According to the economist Joseph Schumpeter our economy is driven by ‘waves of innovation’. Each wave is characterized by disruptive innovations which fuel a new wave of growth: water power, textiles and iron; steam, rail and steel; petrochemicals, electronics and aviation…On this basis we are now in the ‘fifth wave of innovation’: The Age of Digital Networks, Software and New Media.
Throughout history many businesses have capitalized on these waves of innovation, immortalizing themselves as leaders of innovation. But for others, failures to react to these developments have literally consigned them to the depths of history. That is what Schumpeter calls Creative Destruction: whilst Facebook and Netflix, for example, capitalized on the new age of information and digital content, Nokia and Blockbuster were annihilated by it.
So, now, as we enter the age of digital networks, software and new media, what can we learn from previous waves of innovation? What is it that allows some companies thrive on these waves, whilst others fall by the wayside?
Lesson 1 – Blockbuster & Netflix – Nokia & Apple
Only by implementing an idea early enough, you can see its true disruptive potential
Just fifteen years ago should you have wanted to rent a movie, you would have had to enter a video rental store with your membership card and pick up a physical copy. In 2004, the leader of this business model, Blockbuster, had around 9,000 stores internationally and was valued at $5 billion. It was, also, however, already beginning to see the challenges posed by the rise of the internet. In response, it scaled down its emphasis on physical stores and shifted to mail-rentals and stand-alone kiosks. Later, it looked towards online streaming.
But never did it foresee the full potential impact of digital rentals on its business model. As Adweek summarized the death of Blockbuster: ‘they didn’t come on strong enough or soon enough’. Or as the NY Times reported: ‘Internet Kills the Video Store’.
Being the leader in home movie rentals with a $5 billion valuation, Blockbuster was arguably in prime position to capitalize on their strong customer base and brand, pivoting into a new digital venture. Instead, Blockbuster remained reactionary. In 2000, Reed Hastings approached former Blockbuster CEO John Antioco and asked for $50 million to ‘give away’ the company he founded — Netflix. Antioco rejected on the basis that it was a „very small niche business”.
Netflix is now ranked by Forbes as one of the world’s most innovative companies and in 2015 was valued at $32.9 billion – 6.5 times that of Blockbuster at its peak. Blockbuster underestimated the potential transformative effect of the digital revolution. As we previously discussed, really disruptive innovations can only be measured after they have been a success.
This is more apparent today than ever with the swathes of internet-based enterprises which would have seemed to have little appeal or impact before the digital revolution had taken off. Not long ago many would have regarded the very concept of social media as either incredibly niche, or just downright useless. Now, for better or worse, for most it is the first thing they use in the morning and the last at night.
The case of Nokia is yet starker as Nokia held the very technology it needed to defeat its market competitor:
Everyone remembers their first mobile phone. It was probably a reliable brick equipped with the game Snake and an unimaginable battery life in today’s world of smartphones. Equally probable, it was a Nokia, an illustration of the brand’s dominance over the early mobile phone market. In 2012, however, Nokia ended its 14-year-run as the world’s largest maker of mobile phones. By 2014 it had more or less disappeared from the consumer mobile phone market. Why?
In short it was destroyed by the rise of the smartphone. More significantly, it was destroyed despite holding the very technology to develop a smartphone more than seven years before the launch of the iPhone.
At some point in the 1990s, Chief Designer, Frank Nuevo, stood in a meeting room with a phone that had a color touchscreen set above a single button. This phone was shown locating a restaurant, playing a racing game and ordering lipstick. Yet customers were never to see this device. As the Wall Street Journal summarized Nokia’s failures:
‘The gadgets were casualties of a corporate culture that lavished funds on research but squandered opportunities to bring the innovations it produced to market’.
Essentially Nokia could have paved the way for the smartphone revolution but failing to implement left it vulnerable to competitors. The company reportedly spent $40 billion on research and development over the past decade, nearly four times what Apple’s spending during the same period.
Without implementation, innovation is nothing.
Lesson 2 – The Internet and The Steam Train:
Public and private innovation work better in harmony
As studies from the Science Progress journal indicate, innovation in the private sphere cannot be separated from the actions of government. The two feed off one another: The fact that the steam power revolution began in England, for example, was not a coincidence. Thanks to the cannons smelted during the Napoleonic wars England already held a huge advantage in its stockpiles of iron and coal.
The USA held a similar advantage with the invention of the internet. For example, many see the beginnings of the internet in the military project, DARPA. It is quite plausible that the Federal government was essential in this innovation as it often is the ‘first customer for technologies too risky for industry to invest in’.
The innovation of the steam train and the internet may seem miles apart but they share one key factor: public initiatives laid the groundwork for a later explosion of private sector innovation. On this basis, in seeking innovation the private and public sector should aim to work more closely together to innovate more effectively. Governments might seem to move slowly compared to innovative companies, however, they often are able to invest large sums of money into projects, which are way too risky for companies alone. If governments offer these high-risk investments, companies should always try to leverage them.
Lesson 3 – The Computer, The Internet and countless others:
Collaboration is key to riding the innovation wave
As Walter Isaacson summarized in his history of digital innovation, The Innovators, innovation is a collaborative process:
‘Innovation’, writes Isaacson, ‘comes from teams more than lightbulb moments of lone geniuses’.
The list of examples for the value of collaboration in innovation are endless:
James Watson and Francis Crick’s discovery of the makeup of DNA, Bill Hewlett and David Packard’s Hewlett Packard, Wilbur and Orville Wright’s development of the aircraft, Larry Page and Sergey Brin’s creation of Google.
But perhaps the most powerful example to date is Wikipedia: Wikipedia’s founders really tapped into the wave of ‘digital networks, software and new media’, creating a platform founded on the principle of collaboration. This principle was so powerful it defeated Microsoft’s well-funded efforts to build a competitor.
Formal studies echo this sentiment, particularly in respect to innovating at a conceptual stage: A 2015 Nielsen study on collaboration found that generally, the larger and more diverse a team, the better the concept they generate. While products can be built efficiently by strict division of responsibility and hierarchy, the same does not apply to innovation. What works well in a car production line does not translate to an office trying to develop a disruptive mobile application.
Often, great ideas move a long way from their initial conception, becoming almost unrecognizable but greatly improved, thanks to collaborative input. According to Nielsen’s data, teams of six or more people generated concepts that performed 58% better with consumers in pre-market testing than the brands’ initial “starting point” concepts. Collaboration has also been shown to speed up the conceptualization process. Moreover, collaboration is not only a powerful principle to adopt during the innovation process, it also now founds the backbone of an entire new wave of products and services.
The very functioning of peer to peer businesses such as Uber and AirBnB – which dominate markets without any real capital – is hinged on collaboration. Thanks to the internet, collaboration is more seamless and powerful than ever. It offers new opportunities and increases the level of market-place efficiency.
Thus, key to riding the innovation wave of the 21st century is not only harnessing collaboration when your business begins to innovate, but also considering the power of collaboration as part of the actual product/service itself.