Tomorrow is not like yesterday, only more so

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—doing what Sergio Zyman calls “selling more things to more people for more money more often more efficiently.” That’s 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 the things that unseat giants and spawn new industries. They’re obvious in hindsight, but notoriously hard to anticipate. Now that it’s easier to experiment and prototype, and now that ideas propagate in days instead of years, discontinuities happen faster, and spread more quickly, catching companies off guard.

Sometimes, the world fixes itself

The story of the Great Horse Manure Crisis of 1894 has been retold dozens of times as an example of why technology fixes the problems it creates. 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.

Of course, a few short years later, the personal automobile had solved the problem. Anyone building companies to remove manure was out of work, no matter how efficient they might have been.

Incumbents often miss such shifts:

• Blockbuster dominated the video rental business. But it made money from real estate, late fees, and the sale of merchandise. It missed the zero-footprint, no-late-fee model that Netflix dominates. Blockbuster closed its doors.
• Server manufacturers focusing on higher-density, more energy-efficient machines missed the market for less-reliable, pay-as-you-go cloud computing, which Amazon Web Services targeted with amazing accuracy. Amazon won—today its web services division is bigger than all other players combined.

Sometimes, the consequences overwhelm the cause

On the other hand, some predictions fail because they go too well. 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. But Jevons’ analysis showed the opposite: a more efficient engine resulted in greater demand, because of what was now possible. Abundance begets new markets.

This happens often in technology adoption. In Why Things Bite Back, Edward Tenner talks about the unintended consequences of inventions. Football helmets were supposed to protect players; instead, they caused many more injuries by 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.

Driving adoption in unexpected ways

Incumbents frequently miss this reversal of scarcity. 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. But as computers became portable and smartphones added wifi, local connections became wireless; as demands for low-latency, high-bandwidth connections grew, carriers pulled fiber optic cable across the world’s oceans.

What smart innovators do about it

Over the last year, I’ve noticed several common threads among companies who get innovation right. They break themselves into three distinct groups, focusing on three kinds of innovation.

• 70% of resources are devoted to core, or sustaining, innovation, and Zyman’s five mores. This is what Clay Christensen calls Sustaining Innovation. It’s scored by traditional business metrics: return on investment, margins, revenues.
• 20% of resources go to adjacent innovation. This means changing one aspect of the current business model—either the product being sold, the market to which it is sold, or the method with which value reaches the consumer.
• 10% of resources go to transformative, or disruptive innovation. This is a complete rethinking of the buyer’s value network. It’s DHL looking at 3D printing; Metlife looking at apps; Amazon building compute services. This group is usually isolated from the existing lines of business.

I’ve got plenty of other thoughts on this—what makes something disruptive; how to divide the three dimensions; innovating to stand still; and so on. It’s increasingly looking like this Tilt the Windmill thing might become a book. But in order to avoid this post becoming one too, I’ll stop here and leave those for another day.