New Ideas in Old Systems

The fundamental point that I was trying to make in yesterday’s post is that most of us are facing the same innovation problem: it is extremely difficult to get new ideas to spread within most organisations. We are a bit deceived because we hear about innovation at Google, and 3M, and Apple, and we think that all of our organisations should work like that. Unfortunately, most of them don’t. My examples yesterday came from education, and I know that a lot of people in the public sector think that innovation is unusually hard in their organisations. But nearly everyone resists change. Here are some examples.

First off, here’s ex-Pitney Bowes CEO Mike Critelli on how they faced disruptive innovations:

In 1999, two start-up companies challenged us with online postage solutions. My chief operating officer, Marc Breslawsky, and I were in a minority among the senior team in believing that these companies posed no threat to us. Many employees and high-level executives, one or two board members and many shareholders told me that the world had changed and that I was in danger of ignoring potentially disruptive innovation. The reason Marc and I turned out to be right is that we understood that disruptive technologies are successful only when they are superior to the older technology they replace and when they can be marketed profitably. Neither condition was met.

The blog post discusses how Critelli has consistently had a world view that differed from those around him, and how this made it hard for him to get his ideas across. Many of his examples are cases where he was ultimately right – and in particular, I think that his experiences in changing healthcare are admirable. However, in this case, he wasn’t visionary – he was just lucky (be sure to read Mike’s response to this in the comments!).

Those two conditions are not actually required for disruptive innovations to succeed – especially the first one. Those two conditions are what entrenched incumbents always say when they discount the threat that new challengers pose. As the many studies by Clayton Christenson, Scott Anthony and others show, disruptive innovations are usually technologically inferior when they are introduced. This is precisely why the large firms don’t react – because they correctly perceive that their technology is better. The disruptive innovations change by creating a new market based on different business models, and different value networks.

This misperception of the threat posed by new technologies is one of the reasons that it is often very difficult to introduce innovations within established firms. The fact that P-B’s stock price is now 1/3 what it was when those threats appeared in 1999 suggests that a little more innovation would have proven useful for them.

Here’s another example – Kodak. Simon Waldman has a really nice post on some of the issues that Kodak was grappling with around the same time that Pitney Bowes was thinking about online competitors. He says that they didn’t react to the threat posed by digital cameras because:

* They were distracted by a ferocious price war with Fuji in the late 90s

* They were petrified of cannibalising their film business with digital (further compounding the impact of the Fuji price war)

* They massively underestimated how quickly consumers would ditch film

* Decades of comparable success had made them fat and way, way too happy with themselves

A few months ago, I asked this question to my favourite Swedish PhD student, Christian Sandstrom who has made something of a speciality of creating fabulous Slideshare presentations on the changes in the photographic industry. He responded quickly, but I never posted it here. You can see his answer here.

Here’s the quick summary

* Over aggressive diversification left them burdened with debt and in a weak financial state for dealing with the Fuji price war.
* They put too much focus on ‘hybrid’ solutions – using digital as a way to sell print (eg the Photo CD system)

To me, this sounds a whole lot like the problem that George Siemens is describing in education – they were trapped by their underlying beliefs and ideology. Their fundamental belief was that film would retain its dominance. Digital photos were technologically inferior (especially when they were first introduced), so why would anyone switch from film? Digital cameras took the normal route for disruptive innovations – they found a niche that would value their strength – people that wanted to post pictures on the web. They didn’t care about the poor quality – pictures looked lousy on the web back then anyway. And being able to transfer a digital photo straight to your computer was much easier and much faster than taking a picture, getting it developed, and then scanning it.

Like Pitney-Bowes, Kodak didn’t provide a great environment for innovators back then. Change was being fought hard.

Here’s a third example, going on right now – news. Here’s Felix Salmon arguing that the physical system of producing newspapers is one of the things that is making their transition to digital extremely painful:

Spencer Ackerman uncovers a bit of the hidden point here: newspaper conventions have been built for physical newspapers, and can look silly in the age of the web — especially when the stories themselves appear, pretty much unchanged, on newspapers’ websites. It might make sense for the physical LA Times to run one big story about Afghanistan, but once that decision is made, no one is going to chop that one big story into three smaller ones for the website.

Once again, inertia within the existing system makes it highly resistent to change, as we’ve discussed quite a bit here.

I think that the big difference between the public and private sectors in innovation imperatives is not that the private sector has the profit motive, but rather that occasionally private firms go out of business. It’s not Schumpeter’s “carrot of spectacular reward” that motivates innovation, but the “stick of destitution”. Even with this difference, fighting the inertia within established systems is our fundamental problem – no matter which sector we’re in. It’s hard to get new ideas to spread. That’s our challenge. We’ll keep talking about ways to meet it.

Student and teacher of innovation - University of Queensland Business School - links to academic papers, twitter, and so on can be found here.

Please note: I reserve the right to delete comments that are offensive or off-topic.

11 thoughts on “New Ideas in Old Systems

  1. Sorry for being off topic here, Tim. Just wanted to compliment you on this fascinating blog and all these interesting thoughts! I think I’ll try and catch up with some of them. Seems like you have a lot of interesting stuff going on; hope you have time to watch some good movies as well. Finland sends it’s greetings!

    • Hi Reggie – great to hear from you! I hope that you’re doing well. Movie watching has definitely been down for me recently – a lot of my brain’s cycle time has been taken up with thinking about the stuff here…

  2. Thank you for commenting on my blog. I am well aware of Christensen’s work, and, in fact, he has done a case study on Pitney Bowes. I was trying to make a different point than what you have attributed to me. If I were going to discuss disruptive innovation, I would have referred to Andy Grove’s book Only the Paranoid Survive, in which he tries to distinguish between real and false inflection points.

    We had real inflection points and disruptive innovation, including the rapid decline in our facsimile business and, in my judgment, the most profound change as a result of the Internet, the far greater knowledge our customers acquired relative to competitive offerings because of search engines like Google. The real story of disruptive innovation with respect to the Internet was not online postage, but the rapid and significant increase in customer knowledge and power.

    The reason online postage did not fit the disruptive innovation mode was that it would be inevitably held back, as it has been for over a decade, by the way postal and government officials see the world, which is different from private sector customers. There are many innovations that should be disruptive, but are not, because government regulators or procurement officers stop them from coming into being or growing. The disruptive innovative model cannot predict how political decisions will get made.

    For example, I watched the whole move toward market liberalization in Europe stall because the German government, at the urging of the leadership of DeutschePost passed what eventually turned out to be an unlawful sector-specific minimum wage law that destroyed DeutschePost’s two main competitors and invited retaliation in other EU countries. The proposed law was dead on November 28, 2007, but with a handful of votes switching in the next week, it was enacted on December 7.

    I would not characterize my successes or failures, and I had both, relative to distinguishing between real and false inflection points as “lucky.” We had robust scenario planning and a very outside-in process.

    • Thanks very much for the stopping by and making a comment Mike. Your clarification makes much more sense – if you had talked about it that way instead of as a disruption in the original post then I wouldn’t have had anything to say about it.

  3. Great post Tim. Having worked in media/newspaper biz for many years, I totally recognize the entrenched incumbent thinking you are describing here. The inability to challenge the fundamental “truths”, the orthodoxies of the business…. appalling! And boy, where they wrong!!!

    A side note: some similarities in the industries you are describing (printing, photography, newspapers) is that all three are highly capital intensive industries. Baked into the thinking of the execs, especially the CFO’s, is the huge investments they have made in machinery and presses, often just recently, and how these need to be written off over the next umpteen years. The inability to think in terms of sunk costs is another factor here in overlooking disruptive innovation, don’t you think?

    • Thanks for the comment Berend. I agree that the sunk investments play a huge role in the inability to react to threats that organisations often have. It’s part of what makes it such an enormously difficult problem to deal with!

  4. Tim,

    you write, “I think that the big difference between the public and private sectors in innovation imperatives is not that the private sector has the profit motive, but rather that occasionally private firms go out of business.”

    I think the reason is simpler and more fundamental: 1) the intensity of innovation is proportional to the intensity of competition.
    2) The public sector has no competition.

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