Just be careful you don't wind up with an arrow in your back

These days, companies must innovate. After-dinner speakers tell you so; consultants and professors agree; a slew of recent books underscore the message (see "A Reader's Guide to Innovation," next page). If you don't innovate, they all warn, your business is destined for oblivion.

Here's an alternative view. If you think new products or services alone are your company's salvation, you're in (as George Bush would say) deep doo-doo.

How many companies -- excited about new items that no customer really wanted -- have innovated themselves into bankruptcy? Chuck E. Cheese's Pizza Time Theatres seemed like a surefire new restaurant format. It wasn't, and the company nearly collapsed. Koss Corp., a diversified audio manufacturer, invested heavily in a new portable radio with headphones dubbed the Music Box. It flopped, and Koss wound up in Chapter 11 (see "All the Right Moves," January).

No one -- not Pizza Time, not Koss, not even giants like Du Pont or Procter & Gamble -- has yet learned to distinguish innovations that will sell from those that won't. (Du Pont lost about $100 million before discontinuing production of Corfam, a much-touted leather substitute.) But even hot-selling innovations don't guarantee success. People Express rode its popular no-frills flights all the way to never-never land. Osborne Computer sold plenty of its cleverly designed portables, but went broke anyway.

Innovation, in short, is unpredictable, expensive, hard to manage, and therefore capable of destroying a company as easily as saving it. Does that mean that companies shouldn't innovate? No. It does mean that introducing a new product or service is only the starting point of a long, demanding process. You have to put your innovation into the hands of consumers, teaching them not only how to use it but why they might want to. You also have to manage the growth that your new product or service creates. Many an innovation has strained a company's finances, its manufacturing expertise, or its managerial talent to the breaking point.

Some entrepreneurs understand these constraints; others don't. Compare Albert A. Pope and Christopher Sholes, men responsible for two of the more significant new products of late-nineteenth-century America. Pope, who in 1878 became the first American bicycle manufacturer, built a booming business not so much by making bicycles, which were then only a novelty, but by creating customers. He published cycling magazines. He sponsored monthly poster contests. He encouraged the formation of cycling clubs. He listened as well as propagandized, and was among the first to sell the "safety bicycle," with two wheels of equal size.

Sholes was the inventor of the typewriter, a product seemingly so useful that it would sell itself. In 1868 he got a patent, and in 1872 contracted with E. Remington & Sons for its manufacture. For several years thereafter he and his partners did their best to market the new machine, including sponsoring a well-attended exhibit at the 1876 Centennial Exposition in Philadelphia. Yet for more than a decade only a few thousand typewriters were sold. A prime reason, according to historian Cynthia Monaco, is that Sholes and his partner, James Densmore, utterly missed their market. Companies at the time hired clerks to copy every letter by hand, often several times over, and stood to save enormous amounts of money by typing letters with carbon copies (carbon paper had been patented in 1869). But "it never crossed the minds of Sholes and Densmore that there might be a business market for typewriters.'

Just as a successful innovation requires understanding your customers' needs, it also requires reshaping your business for efficient production. Failure on that score sidetracked Pope, who in the 1890s found himself facing stiff competition from Western Wheel Works of Chicago. Pope had opened up a vast market for bicycles. But Western, not Pope, was one of the first to produce bikes out of stamped (rather than forged) parts, greatly reducing costs, and it was Western that soon became the biggest bicycle-maker in America.

This nostrum, too, should be obvious. If it were, Ampex would be the leader in VCR manufacture, RCA in TVs, and a company called Bowmar in pocket calculators. People Express's Donald Burr and Osborne Computer's Adam Osborne seemed to know exactly what their respective markets wanted at the moment they built their businesses. But they weren't able to create operational systems that could meet the demand smoothly, effectively, and efficiently, and so fell prey to competitors.

The boosters who urge you on to innovation, in short, are telling only half the story. You can read all you want about the subject, and you can have a good time dreaming up new products or services. But if you don't reshape your company's activities, both in the marketplace and in the office or factory, any innovation may not only fail but also bring your company down with it. It's no great feat to be a pioneer. The hard part is to avoid winding up with an arrow in your back.


Where to go for further information

With scores of books on innovation, here are some stars and some dogs:

The Sources of Innovation, by Eric von Hippel (Oxford University Press, 1988). Where do new products come from? Not always from the manufacturer, answers MIT professor von Hippel. Frequently it's the customer who comes up with a new idea, cobbles together a prototype, and convinces a supplier to make a new machine. And sometimes a materials supplier is a source, convincing customers to experiment with new products. Von Hippel's writing is dense and his research focused on manufacturing. A path-breaking study nonetheless.

Innovation and Entrepreneurship, by Peter F. Drucker (Harper & Row, 1985). "Every three years or so," says Drucker, "the enterprise must put every single product, process, technology, market, distributive channel . . . on trial for its life." The key question: Would you do it the same way if you were starting over? If not, redirect your energies. Drucker confronts the knottiest problem of innovation: organizing the firm so it continues producing the old while working on the new.

The Economics of Industrial Innovation, by Christopher Freeman (The MIT Press, 1982). If you want to be on the leading edge, argues Freeman, you must plan on devoting huge resources both to R&D and to educating your customers. Most firms prefer a "defensive" or "imitative" strategy, staying a certain distance behind the industry leader. So what if IBM was slow to enter the personal-computer business? Once Apple proved the machines could be sold, IBM could use its marketing muscle to sell more than anyone else.

Pioneering New Products, by Edwin E. Bobrow and Dennis W. Shafer (Dow Jones-Irwin, 1987). The authors, both consultants, would doubtless like to help you develop and market new products. If their book is any indication, their approach will be solid, thorough -- and unimaginative. Set corporate goals. Develop product objectives. The trouble with this checklist approach is that often it doesn't work. Sometimes you have to fly by the seat of your pants.

Breakthroughs! by P. Ranganath Nayak and John M. Ketteringham (Rawson Associates, 1986). INC. usually omits a book's subtitle from its listing. But this one -- ``How the Vision and Drive of Innovators in Sixteen Companies Created Commercial Breakthroughs that Swept the World' -- captures only too well the book's breathless tone. The authors, both vice-presidents at Arthur D. Little Inc., focus relentlessly on dramatic successes (and the heroic people behind them), leaving the reader dazed. You can read all the stories about lottery winners -- but you still won't know which number to pick next week.

Innovation: The Attacker's Advantage, by Richard Foster (Summit Books, 1986). Foster argues that technologies follow the familiar S curve of development, growing fast into maturity and then tapering off. He also likes to think you can analyze where your company's products fall on the S curve and therefore predict the future. Right.


A century later, the themes ring true

From the American System to Mass Production, 1800-1932, by David A. Hounshell (Johns Hopkins University Press, 1984). If you want the inside story of how the growth companies of a century ago coped with the fantastic market expansion their innovations helped create, University of Delaware historian Hounshell has the scoop. While Cyrus McCormick was out selling his reapers, for example, brothers William and Leander were back in Chicago trying to figure out how in heaven's name to make them -- with William worrying that the market for mechanical reapers would soon be saturated.

In New Jersey, meanwhile, Singer Manufacturing Co.'s huge factory was in "chaos." Singer's marketing innovations -- an army of trained women out demonstrating the machines, a system allowing installment buying -- had catapulted the company to the top of its industry. But its manufacturing engineers knew little of the jigs, fixtures, and gauges that allowed workers to manufacture truly interchangeable parts, and as a result had to hire hundreds of skilled craftsmen to fit each machine together by hand. Backlogs mounted; new models were delayed. "Sometimes I think we have been trying to do too much business," the president told the vice-president plaintively, "and that it is getting to be impossible to manage it." Sound familiar?

Singer eventually solved its problems -- as did McCormick, Ford Motor Co., and the other manufacturers discussed in the book. If you're a history buff, the story of how they did so makes fascinating reading.