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Making Sense of Innovation Fads and Fashions

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This chapter is from the book
With the recent bout of Innovation-Mania, it's easy to become swept up in the frenzy and innovate yourself to death. This chapter charts the rise of the drive to innovate, and what forms this fad has taken over the past few decades.

"Innovate or die!"

—Various

Innovate and die. In evolutionary terms, that's usually what happens. Most mutations fail. Few truly new things survive, and even fewer of them thrive. This is just as true in the business world as it is in biology. The record of various innovation fads and fashions during the past few years certainly is consistent with this harsh fact.

For much of the past decade, however, management gurus, media, and markets preached a different doctrine. It was a "cult of innovation at all costs," an unquestioning, single-minded belief in the power of innovation above all else.1 The risks of innovation seemed passé. The need for novelty took precedence. The real risk was not to innovate. Managers became mesmerized by the passionate but also threatening mantra of "Innovate or die!" Survival was a compelling enough reason to take heed of their urgent call to action. But beyond simple survival, the innovation enthusiasts promised much more.

It was a New Economy. The Old Rules did not apply. To the quick and bold pioneers of innovation would go faster and more fabulous riches than anything the traditional, tired ways of doing business could offer.

Innovation Excitement, Then Disillusionment

Swayed by this powerful mix of fear and fortune, many executives and entrepreneurs frantically rushed to innovate almost literally at any cost. A great number of companies seriously stumbled or even outright failed in the process. Their big, rushed bets on raw technologies and unproven business models did not pay off. Victims of this innovation obsession included enormous, globe-spanning, blue-chip corporations and new technology startups alike.

It's difficult to overstate how powerful and pervasive the innovation mania was during this time. It's useful to briefly reflect and recall the prevailing spirit. Something more than a bit of infectious zeal was going around. In retrospect, it all seems a bit surreal or unreal, even though we all experienced and participated in it just a short time ago. What were we thinking? How could all this possibly have happened? For many investors and employees, much of it probably does seem like a bad dream. In each case, the new theories and new models for innovation promised much, yet disappointed—or even worse.

The World's Most Innovative Company

Remember, for example, when Enron was the innovation exemplar, the exalted leader of a new breed of corporate innovator? From 1996 through 2001, Fortune magazine had proclaimed Enron the "Most Innovative" company among all its Fortune 500 peers. Each year, Enron placed far ahead of even hi-tech powerhouses such as Intel, Microsoft, and Cisco Systems. Fortune explained, "If any Old World company could thrive in the Internet era, it's this one."

Enron was also featured as the new model for corporate innovation in innumerable consultants' how-to books, academics' business-school case studies, and business-media cover stories. Enron was an old-line company that had become a master of corporate transformation and radical innovation. It was "leading the revolution." Management gurus noted Enron's "almost magical mix of entrepreneurship inside with the ability to leverage enormous scale and discipline to get things done." It was successfully pioneering new ventures and entirely new industries, from energy trading to broadband to weather derivatives. In just a few short years, Enron soared from a sleepy gas-pipeline company to one of the largest companies in the world, with a play on almost every new business imaginable. One book published in 2001 boasted that, "[T]he Enron model was New Economy before the New Economy got started."

How did Enron manage to innovate so much so quickly and successfully? Its internal "wars for talent" and powerful rewards and incentives (e.g., generous awarding of phantom stock and options to new venture leaders) fueled creativity and ignited its high-octane brainpower. These novel human resource practices let it attract and retain top innovative talent for the most promising new ventures. Enron's liberating organizational structures (e.g., autonomous corporate venturing units, novel partnerships and alliance structures, carve-outs and spinouts) also were featured as another key innovation enabler. These nimble and flexible structures freed new ventures from the corporate bureaucracy, giving them unprecedented entrepreneurialism. Likewise, Enron's cutting-edge financing, valuation, and risk management techniques (e.g., "real-options" approaches and "mark-to-market" accounting) were featured as powerful leverage for innovation. This sophisticated financial engineering let Enron more aggressively fund and better value and vet new ventures. All these tools and tactics were featured as templates for other would-be corporate innovators to follow—or else be left behind.

Of course, in retrospect, all these factors were subsequently cited as precisely the key contributors to Enron's rapid collapse and massive bankruptcy. Enron was innovation out of control. Any accounting gimmicks were little more than a sideshow to cover up the true underlying problem—its failed innovation strategies, structures, and processes.2

Not-So-Disruptive Technologies

The startup world offered other innumerable examples of innovation mania. Few paused to doubt that the Internet was a pervasive "disruptive technology." The web changed all the rules and threatened to transform and disrupt almost every aspect of commerce. But the imminent threats to incumbent retailers looked like fantastic and certain opportunities for e-commerce upstarts.

Online grocer Webvan was one of the best-funded and best-staffed new business ventures in history, for example, and was equipped with all the latest and greatest technology. Its management and technical talent came from some of the biggest and best global information-technology companies. It was funded and advised by some of the most successful venture capitalists (VCs). Even after burning through $1 billion in capital, however, Webvan still could not figure out how to deliver a gallon of milk to customers' doorsteps efficiently, effectively, and profitably. Webvan went bankrupt and liquidated just two years after its founding. The number of other failed e-commerce ventures, some of them also spectacular flameouts in their own right (from eToys to Pets.com), is too long to list. Disruption came not to the incumbents, but to the upstarts.

Incubating Half-Baked Ideas

The explosion of the much-heralded incubator concept was another cause and symptom of the innovation craze. Incubators were neither typical corporate innovators, nor typical startups, nor were they simply financial investment vehicles like a venture capital fund. Instead, the incubators were a unique, New Economy hybrid designed to offer both the scale and scope advantages of a larger parent company along with the best nimble, flexible, and entrepreneurial features that startups had to offer. The incubators were a new organizational form made especially for the Innovation Age.

Incubators typically offered their incubees a wide variety of different types of service and support (for example, office space, lab space, IT resources, internal consulting, and other types of shared services). Moreover, by being part of a larger parent that could raise capital and trade as a publicly held company (something a fresh young startup could never do on its own), each of the incubees could get more ready access to preferential funding and, thus, a powerful financial head start. The concept of the incubator was to be an innovation enhancer—bettering the odds of success—as well as an innovation accelerator—powering ideas to market faster in an era in which speed mattered most.

Idealab, CMGI, ICG, and U.S. Technologies were among some of the better-known incubator names. They raised billions in capital because the concept just seemed to make perfect common sense. Combine the best of big and small: public company and startup. Provide seed capital and follow-on funding. Share services, support, and expertise among the incubees and thereby realize powerful synergies.

The Economist succinctly captured the tremendous allure of the incubator model:

The very notion of a business incubator is intoxicating. Just imagine a floor or two of buzzing proto-companies, bursting with potential, sharing space, services, and ideas under the tutelage of well-connected industry experts. The time, too, is right: an explosion of Internet startups needing help meets a chronic office-space shortage. No wonder the past year has seen the launch of more than 300 Internet incubators, two-thirds of them in America—a rate of six a week.3

Despite its compelling intuitive appeal, in practice, the concept did not work so well. The ambitious and newfangled incubator model seemed to offer little advantage over the more well-established and well-defined venture-capital approach. What's more, the complexities of the incubator concept—being neither pure investment vehicle, pure startup, nor a real operating company—brought into play all sorts of heightened costs and tensions. Complicated legal, financial, and organizational issues soon followed. Rather than being advantaged, member startups became crippled by their incubator affiliations. Lawsuits from investors alleged conflicts of interest or worse (e.g., Idealab, U.S. Technologies). Numerous incubators went bankrupt or simply closed up shop.

Remnants of the grand incubator concept survived, but in much less ambitious forms. Non-profit and university incubators continued, and even increased, their modest operations. But most of the for-profit incubators survived only by morphing into more traditional VC firms and much simplified financial-holding companies, or by trying to morph into workable businesses that offered basic office space and services to startups.

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