Creative People Must Be Stopped (17 page)

Obviously, this can be a significant innovation constraint. Highly integrated and embedded systems are going to be more difficult to modify or improve if they have been supplied in essentially turnkey form, because the detailed understanding of the subsystem belongs to the supplier. For innovation to occur, it will have to be driven by the supplier.

These points apply to services and to smaller organizations, not just to large companies making complex products. Consider one family-operated publishing company that decided belatedly to join the Internet age by engaging an old acquaintance to build a Web site to market its regional publications. The acquaintance, who was used to designing for sizable enterprises with marketing budgets to match, created a beautiful but unconventional design whose workings only he understood. When he eventually gave up maintaining the site (the account, after all, was a small one for him), the mom-and-pop company was left with an elaborate Web site and no easy way to change or update it—the kiss of death for anyone trying to attract and retain eyeballs on the Web.

Difficulty Getting the People You Need

Organizations may also need a supply of motive power and knowledge that comes in the form of human labor. The labor supply can also become a constraint in an industry. Particular types of individuals may be needed at a particular time and place. Silicon Valley in California, for example, has an extremely large labor pool of engineers, electronics experts, and computer programmers. This demographic reality suggests that it will be much easier to start a new consumer electronics development company there than it would be in Nashville, Tennessee. However, a health care services start-up would benefit from being in Nashville, given the many dozens of health care service firms that have been founded and operate in the area. Although advances in communication technology have lessened the geographic constraint, it still matters in cases where labor and knowledge really need to be on-site.

Inertia of Powerful Professions, Unions, and Other Guilds

Beyond the problem of availability, the control of the employee labor supply can also affect innovation. There is a common conception that labor unions generally will constrain innovation. Why is that? Union members are generally in a much better position to understand the nature and problems of the work being done and, therefore, to understand the value of innovation in making their own work lives easier and more productive. However, belonging to a union—just like being a member of a profession such as medicine or law—creates mixed loyalties for employees as they go about their jobs adding value to an organization. Like all other suppliers in an economic value chain, employees are concerned with being replaced, so it is only rational for them to act in ways that will prevent their contributions to the final product from being devalued or made expendable.

Consider the difficulty our society currently is having changing public education or the delivery of health care. Creating significant change in such complex and well-established industries would be difficult in the best of circumstances, but the task is even harder because control over these domains is a contest between powerful professions that have far different incentives than do those who demand change. On the one hand, unions and professions can be the source of innovations in the practice of their jobs, because their members can benefit from improvements in the state of the art. On the other hand, they may act to set rigid standards around the performance of particular job duties, thus enforcing the need for particular types of employees to do those duties, even if the standards don't promote the best or most efficient way to perform a task. When these standards are adopted widely in an industry, they make workers more valuable and indispensable. By the same token, in their own self-interest, unions will necessarily oppose the introduction of new techniques or processes if they are perceived to have the potential of making employees less powerful and ultimately more replaceable.

Overcoming Supplier Constraints

Organizations of any size need suppliers of materials, labor, knowledge, and other important components of the value chain. Yet suppliers, by and large, are not under the direct control of their customers. What can you do to ease the constraints that arise from your need for resources from outside the organization?

Don't Outsource the Core

As I noted earlier, a deeply integrated and embedded system provided by an external supplier is more difficult for the client organization to control or to change than one the organization provides for itself. Consequently, it's imperative that your organization understand its value chain and take proactive steps to keep the most critical components in-house whenever possible. Although it is sometimes obvious what these critical components are, like the secret formula for Coke, they can also be obscure early in the development of an industry. IBM learned this hard lesson as competitive pressures from the Apple II computer forced a rushed development of the IBM PC in the early 1980s. Not realizing the core value of the operating system software, IBM licensed PC-DOS software from Microsoft, thus giving the supplier control over the rate of innovation and the dissemination of this critical component.

When your organization is reliant on a particular kind of expertise to fulfill its current or intended strategy, it is time to have a conversation about the costs and advantages of allowing outside experts—who may have divided loyalties—to control your strategic core. Using a lawyer from an outside law firm makes sense when you are in need of customary legal services that organizations require to do business. But when your corporate strategy is to derive income by acquiring and enforcing patents, that expertise should be in-house. Bringing this expertise in-house
and
giving full support to practitioners' efforts at innovating and otherwise improving the “state of the art” in their professions can go a long way in fostering healthy dual loyalties among these important suppliers while helping the professions grow.

Share the Wealth

Although suppliers have an incentive to control their contributions, they also have an interest in helping organizations improve their products and services. After all, gaining increased control in a declining industry is not in the suppliers' long-term interests. By assisting your suppliers to understand industry dynamics and the changing value of different parts of the value chain, you can help them help you while improving their own chances of long-term success.

Walmart, for example, knows that all parts of its distribution system are vital in allowing the company to achieve extremely high levels of efficiency while keeping costs low. For this reason, Walmart proactively engages in improving its suppliers' information technology systems, to enable electronic data interchange. The company will go so far as to send in its own programmers and IT professionals to serve as consultants while manufacturers set up or work to improve production scheduling and inventory tracking systems. By knowing its suppliers' levels of production, inventory location and status, and other important information about the distribution system, Walmart is more efficient. By learning from Walmart's immense expertise in this area, the suppliers become more efficient and productive as well.

Acknowledge the Threat of Your Innovation

Most emotionally healthy people are skeptical of innovation proposals. This is because they have had a lifetime of experience with the dynamic whereby
your
idea means that you get the benefits, but
they
have to endure the risks and costs of change. These costs may not be obvious to you, but they can be substantial. Consider the struggles with changing delivery of health care, an industry populated largely by highly trained professionals. Politicians and policymakers attempting to implement the will of their constituents may have innovative ideas about how health care should be changed. But the suppliers of the labor and expertise needed to do it may have different ideas about the wisdom or value of the change, and for good reason. It can require over a decade of training and hundreds of thousands of dollars of debt before a physician is allowed to practice independently. Doctors have spent that time, money, and effort becoming experts at a particular way of doing things. It's natural for professionals like them to oppose proposals for change when they have made such an investment, and they are even likelier to oppose it when the heavy cost of their investment isn't recognized.

Beyond these investments, there is also the threat to suppliers that the change may portend. I spoke with many small business owners at the National Court Reporters Association, who, while lauding the sophistication of the technology for automatic voice transcription systems, were working to oppose adoption of the new technology. Apparently, some courts were considering adopting this technology as a way to reduce transcription costs. One court reporter and small business owner told me that it was not just a matter of the loss of income but, more important, that court reporting is highly skilled, nuanced work that a machine could never perform in an acceptable way. “Our system requires accurate transcriptions in order for justice to be served!” It's clear that in addition to her income, her identity was under threat by the suggestion that a machine could perform her job.

These more subtle threats, like this one of identity, can be hard to recognize, but the effort is worth it if adoption is your goal. For example, rather than de-skilling or displacing the transcriptionists, the courts might encourage members of the guild to themselves adopt the machines as a way to improve their efficiency and accuracy, which could to lead to the lower prices the court ultimately desired.

Understand the True Costs of Capital

In addition to expert knowledge, an organization may need money to fuel its competition in existing industries or its entry into new ones. Outside capital may be generated from the issuance of stock or through conventional loans, and although there are important differences between these two methods, they share some characteristic constraints. Access to capital is constrained by the general supply in the economy as a whole and by the economic outlook in an industry. The cost of borrowing or using that money varies within an industry depending on the amount of risk an organization represents to returns or repayment of that capital. The more risk to the returns, the more interest you pay. Beyond debt payments, which tie up capital, preventing them to be put to other, more innovative uses, loans may also entail “loan covenants” that stipulate, for instance, your inventory levels or how or when you pay your suppliers.

Stock prices are also set relative to levels of risk. Stock prices increase as a result of high returns delivered at low risk, whereas prices decrease commensurate with low returns delivered at high risk. Of course, low stock prices mean there will be less money available for investment for innovation inside a firm. At Kodak, the management was certainly aware that the company's stock price would have suffered had it gone wholesale into the risky electronic camera business. Not only would the payoff be far off in the future, but also the risk of failure was high because the technology was untested and the market unproven. Why not simply use those funds to increase sales through marketing expenditures instead of putting them at risk?

Be sure to understand these dynamics when using “other people's money” to build and run your organization. The cost of interest payments are obvious, but the other costs of capital may not be.

Market Constraints: Everybody Wants It Cheaper—and Faster and Better

The third kind of constraint I will consider at the industry level is the constraint represented by the market itself. We normally think of the market as consisting of only the clients and customers, but there is value in a broader definition that includes the product and service producers, along with other stakeholder groups, such as suppliers, regulators, standards associations, and society itself. When we think about markets, it is critical to recognize that different entities (especially customers) are likely to have values, interests, and incentives very different from those of the firms that address that market, and that these differences can represent significant innovation constraints.

Demands for Higher Performance at a Lower Price

Other things being equal, customers prefer lower costs and choose among competing alternatives accordingly. Of course, all other things are never equal, especially when it comes to adopting innovative new products. Even in the case of commodities, customers continue to expect performance increases at the same time that they seek lower prices. With technology products in particular, people have become accustomed to getting more and more performance (higher-capacity disk drives, faster processors, phones with more features, better TV screens) for little, if any, more money than they paid for inferior performance just a few years before. In this context, what can become a significant constraint is the way that performance is assessed.

When companies undertake incremental improvements, their aim is to create new but not revolutionary products or services that will perform better on a market's established performance criteria. If you happen to be a Microsoft Excel user of the past several years, you may have noticed this kind of incremental improvement. The 2007 version offers a spreadsheet that is 1,048,576 rows by 16,384 columns in size, representing an improvement of 1,500% and 6,300% respectively over the 2003 version. This may have affected you or not, but the logic of the improvement is that having more columns and rows is better. Products produced according to this logic are generally easier to sell, as customers know how to assess performance. Competing on this basis, however, shackles innovation in the service of fulfilling a single known need, one that everyone in the market (including competing companies) understands. We may bypass otherwise meaningful innovations because their value is currently unappreciated by customers—that is, the innovations may offer benefits, but only in ways that current performance standards don't measure.