When the Bell Telephone company split up, several smaller telephone companies, called the Baby Bells work, were created. Two of these new companies quickly set about developing new wireless telephony businesses. What makes their case particularly interesting is that because they had roughly the same founding conditions, coming from the same parent company, almost all of the elements that went into the new businesses were the same. They had the same culture, the same sets of resources, the same training, the same types of people, and the same sets of knowledge. Despite the massive similarities, one Baby Bell was able to develop a prospering and thriving wireless telephony business. The other failed miserably.

What was the difference? The difference was ultimately quite simple. The company that failed used the traditional financial metrics that managers used across the rest of the company to measure and predict the success of the company. But you may ask yourself, why did they fail if they were using the same metrics they had been taught would help them succeed in the rest of the business? Why would using tools like discounted cash flow, financial projections, return on investment, and a business plan with the big goal lead to failure? Somewhat counter-intuitively, the answer is that the tools they had been taught to manage the Bell Telephone company were precisely the wrong tools to manage innovation.

Although we intuitively want to use our familiar management tools to bring ideas to life, research suggests that most of the time these tools fail. For example, despite the fact that many entrepreneurs write business plans and many universities around the world still teach business planning, research suggests that business plans have no correlation with success. Why? Because you can't plan your way to success under uncertainty. You can't run a discounted cash flow analysis (DCF) because you can't predict the cash flows under uncertainty and calculating a return on investment is not just an exercise in fiction, it is likely going to damn your innovation to failure. Why? Because you are using metrics appropriate to measure a relatively certain business initiative to measure one full of uncertainty. As a result, you will set expectations for success that you can't possibly meet and ultimately your investors and supporters will back out when you miss those predictions. Like the Baby Bell who did things differently, you could have been a success, but you used the wrong tools (if you want to know more about why these are the wrong tools, see my earlier post Why Innovators Hate MBAs.

So what were the tools that the successful Baby Bell (Bell South) used and how were they different? They didn't try to measure the ROI or use the regular tools they employed to manage the rest of the business. They didn't try to insist that wireless would be a $100M business in three years or hope that it would move the needle on the larger company's revenue. Instead they treated the wireless space as an experiment. They put in a modest amount of capital, gave the entrepreneurs a directive to learn as much as possible about the technology and demand uncertainty, and then re-evaluated (i.e. pivoted in today's terms). Then they invested a bit more in the experiment and continued to learn as fast as possible under uncertainty, adapting over and over as they discovered new insights. They focused on measures of how engaged customers were with the service and willingness to adopt over return on investment and discovered the right strategy rather than trying to plan the right strategy in advance (if you would like to know more, let me know in the comments and I'll tell you the full story with the juicy details).

Although you might have been tempted to discredit the managers from the big stuffy telephone monopoly as lacking innovation management capabilities, one of these companies succeeded wildly (and several others did well), with the exact same managers, but different tools than those who failed. What are these tools? I've outlined them in the roughest description in this post but in the next post, I'll explain the new tools to manage the uncertainty of innovation.

Published on: Mar 10, 2015