Innovation Rx: Put Market Power to Work Inside the Firm

Tom Peters

“American Express: The Failed Vision” screams the BusinessWeek cover for March 19, 1990. We are informed that CEO James Robinson “will not be pursuing the grand vision of a company that provides a full spectrum of financial services.” Robinson acknowledges that “we will stop trying to be all things to all people all over the world.” American Express is hardly alone: The truncation of Saatchi and Saatchi’s dream of becoming a global, one-stop shop for advertising, public relations and consulting has also lately been headline news.

These are but the most recent acts in a long-running drama, synergy-on-paper run amok in practice. AT&T reorganized into independent (it hopes) business units in 1989. An executive explains: “When we were arguing for getting into something, we argued its synergies. When we should have gotten out of something, we argued that it was hooked to something else. But … we had trouble ‘banking’ the synergies. You can’t be out there with a … poor fitting left glove and a perfect right glove and say you’re the best in the glove business.”

Despite the obsession with consortia and “strategic alliances,” the real story of these times is the cost of clumsiness among giant companies worldwide. But some firms are evading the trap of “synergistic” pursuit and instead luring market forces inside their borders.

*Quad/Graphics. As soon as the successful Wisconsin printer perfects a new technology, President Harry Quadracci says “Let’s; sell it.” He reckons outsiders will quickly hear about it, develop it and market it. So Quad created a “wildly profitable” business (Quad/Tech) selling proprietary technology. Such self-generated competition also spurs the firm to lightening-fast innovation.

* Sun Microsystems. The workstation pioneer routinely licenses advanced technology to friend and foe. Doing so quickly spreads the Sun gospel. Furthermore, customers (IBM, DEC) offer up improvements to Sun’s technology. But most important, says the Economist, “Proprietary technologies … tempt companies to relax. Knowing that competitors will share basic technologies makes (Sun) employees concentrate on staying ahead.”

* Cray Research. Stymied as to which of two new product strategies to follow, the supercomputer standout voluntarily split itself in two last year. Cray Research spun off 90 percent ownership of what’s now Cray Computer. Cray’s decision “was a clear-eyed recognition of the advantages of concentrating corporate energies, emotional and managerial, on a single project,” industry guru Esther Dyson writes. “Cray will become two smaller, focused companies—one seasoned and one upstart—fighting fair-and-square in the marketplace.”

* General Motors. The behemoth is forcing its in-house components operations to sell their products to GM competitors. Researchers Charles Sabel, Horst Kern and Gary Herrigel report that “despite their continuing formal ties to the parent company … [the] strategy is to create a set of subcontractors within the company itself whose behavior mimics that of the independent European subcontractors clustered around firms such as BMW.” To add even more outside pressure, shotgun weddings are encouraged. For example, glass and paint supplier PPG Industries’ managers and engineers now lead GM’s UAW hourly workers inside several GM plants.

These examples illustrate a revolutionary market-injection strategy: (1) Making money and lighting a fire under yourself by licensing your most advanced technology; (2) protecting your most innovative units from your main-line business’s rigid ways of thinking by selling off all or part of important pieces of the firm; and (3) insisting that subordinate units (component producers) demonstrate “fitness to compete” by peddling their wares on the open market.

Why are such drastic measures called for? In their well-researched book, Organizational Ecology, Michael Hannan and John Freeman dismiss the idea of timely big-firm change; inbred habits that lead an IBM or a Sears to dominate in one context make it all but impossible to adjust fast when times change. Fine, but don’t upstarts, such as biotech’s Genentech which just sold out to Roche, need massive resources to compete? And aren’t big firms’ deep pockets ultimately a boon to innovation?

Sadly, research consistently demonstrates that technology-based giants routinely de-energize—and often destroy—budding stars they acquire. In a landmark study, MIT’s Jim Utterback looked at how market leaders respond to challenges from new technology; in 32 of 34 cases, the leader reduced spending on the emerging technology and increased spending to shore up the flagging technology.

Are there no synergies then? To be sure, there is value to a brand name and distribution network—and not just at a Pepsi or Marriott. When DEC seeks the output of microprocessor star MIPS for its most advanced workstations, it melds its small supplier’s novel ideas with its own reputation and long-term customer relationships. Overall, though, size, proprietary technology, the pursuit of synergy, and past success are innovation’s mortal enemies. Only the radical infusion of market forces into the big firm will fight the relentless killer—inertia.