This post is fromTilt the Windmill, my new project on Intrapreneurship and Innovation in large organizations. Inthe longer version of this post, entitled “tomorrow is not like yesterday only more so,” I also cover how organizations can adopt a three-maxima approach to innovation portfolios and turn the threats described below into opportunities. > Here is the thing about the future. Every time you look at, it changes, because you looked at it, and that changes everything else.

Here is the thing about the future. Every time you look at, it changes, because you looked at it, and that changes everything else.

Cris Johnson (Nicholas Cage) in Next (2007)

Most companies’ innovation is focused on sustaining the current business model because it’s difficult to predict the future: Without a crystal ball, “tomorrow is like yesterday, only more so” is the wisest course of action.

This ignores the discontinuities that arise in markets, which are obvious in hindsight, but notoriously hard to anticipate. Discontinuities tend to work in one of two ways: Either something completely new eliminates what was perceived as a huge problem, removing an entire market; or something completely new takes off because it enjoys arebound effectin which more supply generates an even bigger demand.

Let me illustrate these two cases with a couple of examples.

Sometimes, the world fixes itself

As the industrial era and urbanization drove more and more people into cities, the shit piled up—literally. Horse manure lined the streets, and removing it required even more teams of horses.

the streets were “literally carpeted with a warm, brown matting . . . smelling to heaven.

the streets were “literally carpeted with a warm, brown matting . . . smelling to heaven.

Pundits claimed Manhattanwould be neck-deep in horse excrementin just a few years.

In New York in 1900, the population of 100,000 horses produced 2.5 million pounds of horse manure per day, which all had to be swept up and disposed of. (See Edwin G. Burrows and Mike Wallace, Gotham: A History of New York City to 1898 [New York: Oxford University Press, 1999]).In 1898 the first international urban-planning conference convened in New York. It was abandoned after three days, instead of the scheduled ten, because none of the delegates could see any solution to the growing crisis posed by urban horses and their output.

In New York in 1900, the population of 100,000 horses produced 2.5 million pounds of horse manure per day, which all had to be swept up and disposed of. (See Edwin G. Burrows and Mike Wallace, Gotham: A History of New York City to 1898 [New York: Oxford University Press, 1999]).

In 1898 the first international urban-planning conference convened in New York. It was abandoned after three days, instead of the scheduled ten, because none of the delegates could see any solution to the growing crisis posed by urban horses and their output.

Of course, the personal automobile soon solved the problem. Anyone building companies to remove manure was out of work, no matter how efficient they might have been. A fundamental replacement by something better eliminated an entire market. Many people who claim we shouldn’t worry aboutPeak Oilcite this example.

The car didn’t win because it made less manure; it won because it was faster, more convenient, and had a greater range. The elimination of the manure crisis was a side effect. Similarly, mobile phones eliminated the pager market.

Incumbents often miss the things that will make a market vanish, and find themselves either insolvent—having lost their source of revenue—or scrambling to catch up from behind. This is the core thesis of Clay Christensen’s work on innovation.

Blockbuster, for example, dominated the video rental business. But it made money from real estate, late fees, and the sale of merchandise (films, popcorn, candy.) It missed the zero-footprint, no-late-fee model that Netflix dominates—or at least, dismissed it until it was too late, partly because it didn’t realize the postal service was an efficient source of bandwidth before consumer-grade broadband was widely available.

Of course, the end result was better for other reasons: nobody wanted to go to the store to rent some bits, and Netflix won. Blockbuster closed its doors.

Here’s another example: In the early 2000s, server manufacturers were shipping more and more machines. They focused on higher-density, more energy-efficient machines aimed at CIOs and bought by CFOs missed the market for less-reliable, pay-as-you-go cloud computing aimed at CTOs and startup founders, which Amazon Web Services targeted with amazing accuracy.

As with Netflix, the end result was better for other reasons: Cloud architects found ways to stitch together dozens of unreliable, relatively slow servers into a reliable, fast computing fabric. Amazon won—today its web services division is bigger than all other players combined—and now server manufacturers are scrambling to remain relevant.

Sometimes, the consequences overwhelm the cause

On the other hand, some predictions fail because they gotoowell. As the British Empire grew, it was limited only by the availability of the coal that fueled the Industrial Revolution.

Early steam engines (designed by Newcomen) were less efficient than their successors (designed by Watt.) One British economist, William Stanley Jevons, hypothesized that this should extend the supply of coal as a result. But Jevons’ analysisshowed the opposite: a more efficient engine resulted in greater demand, because of what was now possible. Cheaper power meant people found new uses for the thing. Abundance begets new markets.

This happens often in technology adoption. InWhy Things Bite Back, Edward Tenner talks about the unintended consequences of inventions. Football helmets were supposed to protect players; instead, theycaused many more injuriesby arming players with head-mounted weapons. The personal computer, far from ushering in the anticipated era of paperless offices, turned everyone into a desktop publisher, driving the consumption of office paper to an all-time high.

We got the Internet exactly backwards

Incumbents frequently miss this reversal of scarcity, which drives adoption in unexpected ways. I once spoke with Bob Metcalfe, the inventor of Ethernet, who told me, “we got the Internet exactly backwards.” He explained that, at the outset, the Internet used wireless for long distances (via satellites) and wired for local connections (CAT-5 wires or coaxial cable carrying Ethernet and Token Ring.)

But as computers became portable and smartphones added wifi, local connections became wireless; as demands for low-latency, high-bandwidth connections between countries grew and enterprises gave up their private WAN connections for Virtual Private Networks, carriers pulled fiber optic cable across the world’s oceans.

The key is that for some innovations, there is a “rebound effect” of the efficiencies that come from reduced cost, turning, for example, the mobile phone from a tool for high-powered executives into a toy for every teenager. Anticipating which innovations will experience this kind of rebound is hard to do ahead of time.

(Horse Manure spreader photo by Don O’Brien on Flickr. Used under a Creative Commons license.)