The Past and the Future of High Technology Innovation

by Mike Cornell and Michele Pierce

What you need to do to become a leader for the next technology revolution.

Steve Jurvetson, a Silicon Valley VC, wrote an insightful article in the Red Herring ("Transcending Moore's Law," October 1, 2001), chronicling his view of the resiliency of Moore's 1st and 2nd Laws and its impact on innovation within high tech enterprises.

As almost everyone knows, Moore's Laws (and Metcalfe's Law, as well) postulate that the capabilities and complexity of technology will expand exponentially over time and will create tremendous discontinuities in the high technology industry as a result. Processing power doubling every two years, costs of production doubling every year, availability and throughput of bandwidth doubling every, well, you get the idea.

Jurvetson provided a mind numbing array of options and alternatives to the substrates used in semiconductors that would allow Moore's Law to continue unabated well into the new millennium. We don't doubt for a minute that Jurvetson and all the other seers of the high technology industry know what they are talking about. We're thinking of running down to Fry's tomorrow and see about getting one of those "post-silicon computation paradigm changing molecular nano-scale chips" slapped into our laptops ASAP.

But while the great scientific minds of the industry are preserving the laws of the land for every chipmaker, software designer and hardware or firmware producer on the face of the planet, let's make a case for another kind of innovation.

The popular refrain in the industry today is that we are returning to the "core" of what makes high tech the great, economy-driving industry that we know and love. No more of this analytically baseless drivel about business model innovation. This seemed to be all the rage as we invested untold billions into value chain transforming new ventures that were going to reshape the world of (fill in the blank: toys, pet food, software, heavy machinery, scrap metal, etc.). Give me bits, throughput, carrier class, optics, and metropolitan area bottlenecks. Or, skip the whole thing and give me something biotech. Well, here's news for you: great innovation does not solely come from core technology; it does also come from business model innovation and not nearly enough is being done by high tech companies today to address this fact.

We are not talking about the flimsy thinking around business model innovation that shaped the dot-com craze. We are talking about fundamental questions about how a technology company comes to market, defines its products, extracts value from customers, shapes a customer's experience, and translates its skills, experiences and assets into a more dynamic interpretation of its value chain. Let's look at history:

• The greatest contributions to Microsoft's success have been on the business side, not the technology side: to whit, creative licensing (IBM), product bundling (Office), mainstreaming of stable, known technologies (Windows and NT).
  
• Intel (and Andy Grove, in particular) cites the fundamental shift in business models, from memory chip to microprocessor, as the singular most important contributor to Intel's leadership position.
  
• Applied Materials' deepest and most sustainable competitive advantages have had less to do with building great semiconductor-making tools than with challenging industry conventions around global reach, providing total solutions, and investing in industry down cycles.
  

• Dell didn't get to be the leader (and the only profitable company) in the PC business by being a technical leader but by coming up with a whole new way of doing business that its competitors have been unable to imitate.

There are scores of other examples where business model innovation has transformed important parts of the industry and has created amazingly resilient companies as a result. Cadence, the world's leading software firm serving the semiconductor design market, transformed the economic and competitive balance within its industry by changing the licensing scheme offered to customers. Instead of the standard "99-year" license, they changed to a "3-year" license thus creating both changes in how to account for sales, but also how to service customers, smooth volatility and change product cycles. Intuit Software is not just Quicken any more. They are a tax preparer, a payroll processor and a financial planner and a source of capital for its customers. As a result, Intuit's stock has outperformed that of most other software companies during one of the greatest bloodbaths in the history of high tech investing.

On the other hand, we know that there are all too many stories of technology-led businesses that have failed to gain supremacy simply by having better technology. Let's take a brief--and for some--a painful walk down the history of winners and, well, losers:

• JVC (VHS) and Sony (Betamax)
• Microsoft (Windows) and Apple (McIntosh)
• E-Bay and Onsale
• Cisco (Ethernet) and Bay Networks (ATM)
• Sony Playstation (32-bit) and Nintendo (64-bit)
• Palm Computing (Handwriting Symbology) and Apple Newton (Handwriting Recognition)

There are scores more of these examples. Have some fun. Turn this little pursuit of winners and losers into a parlor game for your next cocktail party. The player who can reel off the most examples wins a NEXT computing machine. Seriously, the reasons for the outcomes between winning and losing companies are varied. But the singular constant is that each won because of non-technology, business model innovation. Whether it was by building a more comprehensive network of users (E-Bay over Onsale) or understanding unarticulated customer needs better (Palm over Newton) these winners understood that any great technology must be accompanied by great business innovation, as well.

This is because business model innovation really matters. And in this cost-cutting, efficiency-seeking, "hunkering" down mode that most managers are struggling with right now, business model changes are least likely to happen. It is exactly during these times of industry retrenchment when fundamental questions need to be asked, like:

• How do we move from a product sale to solutions selling?
• How do we get more of our customers' total "spend"?
• Would a change in our business model yield more dynamic returns? Change customer behavior? Trump our competition?
• Will investing in a new technology (or a new standard) yield real business results?

There are, no doubt, more questions. But what each of these questions suggests is that technology firms need to innovate around important issues that transcend the development of next generation technology. Let's start with a premise: dimensions of semiconductors will continue to shrink, devices will get smaller and more powerful, software will continue to standardize, bandwidth availability will increase, and finally, IT spending will remain flat and gravitate toward GDP-like growth over the medium term. OK, now what? If you are going to win during these difficult times, you must do things much differently. No more rising tide to lift all technology "boats." No more making it hand over fist simply because you have a bunch of smart engineers who can make a lot of great "me-too" products. High tech companies must innovate differently and separately from engineering-based innovation. Here then are a few principles to think about in order to build a truly innovative organization:

1. Seek innovation at the level of the business model. As mentioned here several times, what has historically created great high tech companies is not basic R&D but the robust challenging of the underlying business model. How many times have you heard that this or that large, successful industry player doesn't have the best technology but, in fact, they still win? Dell, Cisco, Microsoft and E-Bay are good examples of this philosophy playing itself out in spades.
   
   
2. Use multiple lenses to generate new learnings and opportunities. Too frequently companies look at opportunities through a single lens or perspective. Customer insight ("we heard our customer and we are responding…"), external research ("the analysts say the next big market will be…"), or simple extrapolations from the past ("we have grown the installed base in this platform steadily for the past 5 years…"). These individual perspectives do not provide much insight. Here are four important areas every company should pursue to build perspective. These are:
   • Uncover Industry and Company Orthodoxies: ask yourselves the question, "What are the unchallenged beliefs or conventions about how business is done around here?" Frequently, when challenged these beliefs can be overturned to reveal unique competitive advantage. Certainly Dell has challenged many industry conventions around customer service, channel and supply chain to reflect the benefit of such an approach.
   • Build Industry Foresight: all too often the view of industry analysts about where technology is headed is off target and of little strategic value. These would be the same analysts who gave us: Videoconferencing, ATM, USB, VDI and ISDN - ugh. We suggest building a unique view of the future and then become a driving force to make it happen. Microsoft did just this when they saw a future of "a computer on every desktop." They not only benefited by this vision taking place, they enabled it by joining with Intel to create a winning standard for PC computing.
   • Understand your Core Competencies: every enterprise has a set of experiences, knowledge, assets and capabilities that make it unique. Understanding how the bundle of these things creates strategic advantage can lead to adjacent market opportunities that can drive new sources of growth and profitability. America Online took its knowledge of consumer behavior, its experience with selling new communications platforms and its biggest asset, a network of millions of consumers, to introduce and grow Instant Messaging to a dominant place in the communications marketplace. More instant messages are sent than long distance phone calls made in the U.S. today, as a result.
   • Build New Insights into Who is The Customer and How To Serve Them. High tech companies frequently have very narrow views regarding who is the customer and how best to serve them. The customer is the "Channel," the customer is the IT Department, the customers are the OEMs, etc. The problem with this view is that it ignores the end-user of the device or the functionality being embedded into devices almost entirely. Applied Materials spends considerable time and effort understanding its customer's customers, electronics manufacturers, to find out how the chips that their tools make are being used. This has made Applied more relevant up and down the "silicon value chain" than simply just another tool supplier to Fabs.
     
     
3. Experiment with new economic models, new ways of making money. Frequently the lament of managers is that the value exchange between themselves and their customers is so transactional that the only way to differentiate is on price. Most U.S. wireless service providers are exhibiting such behavior in spades. Rather than learning from the example of their long distance fixed-line brethrens - a market where price wars have been the name of the game for years - they are heading right down the same path, trying to steal each others' customers with look-alike calling plans and rock-bottom prices. What they should consider doing instead is using the relationships they have with their customers to experiment with new ways of pricing and bundling of products and services. For example, why not offer Short Messaging System, like their Finnish counterparts who have succeeded in making SMS so cool that it accounts for about half of monthly bills, particularly among teen-agers? Or partner with other companies to offer new voice and data applications?
   
   
4. Listen to new voices. The high tech industry is littered with the stories of brilliant or creative employees who leave companies frustrated by their employer's unwillingness to try new things only to emerge elsewhere as entrepreneurs or champions of the Next Big Thing. Paul Allen leaving Honeywell to start Microsoft, Bob Metcalfe leaving Xerox to found 3Com, Craig Venter leaving the National Institute of Health and eventually starting Celera and winning the race to map the Human Genome are only a few visible examples of this situation. It is not sufficient to involve only the uppermost individuals of the organization in strategy creation and innovation. Young people, new hires and those on the geographic fringe of the organization too have important insights - and most of the time are closer to the market and to the technologies of the future than people whose careers are mostly behind them.
   
   
5. Instill a passion for creating the future. To create an innovative culture in a high tech organization it is unlikely that mantra's like "Go chase Moore's Law" or "Reduce costs!" will generate much enthusiasm. In addition to the well-understood requirement to pursue operational efficiency, generate sales and execute solid R&D within existing technologies, every employee wants to feel that they are coming to work for something more: a mission, a purpose, an energizing catalyst. A deeply held belief in the power of innovation, broadly communicated and intelligently supported can provide just such an emotional impetus.

Innovation is not "speeds and feeds." It is not relentless pursuit of an installed base. It is not in simply chasing Moore's Law. Innovation is the pursuit of doing things fundamentally different. Changing customer perceptions of value, changing the means and the methods with which one goes to market, compressing or expanding value chains and redefining the functionality of products and services have the potential to create far more customer and shareholder value than simply coming up with the latest, greatest device. Business model innovation, rather than pure technical prowess, will be the yardstick by which great high tech companies will be measured in the future.

Mike Cornell is a Partner and Founders of Incline Innovation, a strategy and innovation services firm based in San Francisco and Incline Village, NV. Michele Pierece is a Partner and Founder of Silicon Valley Strategy, based in San Francisco.

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