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Why Innovation Isn’t Enough

By Terry R. Bacon, Cofounder and President, and David G. Pugh, Cofounder and Executive Vice President, Lore International Institute

Do you believe in innovation? Most leaders of high-technology firms do. But, as a business model, innovation alone virtually assures bankruptcy. Let’s clarify what we mean here by a challenge in the form of a business proposition:

Proposition — As a business practice, the creation of new products, services, or gadgets constitute a futile and a useless exercise.

If that did not raise the hairs on the back of your neck and make your blood boil, then let us amplify this challenge by suggesting that: innovation—by and of itself—will not keep the high-tech industry viable.

A Case in Point:

On the day the bankruptcy court sold the assets of his firm, Joe (not his real name) stood by in amazement. He was a sophisticated hardware and software developer with a background that included a degree from a leading computer technology school and the success of having developed a number of new PC technologies.

Initially, Joe’s genius got recognized for his work on the Sol-20 computer. Two of Joe’s colleagues proposed the idea for the Sol-20. Although Joe credited his friends with the concept of the Sol-20, he is credited with actually designing the system. The Sol-20 was introduced about six months before the Apple II computer, so it actually predated the Apple II as a complete computer system. It also included the VDM-1 alpha/numeric video display adapter that Joe had also designed, which let the Sol-20 display alpha/numeric on a television. It was so fast that the adapter enabled the first interactive computer game using symbol characters built into the alpha/numeric display chips of the time. Joe’s VDM-1 design set the architecture for personal computers and video because it was designed to handle part of the display processing, instead of relying entirely on the CPU. But only about 10,000 of the Sol-20 systems were produced, either as complete units or as kits.

Another design request realized by Joe was the portable computer in 1981. This innovation of Joe’s was considered the first portable computer ever. From this design job, Joe was named founder and vice president for engineering at the company. Unfortunately, the firm went bankrupt in 1983.

Joe was able to continue his work, including the founding of Upstart, a company he formed to create a workstation-on-a-card product. That effort and the company failed. Joe is also known for his invention of the Pennywhistle 103 kit modem he developed in 1976. The Pennywhistle 103 made it affordable for personal computers to have a modem. Additionally, Joe invented a wearable CD-ROM-based computer in 1991, but it was never produced.

As an innovator, Joe was an unqualified genius. But almost none of his superior inventions were able to keep any of Joe’s multiple business enterprises solvent. Why—given Joe’s excellence as a designer and systems innovator—did almost every business Joe attempted to develop end in collapse? Joe, like most in the high-tech sector, seemed to have pinned his business success only on his ability to innovate and not on savvy and effective business practices.‡

Are High-Tech Customers ‘Special’?:

Most readers of The Sterling Report are leaders like Joe who oversee innovation-driven firms, interested in creating and using “new” things. In the world of technology, the creation, development, and marketing of the newest versions seems like the very life-blood of the industry. However, we would like to challenge readers by suggesting that, as a business practice, the creation of new products, services, or gadgets will not sustain your competitive advantage nor ensure the survival of your business.

High-tech firms generally assume that their customers are in a different category than other consumers. You may say that your buyers insist on innovation. Don’t innovate and you will lose the whole market. Clearly, this is probably true. It’s not that innovation isn’t a key part of every business. Indeed, every enterprise and industry sector has a need to develop new products and services. Our issue isn’t innovation, per se, but a bedrock belief that innovation alone will sustain the market. If innovation—new products and new features—equated to high profits and the capture of more market share, then today Apple computers should be the biggest retailer of personal computers in the world. Right?

Consider that Apple has a very user-friendly platform; it is graphically superior to its PC competitors; and it has continued to offer new product lines and new programs designed to attract customers driven to purchase cutting-edge products. Yet, year-by-year, Apple continues to represent a smaller segment of the market. If the innovation business model worked, the IBMs and the Microsofts shouldn’t have had a chance. They do, but not solely because of innovation. Other market forces have driven the customer to the PC and away from the Mac.

The Role of Supply Chain Economics:

Some of those forces have to do with supply chain economics. Microsoft and IBM foresaw that their business relationships with suppliers and vendors would drive this market every bit as much as technical innovation. As much as anything, Apple’s loss of market share may be attributed to supply chain management. Microsoft, especially, was at the forefront of creating a supply chain management system with both its suppliers (i.e., Intel) and its vendors (i.e., Dell or HP). There have been some repercussions for firms like Microsoft for too aggressively leveraging their supply relationships, but the overall business effect has been to maximize market dominance.

One key difference in this kind of supply chain management is the significance of customer relationships in the process. Firms like Microsoft understood that as important as the technical excellence of their software, it would only become the product of choice if adopted by vendors. To get vendors aligned with Microsoft, the business relationship took on equal significance with technical innovations. To be sure, Microsoft has continued to innovate. But the reason it now dominates the market isn’t solely because of their technical innovations. The relationships—both good and questionable—that MS developed with its vendors have served to move the firm ahead of nearly every other competitor.


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