Section 13: Innovation
Innovation is the process of solving large-scale organizational problems or developing new technologies and processes to more effectively pursue goals. What can we learn from past examples of innovation? What types of organizational policies and processes inhibit innovation? What are characteristics and leadership practices in organizations that have been innovative?
Bornstein, D. (2007). How to change the world: Social entrepreneurs and the power of new ideas. Oxford University Press. CH3 – Fabio Rosa: Rural Electrification. Author: Gobbo, Andre Francis; Editor: Rodriguez Ranf, Daniela
The Light in My Head Went On#
Fabio Rosa was a recent graduate in agronomic engineering in Brazil and wanted to help bring electricity to rural areas of the country. One day he received a phone call from a university classmate who invited him to Palmares, which was a rural, depressed area inside of a wealthier state. The town could be described as “...reminiscent of the Mississippi Delta”, and had zero infrastructure to work with. Rosa found out that the father of his friend who invited him there was the mayor of the municipality. After a few conversations, Rosa was hired as the secretary of agriculture.
After starting the job, Rosa quickly found that there was a disconnect between what the politicians wanted (to build roads) and what the farmers wanted (for their kids to escape poverty and to maintain ownership of their farms). About 90% of the land was used solely for producing rice. In order to produce rice, the farmers needed water, which was controlled by wealthy landowners who set a high price for access to the irrigation channels and dams. Rosa had an idea to create artesian wells in order to increase access to water; however, he needed electricity in order to make this happen. Unlike the U.S., Brazil had no government works program that brough electricity out to rural farms. As a result, about 70% of people in Palmares had no electricity.
During his research, Rosa stumbled upon an interview with Ennio Amaral, who was a professor at the Federal Technical School in a nearby rural municipality. In this interview Amaral mentioned how he brought electricity to his rural area. Instead of a conventional power distribution system involving 3 wires that provided more electricity than farmers needed and was subsequently too expensive, he had put together a high-tension “monophase” current system that was more suitable for modest energy consumption. This monophase system had 1 wire, carried the current through a transformer to the house, and grounded the system in nearby soil. His plan also substituted cheaper materials than the conventional system (e.g. wood for cement, steel instead of copper, etc).
Upon further research, Rosa found that there was enough water of appropriate quality that he could implement his idea of building wells. However, the system Amaral developed and Rosa wanted to implement was technically considered illegal because the state electrical companies determined what technical standards were considered “appropriate.” If the system didn't comply with the Norm determined by the companies, then the power wouldn't get turned on. Because of this, Rosa went to the town's mayor, who eventually opened the political doors necessary for Rosa to experiment.
Rosa had to convince the farmers that his means of bringing electricity would actually work and be implemented, unlike promises that were made before Rosa arrived. Fortunately Rosa was able to collaborate with the farmers by using their materials and his ideas to create a type of well that didn't need the conventional type of power distribution. By creating this workaround, Rosa had solved the most serious problems with providing low-cost irrigation to farmers.
However, there was still an issue with “red” rice. Red rice is basically a weed that grows when land is continually cultivated. Because of this, farmers in Palmares only cultivated ¼ of their land at a time. Rosa had the idea of flooding the fields before planting the rise, which would prevent the red rice from growing due to a lack of oxygen. Farmers could then pregerminate the proper rice seeds and then transplant them underwater, allowing for only the proper type of rice to grow. This strategy had previously been unvailable to the farmers due to the high cost of water. However, thanks to low-cost irrigation system Rosa had created, each farmer could multiply the productivity of their land by a factor of 4. Rosa had created a new equation allowing this to happen:
Inexpensive electricity + shallow artesian wells + monophase pumps = cheap irrigation
Cheap irrigation + water seedling = more efficient land use, increased income, and a future for rural communities
In Brazil, people in rural areas were leaving in order to find work in the cities. As a result, people were forced to live in shantytowns, unemployment was driven up, and crime rates were increasing. Rosa's equation struck at the root of this problem by giving people in rural communities to access to create their own sustainable wages.
Rosa took this idea to the federal agency that was involved with long-term national development funding, who pounced at the idea. However, there was a substantial obstacle due to political opposition from the state electric company, Companhia Estadual de Energia Eléctrica (CEEE), and from cement and aluminum cartels. As such, Rosa had to muster up political support for his cause for the ensuing battle.
During this time, Rosa had found a means to cheapen the costs of implementing his strategy. He contracted with 2 state companies in order to build 5 kilowatt-amp transformers that were necessary for his system. The farmers supplied tree from their properties for electric poles, which Rosa had managed to configure such that he could use fewer than what was required by the government. Rosa even found a way to extended the life cycle of the poles by dunking them in a chemical solution called creosote.
As this was going on, CEEE withdrew Rosa's permission to engage in his project. Because Rosa's model was threatening that of CEEE's, CEEE held a meeting where they tried to cut a deal. CEEE would provide electricity to Palmeras through the proper grid if Rosa's idea was completely abandoned. However, Rosa countered by saying that his solution could be implemented throughout the entire country, whereas the preexisting electric grid couldn't. Fortunately the national development bank got involved and managed to get the state electric company to stand down.
As a direct result of Rosa's work, 400 families were provided with electricity at a cost of $400 per family, which is significantly cheaper than the government's cost of $7000 per family. Those farmers that switched to the water seedling approach saw their incomes jump from $50-$80 per month to $200-$300 per month. Almost a third of the houses (130 of 400) were people who returned to the rural town from the city because of the project.
Due to the popularity and success of the project, CEEE got involved again because they didn't want a major challenge to their distribution norm. They claimed that the results from Rosa's system were inconclusive and couldn't be recreated anywhere else. It took another year before the CEEE caved and turned Rosa's system into a norm, called the 025 Norm. This meant that Rosa's system was no longer breaking any laws.
Shortly after these successes, the mayor of Palmares was forced out due to term limits, and the new mayor completely halted Rosa's project. Fortunately Rosa's work had taken root in various parts of the municipality, and had positively affected the lives of many. However, Rosa was now out of a job.
Fortunately, the national development bank but Rosa in a different municipality. From there Rosa continued to promote rural electrification, and was leased land to experiment with rice planting techniques. He eventually started another project to bring electricity to 25,000 low-income rural dwellers. Through this project he discovered that the technique of delivering electricity he developed in Palmares could be applied widely to other forms of farming. Rosa and a colleague at the national development bank partnered with the best electrical engineering university program in the country to establish a resource center that utilized the newly established 025 Norm as the central standard. This had ended any and all conflict that the could only work in one place. A credit line was even established with this as the Norm, however economic issues eventually forced the credit line to get slashed.
Due to these political constraints that Rosa kept encountering, he gave up on working with the government and decided to establish a private company. Through this company he started to spread photovoltaic solar cells around the country. However in order to offset such high costs of implementation he had to package the solar cells with something else. He eventually discovered that if he sold solar energy as a package with electric fences he could bring down the prices of fences by about 85%. This meant farmers could receive electricity, increase farm production, and improve land management all at once. Over the course of 5 years he established 700 solar electric and fencing systems in 16 different Brazilian states.
As this was happening, different states had continued to consult with Rosa about the 025 Norm in order to pursue rural electrification. One state launched a $34 million plan to bring electricity to 160,000 people, while another state launched a $240 million project to bring electricity to 800,000 people. However both of these projects eventually fell short of their goals due to a lack of motivation and follow through.
In the mid-1990s a political movement started by farmers who could no longer subsist on their land began to gain traction. As a result of this, the government sought a short-term solution by placing these people on certain tracts of land, but without any electricity. The lands they were put on were grass lands, which were best for grazing instead of farming. This resulted in farming practices that cause environmental degradation and the perpetuation of poverty. A quarter of people who received land had abandoned it in 2 years, while some regions saw almost half of their land get deserted. Rosa saw this problem, and sought to find a solution.
Rosa found it in a book by Andre Voisin published in 1957, who developed the idea of rational or managed grazing. This technique was designed to avoid overgrazing, and was implemented successfully in parts of France, New Zealand, Canad, and the U.S. It was originally introduced to Brazil in the 1970s, however it was met with disappointing results and was ultimately scrapped.
Rosa found that the system only worked if there were several small paddocks created a low cost. He eventually found that small paddocks could be created with the use of electric fencing and appropriate technology. By adjusting the original formula from the 1970s to account for things like fences being drained of their currents by tall plants and other region-specific issues, he was able to develop a system that maintained an effective current throughout the fence. This led Rosa to creating another equation:
Solar energy + polywire + fiberglass posts = inexpensive fencing
Inexpensive fencing + Voisin managed grazing = higher yields, sustainable land use, and a future for even more rural communities
As a result, he saw that most farmers' yields doubled or tripled. Unlike his previous innovations, this time he didn't have to worry about government involvement because the system was being propagated through market demand.
Eventually Rosa stepped down from his business in order to build up a nonprofit that he had started a few years prior to spreading solar cells and electric fences. He sought to use this nonprofit to apply the models he developed in his private business to those poorer areas where the for-profit model didn't quite fit. He started by focusing his efforts in southern half of Rio Grande do Sul, where 250,000 people lacked electricity, and then targeted 13,000 poor families.
Rosa conducted a market study and found that more than half of families were spending $13 each month on diesel fuel, kerosene, and batteries. He correctly thought that people could instead spend this money on monthly payments for a renewable energy supply, equipment, and service. Farmers could rent systems or slowly pay them off at a rate close to $13. Poorer people could also afford this, but they needed more help. So in order to reach the entire market, Rosa designed 2 projects: one nonprofit, and one for-profit.
The nonprofit was called the Quiron Project, which was a venture designed to boost the incomes of 7,000 poor families through a combination of solar energy, organic animal production, managed grazing, and other means of resource conservation. The for-profit was called the Sun Shines for All project, which sought to provide solar energy to 6,100 families that had no electricity but could afford rates of solar panels through renting. His company would break even between 42 and 48 months, and provide 20-30% return for investors in addition to social and environmental benefits.
As a result of all of this work, Rosa was recognized as one of the first 40 people to be honored by the Schwab Foundation for Social Entrepreneurship. He also won a $50,000 award from the Tech Museum of Innovation associated with the San Jose Tech Museum for applying technology to benefit humanity. He was one of 5 winners that were chose from 400 nominees hailing from 50 countries. The good news kept coming, as the Solar Development Group, a company based in Washington, DC, agreed to invest in The Sun Shines for All project in 2002. He also received funding fro the Quiron Project from a wide variety of other wealth funders. Thanks to Rosa's tireless work, he helped bring about a fundamental change that institutions can establish reliable, long-term credit relationships with poor people across the world.
Lerner, J. (2012). The architecture of innovation: The economics of creative organizations. Harvard Business Press. CH1 – The Search for Innovation and Growth. Author: McCully, James I; Editor: Legnetto, Deanna Marguerite
Gladwell, M. “The Creation Myth: Xerox PARC, Apple, and the Truth about Innovation.” The New Yorker, May 16, 2011. Author: Boucher, Timothy M.; Editor: Berkley, Njeri N
Collins, J., & Hansen, M. T. (2011). Great by Choice: Uncertainty, Chaos and Luck-Why some thrive despite them all. Random House, CH4 – Fire Bullets, Then Cannonballs. Author: Lancto, Katelyn N; Editor: Legnetto, Deanna Marguerite
Christensen, C. (1997). The innovator's dilemma: when new technologies cause great firms to fail. Harvard Business Review Press. CH5 – Give Responsibility for Disruptive Technologies to Organizations Whose Customers Need Them. Author: Rodriguez Ranf, Daniela; Editor: Swartwood, Hilary Ann
The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail#
Clayton M. Christen
Chapter 5: Give Responsibility for Disruptive Technologies to Organizations Whose Customers Need Them
In this chapter Christensen elaborates on the idea that in practice, it is a company’s customers who effectively control what it can and cannot do. He also explains the resource dependence theory, a controversial theory supported by a minority of management scholars that suggests that a company’s freedom of action is limited to satisfying the needs of those entities outside the company (customers and investors, among others) that provide the resources it needs to survive. The theory further posits that organizations will survive prosper only if their staff and systems serve the needs of customers and investors by providing them with the products, services, and profit they require; and that organizations that don’t structure themselves in this way, will ultimately die off. The controversial aspect of this theory is that it stipulates that managers are powerless to change the direction of the companies against the desires of their customers: “it is forces outside the organization, rather than the managers within it, that dictate the company’s course.” According to resource dependence theory then the real role of managers is only symbolic in companies whose staff and systems are ‘well adapted to survival’. This is a disturbing idea for anyone who has managed companies and people, particularly those who see their role as change-makers. However, Christensen explains that based on findings reported in this book provide support to the resource dependence theory, particularly the point about customer-focused resource allocation and decision-making processes of successful companies are far more powerful in directing investments than decisions from executives.
The question then is, if customers employ vast power in influencing and directing a company’s investments, what should managers do when faced with disruptive technology that the company’s customers do not want? Christensen proposes two options: 1) to convince everyone in the company that they should pursue it anyway by explaining the long-term strategic importance, despite rejection from customers who provide revenue and despite lower profitability than the upmarket alternatives; or 2) to create an independent organization and embed it among emerging customers that do need the technology. Cases presented in this chapter serve as evidence for why the second option offers higher probabilities of success than the first.
INNOVATION & RESOURCE ALLOCATION
The mechanism by which customers control the investments of a company is through the resource allocation process: the process that determines which initiatives get staff and money which do not get resources. Resources determine whether a project will survive or fail. As Christensen describes it, “only those new product development projects that get adequate funding, staffing and management attention have a chance to succeed; those that are starved of resources will languish.” Resource allocation and innovation are then two sides of the same coin and patterns of innovation in a company will mirror the patterns of where resources are allocated in a company. A good resource allocation process includes a vetting process to filter out proposals that customers don’t want. According to Christensen if this process works well, products that customers want will get funds and products that customers don’t want should not, and that this is how companies must work and that the better companies follow this approach the more successful they will be. From an internal process and company dynamics perspective, Christensen explains that non-executive participants make their resource allocation decisions by 1) deciding which projects to propose and give priority to senior management based on an understanding of what types of customers and products are most profitable; and 2) by how their involvement or sponsorship of a potentially profitable innovation project/program could impact their career trajectory. Christensen says it is through the combination of seeking company profits and personal success that customers wield a profound influence on resource allocation.
SUCCESS IN DISRUPTIVE DISK DRIVE TECHNOLOGY
Christensen breaks down the system of customer control through three cases from the history of the disk drive industry to demonstrate how managers can develop strong market positions in a disruptive technology. In two cases for Quantum and Plus Development, as well as for the Control Data Corporation in Oklahoma, managers spun out independent companies to commercialize the new disruptive technology, which allowed them to harness the forces of resource dependence. In the third case of Micropolis Corporation, the manager chose to fight the customer forces from within the mainstream company; the company survived the project but not without enduring many losses that included walking away from all of their major customers, and survived due to sales of a new product line. The manager of this last case concluded that the experience of transitioning was one of the most exhausting of his life.
DISRUPTIVE TECHNOLOGIES AND THE THEORY OF RESOURCE DEPENDENCE
Disruptive technologies have had a deadly impact in many industries beyond disk drives. Christensen presents three other examples of the effect of disruptive technologies in the following industries: computers, retailing and printers. These examples highlight how only companies in these industries where those that harnessed rather than fought the forces of resource dependence survived.
DEC, IBM, and the Personal Computer
The company that was most affect by disruptive technology is Digital Equipment Company (DEC), failing in just a few years as stand-alone workstations and networked desktop computers avoided most customer’s needs for minicomputers. It failed four times to build a profitable business model, four times withdrawing from the personal computer market. Christensen argues in trying to enter the desktop personal computing business from within its mainstream company, DEC was force to straddle two different cost structures based on two different value networks. In contrast, IBM had significant success in the first five years of the personal computing industry. The emergence of the minicomputer represented a disruptive technology to IBM, the industry’s first leader and its competitors. Customers didn’t yet have a use for it, and the market was initially significantly smaller, so as a result makers of mainframe computers ignored the minicomputer for years. Apple and IBM who were the leading desktop makers did not introduce portable computers until the portables’ performance trajectory intersected with the computing needs of their customers. Its success was due to IBM’s creation of an autonomous organization in Florida that was free to procure components from any source, to sell through its own channels and develop a cost structure appropriate to technological competitive requirements of the personal computer market.
The conclusion is that it is very hard to manager two cost structures and two profit models within a single company, as the positon in one market will suffer unless two separate organizations, embedded within the appropriate value networks pursue their separate customers.
Kresge, Woolwoth, and Discount Retailing
Few industries have been impacted more severely by disruptive technology than in retailing, where discounter companies seized dominance from traditional department variety stores. It was disruptive because the quality and vast selection offered by discounters created a chaos in the traditional metrics for quality retailing and the cost structures were radically different to compare between their value networks. Just as in disk drivers, a few traditional retailers like S.S. Kresge (K-mart), F.W. Woolwoth, and Dayton Hudson (Target) saw the disruptive approach coming and invested early. None of the others (Sears, JC Penney, among others) made significant attempts to create business discount retailing. Kresge and Dayton Hudson both created focused discount retailing organizations that were independent from their traditional business and they succeed. By contrast F.W. Woolwoth (Woolco), tried to create it from within the traditional variety store company and failed. Woolwoth’s organizational strategy for succeeding in disruptive discount retailing was the same as DEC’s strategy fir launching the personal computer, and neither could achieve the cost structure and profit model required to succeed in the mainstream value network. Kresge achieved alignment by cutting off the customer base that historically had provided the company’s resources, thereby intensifying Kresge’s dependence on the new source of resources in discount retailing.
Survival by suicide: Hewlett-Packard's Laser Jet and Ink-jet Printers
Hewlett-Packard’s experience in the personal computer printer business illustrates how a company’s pursuit of a disruptive technology by spinning out an independent organization might entail killing another one of its business units. Ink-jet printing was a disruptive technology because it was slower than laser jet, the resolution was worse, and its cost per printed page was higher, but it was smaller and less expensive than the laser jet. Rather than attempting to commercialize both from the main HP printer division, it created a completely autonomous organizational unit in Vancouver Washington responsible for making in-jet printers a success. HP then let the two compete with each other. Ultimately, the ink-jet printer was more successful and one of HP’s business may have killed the other, but Christensen suggests that had HP not set up its ink-jet business separately, the ink-jet technology would probably have failed within their mainstream laser jet businesses.
ADDITIONAL ORGANIZATIONAL IMPLICATIONS OF DISRUPTIVE TECHNOLOGIES
Aside from creating organizational distance between mainstream enterprise and the organization charged with commercializing the disruptive technology, Christensen suggest there is a second dimension: the team should be structured to facilitate the cross-functional interaction that is characteristic of different types of projects. Best projects at this of an industry’s development are best managed by a tightly integrated teams. According to Christensen’s research says that scholars have found that overtime, the patterns of interactions ad communication between the individuals and groups within the organization will come to mirror the manner in which the components themselves interact within the product architecture. Christen emphasizes that “the organizational structure and the patterns of working together work well as long as the innovations are modular, meaning as long as the technological change is largely self-contained within each component and does not require that other components in the system be redesigned to accommodate the change.” He explains that when a new project involved a new architectural design, then the structure and patterns become barriers rather than facilitators. The same thing applies at the broader level when a product requires manufacturing, purchasing and marketing to coordinate their activities around different questions at different points than the norm, then a strong team is important.
It is important to note that no single model is appropriate for all types of products and technologies. Major development projects that involve significant architectural innovation, that require different patterns for working, but that are sustaining in character, can be managed by a strong team within the mainstream organization. However, disruptive projects, can only thrive within organizationally distinct units.
Heath, C., & Heath, D. (2013). Decisive: How to make better choices in life and work. Random House. CH 4: Find Someone Who Has Solved Your Problem.
Heath, C., & Heath, D. (2013). Decisive: How to make better choices in life and work. Random House. CH 3: Multi-Track.
Heath, C., & Heath, D. (2013). Decisive: How to make better choices in life and work. Random House. CH 7: Ooch.