Innovating What We Innovate

It finally came to me last week. For more than a decade I’ve been working with corporations, trying to help them accelerate their ability to generate new, interesting ideas to market as viable products and services. In some instances we’ve been successful, and in other instances there were interesting failures. I’ve recognized for a while that some major challenges exist. I wrote Relentless Innovation (McGraw-Hill Education, 2011) as a way to frame some of the things I’d learned about the way culture resists change, and how a “business as usual” approach can stymie innovation. But even with these obstacles it would seem we should have more innovation than we do.

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What came to me finally is that we are trying to do new chemistry in old equipment, equipment that is tailored for a more conservative, slow-paced way of working where there is less change and more certainty. Our businesses are “built to last” and meant to gain scale quickly and then lock in customers and channels to drive more revenue and profits. In a day and age (say 20–30 years ago) when markets were more stable and there was less innovation, building a company with this intent made sense. Those days are over.

In fact we can look back 20 to 30 years ago at some key events and agreements that at the time seemed relatively benign, but in fact have accelerated competition and innovation.

The unintended consequences of free trade

Just under 30 years ago, President Bill Clinton signed the NAFTA agreement, which allowed for mostly free trade between Mexico, Canada, and the United States. This was the start of many more free trade agreements, as other countries began to reduce trade barriers and increase global competition. It should come as no surprise that the European Union is almost 30 years old. These agreements and others like them were good for consumers because they lowered prices, but often bad for established businesses that were used to competing behind tariffs. These agreements also increased the migration of lower-skilled work to places where costs were lower. This migration isn’t new—any task with a high labor component has always migrated to lower labor-cost areas. The difference was that instead of moving from north to south, it moved from the United States to Mexico, as an example.

Globalization and free trade increased competition dramatically and introduced a shift in valuable skills. In the United States, manual labor and low-skills jobs began to disappear while IT and finance skills gained credibility. This was also the beginning of the imbalance we see today, why there is an increase in disparity in incomes between people who offer the market manual labor or few skills vs. those who can move financial markets or program software.

The internet boom

The internet also began to appear about 30 years ago, moving from an interesting collegiate experiment to a system that connects people across the globe. Yahoo and then Google began to organize the data on the web. Google is 20 years old this year (2018), meaning it is leaving its awkward teenage years and becoming an adult.

The advent and rapid advancement of the internet as a communication tool, then a content tool, and now thanks to Amazon a sales and fulfillment tool, has shifted how we consume content, how we acquire goods and services, and it has significantly changed entire industries. Just ask Sears, the Amazon of the 20th century and now filing for bankruptcy.

The evolution of the internet now means that I can do business with just about anyone, anywhere, in real time. Existing companies now have far more competitors, and the consumer has far more options. Thousands of new companies can compete to provide goods and services, increasing the opportunity for innovation dramatically.

Apple and Amazon

The third leg of this stool, beyond globalization and the internet, is the emergence of new and somewhat rapacious companies. Amazon and Apple are the avatars.

Amazon was founded in 1994 as a book seller and has gained scale quickly by increasing its dominance over physical retail, while innovating its business models and entering entirely new markets (web services as an example). Amazon demonstrated that people were willing to wait for the company to grow before becoming profitable, and cheered Bezos on to greater heights rather than demanding immediate profits. Steve Jobs returned to Apple in 1997, and he created a company based on a few simple ideas, which included simplicity and integration. Both of these companies explored new value propositions and new ways of working with customers. Both are closing in on market dominance not seen since the Gilded Age. Both give hints about new operating models and structures.

Stuck in the railroad age

Yet most corporations are stuck with a command-and-control organizational structure that dates to the age of railroads, which were the first large corporations. It won’t be a surprise to learn that the railroads adopted their operating models and organizational structures from the military, the other large and bureaucratic organization of that day. These organizational structures worked well when change was slow and many organizations had monopoly or near monopoly power, and when few people were educated. Today, most of these stipulations aren’t true. Change is constant and accelerating. Few firms, other than Amazon and Google, have anything close to monopoly control, and workers are far more educated and interested in the meaning and mission of their work.

Corporations operate like glaciers, moving slowly and inexorably toward an almost predetermined goal, difficult to steer and with deep sources of internal, informal power that seem oblivious to the environmental changes all around. Our business structures and models are for the most part still based on top-down command and control, very regimented (a word straight from the military) and hierarchical, when we need to be more open to investigation, more flexible, more adaptable, more nimble.

Innovating organizational structures and business models

What we innovators should focus on are new organizational structures and new business models rather that products and services. We can see evidence of some organizational structure and business-model innovation in the “asset-light” companies like Airbnb and Uber, which have reworked their models to demonstrate that they don’t need to own the assets to deliver a valuable product or service.

But these are just the beginning. As both Uber and Airbnb have demonstrated, once an organization reaches a certain size, it takes on trappings of bureaucracy and perhaps arrogance, and loses sight of customers and their needs. It becomes increasingly rule-bound and inflexible, losing some of its advantage and creativity.

If we can innovate new products and services with such alacrity, certainly we can innovate new organizational structures and business models that allow businesses to scale and remain nimble, become relatively large but still able to respond to emerging trends and needs. This is the new “holy grail” of innovation—creating organizational structures and business models that are able to shift as customers shift, completely flexible and nimble while still scalable.

First published Sept. 25, 2018, on the Innovate on Purpose blog.

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