Innovate or die

For centuries people assumed that economic growth resulted from the interplay between capital and labor. Today we know that these elements are outweighed by a single critical factor: innovation. Innovation is the source of U.S. economic leadership and the foundation for our competitiveness in the global economy.

—Bill Gates, “How to Keep America Competitive” (2007)

The rules have changed in the 21st century. It is difficult to compete and survive if you are still doing things the same way you did even a few years ago. Indeed, we might take Bill Gates’ observation a step further: American economic power has always been driven by innovation, but today innovation isn’t enough. The speed of change in markets and technology has accelerated so much in the last 20 years that companies are now in danger if they don’t embrace constant innovation.

Many of the institutions that are the most ineffective and inefficient are those resistant to change and innovation—and the most blaring examples are government operations and government-run public schools. In the private sector, competition and free enterprise force change or they will eliminate a company altogether.

It is shameful to see large private companies that don’t innovate and change hold their hands out to government—and you, the taxpayers—for bailouts that are necessary because of their own failures. I am referring to the automakers in Detroit. They made their bed; let them lie in it.

Thomas Friedman penned a column in The New York Times in 2008 titled “How to Fix a Flat.” He said, “Last September, I was in a hotel room watching CNBC early one morning. They were interviewing Bob Nardelli, the C.E.O. of Chrysler, and he was explaining why the auto industry, at that time, needed $25 billion in loan guarantees. It wasn’t a bailout, he said. It was a way to enable the car companies to retool for innovation. I could not help but shout back at the TV screen: ‘We have to subsidize Detroit so that it will innovate? What business were you people in other than innovation?

“How could these companies be so bad for so long? Clearly the combination of a very un-innovative business culture, visionless management and overly generous labor contracts explains a lot of it.”

Friedman concluded the column by saying, “Lastly, somebody ought to call Steve Jobs, who doesn’t need to be bribed to do innovation, and ask him if he’d like to do national service and run a car company for a year. I’d bet it wouldn’t take him much longer than that to come up with the G.M. iCar.”

I was struck reading that last comment about putting the now late Steve Jobs in charge of GM—the founder of Apple, who everyone knows was such a creative innovator in the market. Last week I attended the Louisiana Association of Business & Industry annual luncheon, where I heard Steve Forbes of Forbes magazine speak. He was talking about the health care industry and how it and the insurance industry should be opened up and turned into true, free markets. Do that and see what happens to costs, he suggested. Forbes also concluded his remarks by asking what would have happened if we had allowed Jobs into the health care market—what innovations might we have seen?

So, what if you don’t innovate and embrace change in the 21st century? What if you are a 100-year-old company (or 200-year-old company!) and have enjoyed iconic stature and dominance in your industry? Aren’t you exempt from such pressures? No.

Have you heard of a 131-year-old company named Kodak, which just filed for bankruptcy last week? Or what about Encyclopedia Britannica, more than 200 years old, which has fallen hard after reporting record sales of $650 million in 1990.

How did this happen to these industry leaders? Lack of innovation and their failure to foresee change, embrace change and get ahead of the curve. As futurist Joel Barker concludes, they were blinded to the future by their past success. There was a paradigm shift—and these icons missed it. Pride goeth before a fall.

Ironically, according to a 2006 case history by professor Shane Greenstein and Michelle Devereux for the Kellogg School of Management at Northwestern University, Bill Gates and Microsoft approached Encyclopedia Britannica in the mid-’80s about an agreement to put the product on a CD-ROM for computers. The company quickly declined the offer, stating, “The Encyclopedia Britannica has no plans to be on a home computer. And since the market is so small, only 4 or 5 percent of households have computers, we would not want to hurt our traditional way of selling.”

They wanted to protect their status quo.

According to the case study, it says Encyclopedia Britannica viewed the CD-ROM encyclopedia as one step above a video game. Bad idea. Microsoft eventually produced Encarta on a CD-ROM in 1993, adding graphics and music, and gave it away free with the purchase of a computer and software. Encyclopedia Britannica filed bankruptcy three years later and sold.

But innovation didn’t stop with Encarta winning the battle. Along came Jimmy Wales from Huntsville, Ala., who in 2001 established Wikipedia. Just eight years later, the big, bad Microsoft Encarta threw in the towel. In his New York Times blog in 2009, Noam Cohen wrote, “Microsoft delivered the coup de grĂ¢ce Monday to its dying Encarta encyclopedia, acknowledging what everyone else realized long ago: it just couldn’t compete with Wikipedia, a free, collaborative project that has become the leading encyclopedia on the Web.”

In just one decade, look at what Wikipedia reports: 400 million unique visitors monthly as of March 2011, according to ComScore. There are more than 82,000 active contributors working on more than 19,000,000 articles in more than 270 languages. (Last week, in protest of the antipiracy legislation in Congress, Wikipedia had a blackout experienced by 162 million people, resulting in 8 million U.S. readers taking their suggestion to look up their congressional reps from the site and let their voice be heard. Sounds like more than an online encyclopedia.)

So, fast-forward to 2012. Kodak, which gave us the instamatic camera and was a household name, filed bankruptcy last week. It now employs 17,000 people, down from 63,000 less than 10 years ago. Its market value is below $150 million, down from $31 billion 15 years ago. It is evident that Kodak failed to embrace change and technologies, including the digital camera—a technology, ironically, it invented in 1975. Unbelievable … and scary if you aren’t innovating in your company. Are you?

These lessons are perhaps best summed up in the United Kingdom’s Daily Mail, which quotes Mark Zupan, dean of the University of Rochester’s business school, regarding the Kodak news: “If you’re not willing to cannibalise yourself, others will do it for you. Technology is changing ever more rapidly, the world’s becoming more globalised, so to stay at the top of your game is getting increasingly harder.”

This is a warning to all in business, but it also must apply to our institutions, including government, nonprofits, universities, and public and private schools: Embrace change and innovate—or you may go the way of the dinosaur … and Kodak.

Editor’s note: This story has been changed since its original publication. Encyclopedia Britannica did not file for bankruptcy in 1996.

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