China Rising

Why does China owe a huge debt of gratitude to a little known US trucker?

In 1953, Malcom McLean, a trucking magnate in the United States, got tired of seeing his trucks stuck in traffic jams. He hit on the idea of driving them onto ships at one end of the states and shipping them to a port at the other end where they could continue their journey.

Malcom soon realised that he was wasting a lot of money shipping the engine and wheels together with the goods. As soon as he left these at the harbour, the shipping container was born. As is usually the case, others had similar ideas and for a number of years there was competition around the format (size and shape) of the containers.

Eventually, McLean's company won significant contracts to ship supplies to the Vietnam-war effort. This led to a ready acceptance of container shipping. The US Government imposed standards on the format of containers used in these efforts.

People realized that not only was containerization feasible but the innovation dramatically reduced shipping costs. Manufacturing started moving from high-cost areas to low-cost areas, first domestically and then internationally. This allowed companies to take advantage of low labour costs and not have the savings eaten up in exorbitant shipping charges.

Over 50 years of this process has led to seismic shifts in economic development with the phenomenal growth in the economies of Japan, followed by India and now China.
This clear example of disruptive innovation illustrates some key ideas in innovation. First, the length of time these developments can take; second, the far reaching industry changing consequences of a seemingly simple initial change; third, the resistance to such a change when it is noticed by the incumbent powers.

The management challenge in these situations are enormous. First, how do you recognize that what you are looking at is a disruptive innovation that cannot be ignored? Second, and perhaps more importantly, how do you allow both the old and the new to develop side-by-side during the transition?

I believe that it is almost impossible for an incumbent to recognize a disruption until it is too late. Instead all firms should develop an experimental capability in which a reasonable amount of scanning and prototyping becomes a constant part of the organization.

This is not a trivial thing. Organizations taking this route will need to develop significant dynamic and deep learning capabilities. They will have to develop cultures that are flexible and reflective, that tolerate mistakes, regarding them as failed experiments from which much can be learnt.

When innovation in technology is not enough

"It was the holy grail of inkjet printing", Antonio Perez, the new CEO of Kodak told BusinessWeek in an interview last year. Ever since the lab produced specialist inks that promised archival vivid inkjet prints, Kodak had been working on a top-secret project to make a grand entrance into the inkjet business. The distant echoes of Kodak's founding by finding the mechanisms to switch from wet- to dry-plate technology is muted. This is not revolutionary, but merely incremental; improving on a theme.

"You press the button and we do the rest", is the famous catch phrase coined by George Eastman in 1888. At the age of 24, Eastman was about to go on holiday and a friend suggested that he record his trip on his wet-plate camera. While he never made it to his holiday, he became obsessed with simplifying the process of making pictures. This effort culminated in the Eastman Kodak Company, which has been around for close to 130 years.

The switch to digital away from film is a classic example of a "disruptive technology", where a slow-start, fringe technology is taken up and eventually threatens the existence of the major players.

Kodak's mainstream business of consumer and professional film and the associated ecosystem of processing and print shops seemed too big and stable to take any significant interest in the growing field of digital photography. However, the trend reached the point in the early 2000's that simply couldn't be ignored. In 2003, Kodak slashed its dividend to provide R&D funds to refocus its imaging business, which made up 70% of its revenue, on the digital market.

Now Antonio Perez, who hails from HP, is attempting to complete the turn-around. Besides the increased range and capabilities of the consumer level cameras and the retooling the processing shops to be more digital and self-service friendly, he has taken a huge bet on innovating the home printing business model.

He argues that people don't print at home because the costs of the inks are too high. Working with a team of ex-HP staff he has tried to rewrite the inkjet printer business model. Three years of R&D and some $300 million later, the new range of Kodak printers was launched in February 2007.

A year later the jury is still out on these printers, with Kodak selling only 520,000 units of their multi-function printer against global sales of 61 million.

Here we have an example of a systematic and strategic attempt at innovation in the hope of turning a company, if not an industry, around. Looking at Perez's background at HP it is not at all surprising that he is focused on the inkjet printer market. The dangling question is whether the market is appropriate for a late, but innovative, entrant who is using innovation to drive a low running cost, higher initial cost model.

Doing and Learning

Isn't it amazing how authors seem to have perfect vision when looking backward at innovations? The reason I mention this is because I recently read "Hidden in Plain Sight" by Erich Joachimsthaler. He implies that Apple spurred the iPod by activating the growth platform of “managing music” including its behavioral episodes: finding, evaluating, selecting, buying, listening to and storing music.

While I agree that understanding and playing into the behavioural episodes of customers can lead to innovative opportunities far beyond the product itself, my own research into the iPod shows none of the foresight attributed to this idea.

Steven Levy, in his book "The Perfect Thing", shows that there was a lot of serendipity in the iPod's rise to fame. In 2000 when Apple wanted a Mac-based music player they bought out Soundjam, one of the only two available on the Mac platform. iTunes was re-skinned to look like iMovie.

Then in 2001 realizing that there was dissatisfaction with the music devices of the day, Apple recruited Tony Fadell as a consultant to do an eight week feasibility study. Fadell coupled some commonly available parts together and the iPod was born. In presenting the results of the feasibility study to Jobs, Fadell and his team created two dummy products, knowing that Jobs routinely knocks the first ideas.

The marriage of iTunes, iPod and the deals that Steve Jobs did with the record industry to create the iTunes Store put an almost unbeatable ecosystem together. We can learn a lot from this, but we should not attribute any of this insight to the founders of iPod. They like most business executives (especially founders and entrepreneurs) simply play a game of survival and growth, ducking and diving, experimenting with new ideas, learning and responding.

This then is the ultimate paradox of business research; founders do amazing things because they are driven to do something special or know no better and business researchers find ways to understand why it was successful and then generalize this into techniques for others to follow.

On a Razr Edge

Yesterday, Motorola announced a restructuring that would see its mobile handset business isolated from the rest of the group. Most commentators see this as the end of the road for the mobile division; doomed to be sold off.

This is very sad as Motorola is not only a pioneer in electronic innovation, but in effect created the mobile phone industry 25 years ago. It was the leading handset maker through the 1990s, loosing this position to Nokia in 1997.

This failure to recognize the handset as a fashion item and remain in tune with the fickle needs of the consumer could be the ultimate cause of Motorola leaving the business it started. The inability to understand and respond to customers plagued Nokia in 2004, when it was accused of arrogance and lack of design and innovation.

At the same time Nokia was struggling, Motorola had a huge success in the launch of the Razr handset, selling over 110m units and reclaiming a market share level of over 20%. However, since then Motorola has not had any significant handset launches or innovations. BusinessWeek has a great view of this failure, "The Razr was a fluke. Motorola was never an innovation-led company. It was a technology-driven company run by engineers who failed to understand the difference between technology and innovation." You can read the complete article here.

The stakes are high in this industry. The metronome of contractual upgrades beats out a rhythm demanding handset manufacturers respond to new product cycles of no more than two years. Then as part of the fashion industry, they need to understand the psychology of being 'cool'.

Here is an industry where innovation, has to be 'built in'.