Scott Anthony on The Fourth Era of Innovation: “The New Corporate Garage”

H-PTo the right is the rented garage in which Bill Hewlett and Dave Packard began forming, in 1939, a two-person company — the original Silicon Valley startup. Working with limited resources, the pair created a series of products—starting with audio oscillators used by sound engineers—sometimes using the Packard family oven to put on finishing touches. Their efforts impressed Walt Disney Studios, one of HP’s early customers, and set the course for a legacy of innovation and leadership.

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Here is an excerpt from another “classic” article written by Scott Anthony for Harvard Business Review and the HBR Blog Network. To read the complete article, check out the wealth of free resources, obtain subscription information, and receive HBR email alerts, please click here.

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Quick: List the big companies that have launched paradigm-shifting innovations in recent decades.

There’s Apple—and, well, Apple. The popular perception is that most corporations are just too big and deliberate to produce game-changing inventions. We look to hungry entrepreneurs—the Gateses, Zuckerbergs, Pages, and Brins—instead. The rise of fast, nimble, and passionate venture-capital-backed entrepreneurs seems to have made slow-paced big-company innovation obsolete, or at least to have consigned it to the world of incremental advances. But Apple’s inventiveness is no anomaly; it indicates a dramatic shift in the world of innovation. The revolution spurred by venture capitalists decades ago has created the conditions in which scale enables big companies to stop shackling innovation and start unleashing it.

Three trends are behind this shift. First, the increasing ease and decreasing cost of innovation mean that start-ups now face the same short-term pressures that have constrained innovation at large companies; as soon as a young company gets a whiff of success, it has to race against dozens of copycats. Second, large companies, taking a page from start-up strategy, are embracing open innovation and less hierarchical management and are integrating entrepreneurial behaviors with their existing capabilities. And third, although innovation has historically been product- and service-oriented, it increasingly involves creating business models that tap big companies’ unique strengths.

It’s early days still, but the evidence is compelling that we are entering a new era of innovation, in which entrepreneurial individuals, or “catalysts,” within big companies are using those companies’ resources, scale, and growing agility to develop solutions to global challenges in ways that few others can. As the stories that follow show, these companies have pushed into territory that was once the province of entrepreneurs, NGOs, and governments—from delivering health care technology, clean water, and new agricultural capabilities in developing countries to managing energy, traffic, public transit, and crime in the world’s major cities. Before looking at how catalysts drive such invention inside their companies, it’s important to appreciate the three historical periods that brought us to the present age—the fourth era of innovation.

A Brief History of Innovation

The first era of innovation—that of the lone inventor—encompassed much of human history. Innovators occasionally formed or latched on to companies to exploit the full potential of their ideas, but most seminal innovations developed before about 1915 are closely associated with the individuals behind them: Gutenberg’s press. Whitney’s cotton gin. Edison’s lightbulb. The Wright brothers’ plane. Ford’s assembly line (actually as much a business model as a technology).

With the perfection of the assembly line, a century ago, the increasing complexity and cost of innovation pushed it out of individuals’ reach, driving more company-led efforts. A combination of longer-term perspectives and less stifling corporate bureaucracies meant that many organizations would happily tolerate experimental efforts. Thus the heroes of this second era worked in corporate labs, and corporations evolved from innovation exploiters into innovation creators. Many of the notable commercial inventions of the next 60 years came from these labs: DuPont’s miracle molecules (including nylon); Procter & Gamble’s Crest, Pampers, and Tide brands; the U-2 spy plane and SR-71 Blackbird fighter jet from Lockheed Martin’s famed Skunk Works.

The seeds of the third era were planted in the late 1950s and the 1960s, as companies started to become too big and bureaucratic to handle at-the-fringes exploration. The restless individualism of baby boomers clashed with increasingly hierarchical organizations. Innovators began to leave companies, band with like-minded “rebels,” and form new companies. Given the scale required to innovate, however, these rebels needed new forms of funding. Hence the emergence of the VC-backed start-up. The first publicly owned venture capital organization was General Georges Doriot’s American Research and Development Corporation, whose $70,000 investment in Digital Equipment Corporation in 1957 was worth $355 million when DEC went public in 1968. The third era came into its own in the 1970s, with the establishment of Kleiner Perkins Caufield & Byers and Sequoia Capital. These and similar institutions helped to support the formation of Apple, Microsoft, Cisco Systems, Amazon, Facebook, and Google. Life became even harder for innovators in big companies as the capital markets’ expectations for short-term performance grew.

The technologies birthed during this era and the globalization of world markets have dramatically accelerated the pace of change. Over the past 50 years corporate life spans by some measures have decreased by close to 50%. Back in 2000, Microsoft was an unstoppable monopoly, Apple was playing at the fringes of the computer market, Facebook founder Mark Zuckerberg was a student at Phillips Exeter Academy, and Google was a technology in search of a business model.

This breathless pace, and the conditions and tools that enable it, bring us to the fourth era—when corporate catalysts can have a transformational impact. Whereas the inventions that characterized the first three eras were typically (but not always) technological breakthroughs, fourth-era innovations are likely to involve business models. One analysis shows that from 1997 to 2007 more than half of the companies that made it onto theFortune 500 before their 25th birthdays—including Amazon, Starbucks, and AutoNation—were business model innovators.

Today it’s easier than ever to innovate, which may suggest that it’s an ideal time to start a business. After all, a wealth of low- or no-cost online tools, coupled with hyperconnected markets, put innovation capabilities into the hands of the masses and allow ideas to rapidly spread. For many start-ups, $25,000 is sufficient to launch a fully formed business, as the incubator Y Combinator and its numerous copycats show. These early-stage funders have helped launch promising new companies such as Dropbox, Airbnb, Xobni, Scribd, Hipmunk, and many more.

But surprisingly, the ease and pace of innovation that now aid entrepreneurs can also work against them. In the past, although growth markets attracted multiple entrants (by one count, Google was the 18th significant contender in the search-engine space), competition was less frenzied, giving start-ups time—often years—to develop difficult-to-replicate assets. And companies that clearly weren’t going to make it promptly folded, releasing top talent into the market. Today young companies have what feels like milliseconds to enjoy an early success before they need to start outspending imitators and fighting for talent. Consider the “daily deal” space. By some accounts, Groupon reached $1 billion in revenue faster than any other company in history. But dozens of instant copycats put it on the defensive—and lower fixed costs today mean those contenders can linger far longer. Groupon may succeed in spending its challengers into retreat, but hypercompetition, coupled with shortening development cycles, makes it harder than ever for start-ups to create enduring competitive advantage. In other words, they are increasingly vulnerable to the same capital-market pressures that plague big companies—but before they’ve developed lasting corporate assets.

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Here is a direct link to the complete article.

Scott Anthony (@ScottDAnthony) is the managing partner of the innovation and growth consulting firm Innosight. He is the author of The Little Black Book of Innovation and the HBR Single, Building a Growth Factory. His new book is The First Mile: A Launch Manual for Getting Great Ideas into the Market.

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