This chapter examines how to best innovate. The advice sometimes runs contrary to our normal thinking. The Panda Principle tells us not to worry about being the best, rather be the first to gain an early advantage and move on. Change cannot be predicted, controlled, or managed, so be reactive. Recommendations for effective innovation include the following:
• Get there first
• Be aware of the sequence of events
• Be sensitive to change outside your domain
• Be aware of changing priorities
Research studies have found a connection between high levels of innovation and profit. Jeff Mauzy’s study of 150 major U.S. firms found that innovative companies experience profit growth rates that were four times as great as those for non-innovative ones (1). The search of ways to innovate is perhaps the reason that many companies today are hiring liberal arts graduates. Many believe these people are better for today’s business than MBAs. Lee Iacocca, former CEO of Chrysler has said, “MBAs know everything and understand nothing.” He meant that most business graduates had formulas for everything but that those formulas were useless in an age in which creativity and innovation are essential to succeed (2). Creativity is essential to help produce more new products or services, make improvements in current products and services, make faster decisions, reduce costs, avoid threats, find new markets and new ways of promoting company services, and better differentiate your product from others. Several research studies support the belief that increased stock prices and earnings are tied directly to successful innovation through new product introduction. Companies that launch a steady stream of relatively successful new products and services over a long period of time often see their stock prices consistently rise (3).
Motorola, 3M, Amgen, Owens-Corning, Rubbermaid, and Pfizer each spend more than 4 percent of sales annually on research and development (R and D) (3). But it does not have to be that way. Innovation does not require tons of money. A Fortune analysis of 143 companies, comparing R-and-D expenditures as a percent of sales and rank on their list of innovative companies, shows very little correlation between R-and-D spending and standing on their list (4). For instance, they noted that the relationship between R-and-D dollars and perceived innovation can be quite perverse. Pharmacia Upjohn spends 18 percent of revenues on research, more than almost any company in any industry. But money does not make it right; they ranked as 339 in innovativeness in the year of the study. Their lack of R-and-D productivity is not unique among businesses. Eighty percent of executives surveyed replied that they thought innovation was critical to their company’s future competitiveness, but only four percent indicated that their firms knew how to innovate in a superior way (1).
LESSON ONE: THE PANDA PRINCIPLE
At one time there were alternatives to our present writing systems, counting systems, sets of number signs, and calendars. Some of these systems were undoubtedly better. So how did we end up with these? The answer to this question rests on how we go about innovating. Often the sequence of events is just as important as the actual inventions. The losers believed that they had a better mousetrap— sometimes they did, but they were fighting the Panda Principle. Gain Early Advantage should be the prime directive of any innovative organization.
William E. Coyne, a Senior Vice President of Research and Development for 3M, was one who believed in the prime directive that you get the most from your innovations if you move quickly. If a new project overspends its budget by 50 percent, it can shave profits by 4 percent. But if the product is six months late to the market, profits are trimmed by 33 percent. He says this shows better than anything else why they feel a sense of urgency (5).
For instance, consider the VHS and Betamax videocassette formats, which were introduced about the same time and therefore had equal market shares. A combination of luck and corporate maneuvering brought VHS vendors a slightly bigger early market share. Chaos theory tells us that often little things can make a big difference, and it was true in this case. Having a slightly bigger market share at the beginning gave VHS an enormous advantage in spite of it being inferior to Beta videotape technology. This small variation meant that more video stores stocked VHS prerecorded tapes, which cascaded into more customers choosing VHS recorders, which meant that VHS rapidly took command of the entire market. Betamax had a slightly better technology, but being better does not guarantee success. You can build a better mousetrap, but you had better do it first. If you have a choice between building a better product or getting a reasonably good product out first, you had better get there first. It is the Panda Principle in action.
Stephen Jay Gould in his book, Bully for Brontosaurus, shows the value nature places on being first in a new niche. He calls it the Panda Principle. Creatures in nature can survive perfectly well, even though other creatures could occupy their grid or niche more competitively. Companies that do not compete with the best can try to do what the panda did (6). The panda’s “less- competitive” characteristic is its thumb. It is not a real thumb, it certainly is not as good a thumb as some potential competitors might have, but it is the best the panda could manage. The panda had already committed its fifth digit for other uses. Normally a more fit competitor would have driven the panda to extinction, but there is an exception to the eat-or-be-eaten rule. The panda population remains stable as long as a more fit competitor does not arrive. We all know that less-fit companies and managers do survive, sometimes for quite a while, as long as the conditions for survival are not too severe. This is a dangerous place to be, but sometimes you get lucky. Inertia is a great force for survival.
An Italian named Pellegrino Turri constructed the first typewriter in 1808. Several dozen patents were filed, and prototypes were built over the next six decades, but none were mass produced or commercially successful until April 1874 when an American gun manufacturer, E. Remington & Sons, shipped its first type writer, based on a prototype by American inventor, Christopher Sholes. A great diversity of typewriters were tried out over the next 40 years. Thomas Edison even tried his hand at it. Some machines resembled pianos; some including Remington’s resembled sewing machines (they were already making sewing machines—so why not?). Some used a ball carrier (like later-day IBM Selectric) that moved; others had moving type bars and, in some cases, even the machine moved. In some, ink was applied to a ribbon; others put it directly on the typeface. Keyboards were straight, curved, or circular, with one to nine keys. Sholes’s system originally used piano keys in a single row, with letters in alphabetical order. He soon changed to the QWERTY arrangement, which is the standard keyboard we use today. Surprisingly, he chose it because of sluggish response! Sholes continued to innovate his product by adding type bars, an inked ribbon, and a cylindrical paper carriage.
The QWERTY keyboard is a perfect example of the Panda Principle of getting there first. Typewriter speed records are owned by a better-fit tool called the Dvorak simplified keyboard, but people still use the old, less-effective QWERTY keyboards, not because it is better but because it was there first. They enjoyed a head start as the keyboard of the first successful typewriter.
In those early days, both the typewriter and typist operated differently. Early typewriter keys often jammed. These jams were impossible to see because the keys were hidden from view below the roller. The problem could only be spotted after the typist had typed several lines. Those early typists used a different method than today’s touch typing. They typed using one finger on each hand, so the QWERTY system forced them to slow down by making them use the left finger to type the most common letters.
Letters were positioned not for ease and speed but to slow the typist down so one key would have time to recede before the next one was hit. In addition, the top row contained all the letters needed to spell typewriter so the first typewriter salespeople could impress customers by quickly typing out the name of the new machine.
You might expect that the keyboard is designed so that most of the typing is on the home row. You would be wrong. Only 32 percent of strokes are on the home row; most (52 percent) are on the upper row and 16 percent are on the bottom row. No more than 100 English words can be typed without leaving the home row. A new version of the keyboard called the Dvorak has nine of the 12 most common English letters—including all five vowels and the most common consonants (T, H, N)—on the home row, while the six rarest letters (V, K, J, X, Q, and Z) are on the dreaded bottom row. Therefore, 70 percent of typing strokes remain on the home row, with only 22 percent on the upper row, and a mere 8 percent on the bottom row. Thousands of words can be typed with only the home row (7).
The QWERTY system is an inferior method. Over 3,000 English words utilize the left hand alone. This overuse of one hand extends to our weaker fingers. The QWERTY makes almost as much use of the weakest finger (pinky) as it does of the second strongest (right third). The outcome of all of this is typing that is unnecessarily tiring, slow, inaccurate, hard to learn, and hard to remember. A good typist’s fingers cover 20 miles on a QWERTY keyboard but only one mile on a Dvorak keyboard. Dvorak typists hold most world records for typing speed. QWERTY typists make about twice the errors that Dvorak typists make. A beginner using a QWERTY keyboard needs 56 hours of training in order to reach a speed of 40 words per minute. The same person needs only 18 hours using a Dvorak keyboard (7). In short, the QWERTY keyboard is a perfect example of obsolete technology and process. So why do we use it? Why was it the winner?
The QWERTY typewriter did not win because it was the best invention then or now; rather it won for other reasons (6). The QWERTY system was clearly less “fit” or effective, but those buying the typewriter perceived it to be a better way. Because one company, E. Remington & Sons, started mass-producing a typewriter with the QWERTY layout, more typists began to learn the system, which meant that other typewriter companies began to offer the QWERTY keyboard (8). Soon everyone began ordering this new tool and inertia built up. The power of the status quo took over, and Remington continued to use the QWERTY—even as newer typewriters evolved.
Being first is a powerful force. When the U.S. Navy faced a shortage of trained typists in World War II, it experimented with retraining QWERTY typists to use Dvorak. The retraining soon enabled Navy test typists to increase typing accuracy by 68 percent and their speed by 74 percent. Faced with convincing results, the Navy ordered thousands of Dvorak typewriters, but they never got them. The Treasury Department vetoed the Navy purchase, probably for the same reason that insured QWERTY success. There was inertia of tens of millions of typists, teachers, salespeople, office managers, and manufacturers. August Dvorak died in 1975, a bitter man. “I’m tired of trying to do something worthwhile for the human race,” he complained. “They simply don’t want to change” (7).
Another case in which getting there first outweighed being best occurred in 1956. The United States was investigating a number of design proposals for its civilian nuclear power program. There were reactors cooled by gas, by ordinary light water, by a more exotic fluid known as heavy water, and even by liquid sodium. In hindsight, many engineers believe that high temperature gas-cooled systems would have been much safer and more efficient. So what happened? In October 1957, the Soviets launched Sputnik. President Eisenhower became very eager to get any reactor up and running. At that time, the only reactor anywhere having any inertia of being ready was the highly compact, high-powered version of the light water reactor developed by the Navy for their nuclear submarines. The Navy hurriedly scaled the reactor up to commercial size and placed it in operation. All of this led to further technical developments and by the mid-1960s, it had basically displaced all others in the United States (9). Getting there first should be the top priority for anyone who hopes to be competitive.
The Panda Principle makes displacing an old product or service in business a hard task. It can also provide hope for us but only if we move quickly. Darwin tells us that the best competitor among those not too different from it will win. We do not always need to be world class, but we do need to be fast, fast at innovating. The Panda Principle tells us to not worry so much about having the best product or service, rather having a reasonably good one that was developed early will create a great deal of inertia. Waiting to become the best means waiting at the altar. Create, innovate, and move now! We will figure out how to perfect the moves later.
Being first helps, but it is not an iron-clad insurance policy against extinction. The panda could become extinct if it fails to keep better adaptive predators out or fails to continue to evolve. Fish in the Riff Valley in Africa existed for generations, but when the perch was introduced, this more-fit competitor wiped out all less-fit ones. The same is true of organizations. General Motors was here first and has a lot of inertia. Things were okay until new foreign competitors changed the rules and their chances for survival. It is lucky for the QWERTY keyboard and General Motors that business, like nature, seeks stability and order; otherwise, things would really be chaotic.
A business person cannot simply try to be the first. He or she must keep a vigilant eye on change. Often it is not the size of the change but rather the ongoing sequence of events that is essential. Little changes can and do produce large consequences.
Stuart Kauffman points out that if you were to take a patch of prairie and put a fence around it so that certain types of small animals can no longer enter the plot, then the plot will change over time. The interesting part is when the fence is removed. Because the same set of animals return, it would seem logical that the original community of plants would return—but they do not. What you get is a different stable community (10). Once you are out of the game, it is hard to get back in because someone will take up your space. Being successful, it seems, is dependent not only on who gets there first and creating inertia, but also on the sequence of events. Successful innovation depends not only on who came first but also on who or what came after the innovation. Not only do you have to look forward, you also have to look behind you.
In the 1890s, when the automotive industry was still in its infancy, gasoline was considered the least-promising power source. The Panda Principle was working well for steam, which was well developed, familiar, and safe. Gasoline, on the other hand, was noisy, dangerously explosive, and hard to obtain in the right grade. But gasoline did win out, largely because of a series of historical accidents that may have slowed steam’s inertia. In 1895, a horseless-carriage competition sponsored by the Chicago Times-Herald was won by a gasoline engine. This significant event probably inspired Ransom Olds’s 1896 patent of the gasoline engine and subsequent mass-production of the “Curved-Dash Olds.” This all helped gasoline engines overcome its slow start and gain some inertia of its own, but the fatal blow to steam came from an unexpected place. In 1914 there was an outbreak of hoof-and-mouth disease in North America. Outbreak of the disease led to the withdrawal of horse troughs, which were the only places where steam cars could fill up with water. By that time the Stanley Steamer and its condenser and boiler system was invented so steam cars did not need to be filled up every 30 or 40 miles; but it was too late. Steam never recovered, and gasoline quickly became locked in (9). If things had been different, if steam had won, or if there had not been an outbreak, then it is likely outcomes would have changed. The sequence of events is important, which is why it is so important to remain sensitive to changes both within and outside your domain.
3M calls this sensitivity to one’s environment foresight, or figuring out where their customers are going. Innovating in the right way requires knowing what their customer needs are and what trends are affecting their industries. They want to know both articulated customer needs as well as unarticulated ones. The latter are harder to find, but often lead to the most rewarding products. 3M notes that the world’s first masking tape and the Post-it® Note were not products asked for by their customers (11).
BE SENSITIVE TO SMALL CHANGES IN YOUR ENVIRONMENT
It is easy to get into a market first, but as more and more enter, it becomes harder to survive. Eventually, a market niche becomes saturated and stable and no further competitors can be added. Studies by Kauffman show the interdependent nature of environments. Change a single entity and small or large avalanches of extinction can and do occur (10). The most important thing we can do is to continually seek ways of monitoring direct and indirect environmental changes so we can pick up any changing priorities.
Changing priorities have always shifted the balance of power in nations as well as in nature. In the early sixteenth century, Magellan, a Portuguese explorer, made a voyage around the world. It demonstrated that all the oceans were interconnected. From this time on, the priority changed. European nations with access to the Atlantic would have opportunities denied to landlocked powers of central Europe and the Mediterranean. It meant Spain and Portugal powers would now be joined by France, Holland, and, above all, England. Sometimes priorities are changed by a single historical event like Magellan’s voyage. At other times, the event can be as simple as a change in government regulations.
If you have extra time, look at an old map of natural gas pipelines crisscrossing the United States. An ignorant person would simply see a cobweb of interconnections capable of shipping gas from any gas field to any local company. Those in Washington and in utilities would not see it that way. Government regulations required a gas pipeline to run single-mindedly from a specific field to a particular utility company—with very few shifts or diversions (4). Then along came a person named Kenneth Lay of Enron.
In 1986, his company had just been formed by a merger of two natural gas giants. The Texas oil company executive had been trained as an economist and recognized that Enron could use all those natural gas lines as a network to buy gas where it was cheap and sell when it was needed. All he needed was a little deregulation. That was opposite thinking of other gas utilities who were vigorously resisting deregulation. When deregulation did come, Enron hired aggressive well- paid traders and almost single-handedly began creating spot markets. His gas business colleagues said there was no need for spot markets. Enron found that its new approach could reduce the cost of gas for some utilities by 30 percent to 50 percent. Priorities changed, so the company created new products, new services, new kinds of contracts, and new ways of pricing. Gas used to cost a lot—new, cheap, free- market gas meant new opportunities. Lay did the unthinkable; he used gas for fuel in electric generation plants—something forbidden under old federal regulations. To prove their point, Enron operated their own gas-fired power plant in Texas, showing that it competed economically with coal-fired plants with far less pollution (4).
Being sensitive to changes and their potential effects encourages innovative thinking. When it comes to innovation, it is usually the quick or the dead. It won’t always work, but it is far better to get to the market first with a second-rate product or service than to get there second with a first-rate product. That’s the Panda Principle in action.
Being first does not insure success. It is often the sequence of events sur-rounding an innovation that is just as important as the innovation. Even the order of events matters. Replay events surrounding an innovation and change one sequence, and you could change reality. Change cannot be predicted, controlled, or managed. Therefore, it is better to be reactive than retroactive. It is better to be flexible and adaptive than strategic. Keep on innovating because you never know when a little change will produce large consequences.
It is essential to know your innovative IQ and the stability or dynamics of your work environment. Assess your degree of creativity and ask if it is enough to keep you competitive. The questionnaire (Exercise #5 in chapter 13) can help show your innovative potential by looking at several areas—cultural, decision making, orga-nizational structure, and control issues—and by examining how you respond to them. Among other areas it also examines your sensitivity to changing priorities in your customers, competition, cost, labor, technological, and outside factors. It, or similar tools, can help you to identify how flexible and innovative you are and compare these results to your business climate. Many will find that they need to enhance their creativity and ability to respond to changes. Most will find it valuable to have a better understanding of their unique environmental demands. Being sensitive to them is essential for survival and to make sure your workplace creativity meets or exceeds those environmental demands.
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