retail.  Sears grew because it had a huge selection and could deliver goods anywhere.  The Sears catalogue is an analogue to today's Amazon website.  Sears modified its business model to move toward a physical retailing model as the US expanded and as people moved to the suburbs and seems to have forgotten its mass, virtual retailer roots.  Today, Amazon and other virtual retailers dominate, but we can imagine a future where hyperlocal retailers blending virtual and physical stores and delivery emerge.
  4. Business models and business conditions are temporary.  The concept of mass production is an idea that may be relevant to exactly one century - the 20th century - for the US.  The fact that mass production worked then, in those conditions, does not mean that it should and must continue to work as an operative model now, because many conditions have changed.  The internet and ecommerce make it much more possible for individuals to be craftsmen (Etsy for example) or self-employed (Uber, AirBnB), which is simply a return to an earlier model, with much more technology underpinning.
  5. Technology introduces change, customers and innovators change technologies into solutions that change the market.  Technologies change but unless they can be harnessed and adapted to create benefits and solutions that customers need and want, they aren't meaningful.  The transistor by itself is interesting, a smaller, cheaper portable radio provides a huge benefit to consumers.  We innovators fall in love with technology but fail to understand that it is the customer need and benefit that is paramount.
  6. Much innovation in one era is built on the investments of a previous era.  Mass production isn't all that useful unless there is a good transportation infrastructure, as an example.  The dot com boom was based on research and technologies that were sparked during the Cold War.  Currently those technologies are reaching end of life, and we see far more innovation in services, business models and customer experiences than in technologies, and far more financial engineering than is probably good for the economy.  This is because we haven't had a real flourishing of either new technologies, new infrastructure or a real competitive threat like the Soviet space race.  In other words, we've coasted for the past 20 years, harvesting previous investments without laying a foundation that future generations can build on, unless they want to bet on sub-prime mortgages.
  7. A lot of innovation was created by those outside the status quo - new immigrants (Andrew Carnegie as an example) or those outside the establishment, typically on the frontiers, who sought to solve problems faced by the emerging population, while the establishment was relatively comfortable.  The median age of the US was relatively low, and few people lived into old age.
What can we predict about innovation in the near future based on the past?

  1. We should be on the cusp of some significant new emerging innovation, but for the life of me I can't figure out what that is.  It could be a continuing evolution of business models and customer experiences.  We lack a real compelling burning platform like the Soviet Space race and are more distracted and less unified than in previous generations.  Also, corporations spend less on R&D than in the past and the government is spending less on a percentage basis on technology and R&D.  This means that future innovation is less likely to be technology driven and more focused on experiences, services and hopefully business models.
  2. The older command and control hierarchies and mass production thinking may give way to new organizational models, new governance and new ways of building companies.  As we move from an agrarian calendar and mass production models, new business models, relationships and organization models will emerge and may drive new innovation in organizational structures and customer relationships.
  3. The individual or small business becomes as important to the economy as large corporations.  More people can work as craftsmen or knowledge workers on their own, leveraging virtual workspace technologies and the increasing value of knowledge work.  Larger business increasingly want to outsource work to find the best value for their money, retaining only the mission critical or activities that reflect competitive advantage.  The infrastructure in terms of software and ancillary services exists to support a larger workforce of independent contractors and small businesses.
  4.  Past innovations were often launched by public works or investments by the government.  Transportation was either privately financed by large groups or by the government.  Defense, aerospace and technology were funded in response to the Cold War.  Future innovations will emerge from customer needs and those that can aggregate them quickly, and less from technologies or challenges identified by the government.  Indeed the government is becoming a consumer of commercial innovations rather than a springboard for future innovation, with the possible exception of healthcare, aging and green technologies.  This means a more distributed and diversified innovation future, less focused on one large population or government challenge and more competition over standards and protocols.
  5. Immigration, like it or not, will play an important role in future innovation.  The resident population is aging, and less likely to be as active innovating and solving problems because of the wealth transfer to older populations through retirement savings and health care transfers.  More innovation is likely to come from immigrants who refresh the population at the lower end of the age scale, who face more challenges and difficulties than some of the native born population.  Aging populations by definition are less innovative, so to refresh the innovation spirit and energy we need to recruit immigrants who can create compelling new innovations.  As the country ages, and boomers retire, there will be far more emphasis on innovation in terms of products and services for the boomers, who are used to having their own way and will demand far better products and services than their parents did when they retired.
  6. The pace and nature of innovation will accelerate as more people in more places become part of the global economy and more consumers achieve middle class status for the first time.  There are far more competitors in far more regions and geographies, which means more competition.  However, there are far more people entering the middle class who have buying power and will want new products and services. This means, though, that innovations must be conceived for global consumers, as the markets for new innovations will be in many more markets than just the US.  Our understanding of the needs and expectations of the US-based customer is poor; our understanding of needs and expectations of newly emerging customers in other countries is virtually non-existent.  We need to move faster, with greater urgency, to create innovations that meet global needs, not just US needs.
Those who don't study the past are doomed to repeat it

I started out this post commenting on the lifecycle of the average manager, and how narrow their time focus is.  While we live out our work lives over 40 years we do so in 90 day increments, often failing to appreciate how repetitive and cyclical business and innovation are.  The more we understand about how innovation has unfolded in the past, the more we are likely to be able to predict how innovation will emerge in the future.  There are two great quotes that are relevant here.

The first is Spinoza's quote:  Those who cannot remember the past are condemned to repeat it.  And we do, quite often, repeat the experience and mistakes of the past.

The second is Faulkner's:  The past is never dead.  It's not even past.

We can learn from the past about how innovation unfolds, and use that insight to determine how innovation is likely to emerge, and what the key drivers will be.  Doing so makes us smarter and more prepared to engage innovation as it occurs, and to use those innovation drivers to our benefit.
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posted by Jeffrey Phillips at 6:15 AM


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