The Dreamliner and the Risks of Transformative Innovation

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In October of 2011 Boeing launched a new plane, said to be the most innovative new aircraft in the commercial space in decades.  Airlines were lining up to order their own, with Japanese airline ANA waiting over 3 years for its first craft to be delivered. Customers paid up to $30,000 per seat to take a ride in the new plane that had the entire industry and traveling world abuzz. The plane offered huge improvements in energy efficiency, was made from a variety of high tech composite materials, and included a wide-spectrum of high-end consumer features like increased space, reduced noise, modular bathrooms, and even a LED light show during preparation for take-off. It seemed like a huge leap for Boeing and the aircraft industry.

The Dreamliner 787 was meant to herald a new age of commercial aviation. Instead it has Boeing scrambling.
The Dreamliner 787 was meant to herald a new age of commercial aviation. Instead it has Boeing scrambling.

However in the time since, Boeing has been dogged with problems: Cockpit windows have cracked multiple times, now three active Dreamliners have had overheating problems related to their lithium ion batteries, and two planes have had fuel leak problems. Given that only 50 Dreamliners are in service (with hundreds more on delayed order) these are potentially scary indications that the entire plane design may need to be reconsidered. The issue has even led US investment bank Goldman to downgrade Boeing stock from “conviction buy” to “buy” while the issues are reviewed by the FAA.

The question that has to be on the mind of many Boeing executives is whether the Dreamliner was too big of a risk – to big of a redesign and innovation – to have been taken in the first place; particularly in an industry with such high regulatory and consumer scrutiny.

But has the Dreamliner really failed? Or is it simply experiencing the rocky beginning that many transformational innovations go through? What does this case say about the relative merits of the first-mover advantage versus being a fast-follower? Let’s consider the details and the impact the Dreamliner has had on its:

–         Industry/competitors: the airline manufacturing industry is particularly competitive, with high levels of capital required. In fact, two major western companies now dominate the consumer and military industry, with Boeing and Airbus fighting for market share. Airbus is set to launch their own next generation craft next year – it too relies on the same type of batteries found to cause issues for Boeing. Boeing has the first-mover advantage in that they’ve defined the next stage of technical development and can capture the early market – whatever features Airbus shows in the A350 will almost certainly have been inspired by the 787. Airbus however has the fast-follower advantage: the chance to quickly adapt its competitor’s technology while making necessary improvements to have an even better product at launch.

–         Market: the airline industry is intensely competitive, with any opportunity to gain consumer share coveted. The Dreamliner captured the imagination of the commercial airline industry, with airlines queued up to place orders to not only gain an edge against their competition but also to keep up. The Dreamliner has been a success, but it is vulnerable to being displaced by its competition based on the difficulties relating to safety. Unfortunately, in the airline industry almost any issue quickly escalates to a safety concern. No amount of internal testing can replace use in the field, so these ‘teething’ problems are almost inevitable in such an innovation. Only time will tell if these are early indications of incomplete qualification of designs and innovation or just minor bugs that needed to be worked out.

–         Consumers: the Dreamliner did something no plane has done for decades – it captured the enthusiasm and interest of the flying public. Boeing was able to become synonymous with innovation in the industry. This interest almost certainly contributed to the early success in selling the plane within the airline market. Boeing now has the challenge of resolving safety issues in a way that assures the consumer of the concern for safety. This means solving the quickly and completely. Another instance of having the plane grounded might be permanently disastrous for the Dreamliner and Boeing brand in the eyes of consumers, especially related to new innovations.

Transformative Implications BoxThat the launch of a transformative new airliner design will meet with some growing pains should have been no surprise to Boeing executives. With any innovation there is a level of risk involved in introducing it to the market – whether that be market acceptance, technical success, or speed of adoption (among other factors). The bigger question is whether Boeing understood the risks before launch and fully evaluated the upside versus the potential downside of making such a transformational leap. The Poole College of Management provides a great discussion on ‘Managing Levels of Innovation Risk’ on its Enterprise Risk Management page. For the executive or innovation leader it is very important to understand the organizational needs – for real breakthrough growth or to capture a new market segment transformation innovation can be a necessity. However, it may be enough to make more sustainable, low risk incremental innovations in order to obtain the same gains.

To the Osmotic Innovator, the warning is to be certain of the organizational goals in relation to an innovation initiative. While transformational innovations are exciting and capture the imagination both internally and externally they also carry a very high risk profile and can do long term damage to a brand and a company that undertakes them. There is a case to be made that in some cases incremental or core innovations can represent a more easily digestible risk profile.

So where does Boeing net-out? Boeing, hopefully, made the evaluation that its position required or allowed it to take a gamble on a transformational innovation. Rather than suffering the innovators dilemma and being outpaced by other firms it would disrupt its own business and take the risk necessary to do so. While being first-mover allowed them to capture a potentially huge share of the market for the Dreamliners benefits (high efficiency longer-range medium sized planes with enhanced consumer experience) and set the industry standard, technical and supply problems have given its competitor a chance to both learn and catch-up, potentially offering a better comparable product when they do launch. Boeings willingness to work with regulators to make its system safe speaks well to regulatory agencies, airlines, and travelers; but it is inherent that these changes are made quickly to repair the damage to the brand and fend off otherwise equivalent competitor offerings.

The future success of the Dreamliner and its place in history (as either a transformational innovation or a failed early stage technical innovation bested by the fast-followers) will rest on Boeings willingness to dedicate resources to solving its problems quickly and efficiently and on the ability of its competitors to leverage these first-mover difficulties to their advantage.

Observing the Innovators Dilemma

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In 1997 Clayton Christensen published The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail.  The book (which we highly recommend) proposed an intriguing explanation as to why large companies with seemingly unlimited resources can fail to see their own demise in the emergence of disruptive technologies.  One oft cited example of this phenomenon is the demise of Kodak who not only failed to see the importance of digital photography on their core film business but in fact were the ones who invented digital photography in the first place.  The purpose of this post is not to discuss Christensen’s work however but instead to cast our eyes over some industries and see if we can spot companies who might well be in the midst of an innovators dilemma as we type.

In order to identify where an innovators dilemma might lie we need to quickly describe the required conditions for its occurrence.  A very common approach, and one used by Christensen, is to describe the situation using innovation S-curves as below.

A:  A new technology in its infancy.  Performance improvements are hard to generate as the innovation is becoming understood.  Generally, innovations at this point are only used by very early adopters and the value of the product offering may be limited.  B:  Rates of performance advances are peaking, rapidly catching up to incumbent technology. The technology becomes commonplace and even the industry standard.  New competitor technologies look hobbyist or misaligned.  C:  The technology matures, performance advances are harder to generate as the limitations of the technology are found.  Most people who might use the technology are doing so.  New competitor technologies seem to have higher potential and are gaining acceptance.  D:  The technology fades.  People stop using the technology and choose others.  A new technology becomes the industry standard.  The Dilemma Zone:  Technology A is well understood, the industry standard and an integral part of the business model of those employing it.  The profitability of the technology is peaking.  Technology B looks very promising even to the point where it is the odds on favorite to be the future of the industry; the only question is exactly when.

So, with this set of conditions in mind we will go hunting for some modern dilemmas in the businesses of today.  Kodak followed the red S curve to their well-publicized regret, who might be next?

Dilemma #1, HBO:  HBO are having a great run at the moment, their internally created content such as Game of Thrones and Boardwalk Empire have generated huge returns for their parent company Time Warner.  HBO is one of the most well known and entrenched premium cable channels in the world and its exclusive offerings are an important part of the business model of cable providers such as Verizon and DirecTV.  So where is the dilemma? Well, Game of Thrones Season II has been downloaded illegally about 25 million times over the year1 and HBO know why; there is no other way to get it apart from subscribing to a full cable service.  HBO could provide downloads through their own site or through iTunes or another vendor but (at least for season 2) chose to take the money i.e. maintained the high premiums from the cable providers at the expense of the pirated copies.  Financially this makes sense today but long term HBO may not always have such a gem as Game of Thrones with which to negotiate (or even define) the process of streaming its content on demand.

Dilemma #2, Big Pharma:  Big Pharma is REALLY big and is based primarily on a model that is around as old as your granny.  Two pillars, small molecule chemistry and blockbuster “one size fits all” treatments are what has driven the growth of this industry since the early 20th century but that is coming to an end.  Biotechnology in its many forms is most definitely the future of medicine in the 21st century.  A scan of where the breakthrough patents are being generated in the field and you can see the majority are coming out of small Biotechs and Universities not the massive health laboratories of the S&P 500.  The problem is that small molecule chemistry (what Big Pharma is great at) is not Biotechnology any more than plumbing is interpretive dance.  The initiative needed to transition the capabilities of say, a Pfizer (100,000+ employees2), to a new science is immense, perhaps too immense.  Coupled with this is a reality that Biotechnology tends to make very targeted drugs, limiting the opportunity for another “everyone gets a pill” Lipitor or Prosac, a model that Big Pharma now relies on.  So the dilemma is set, Big Pharma must re-skill, and possibly re-size, but to do it now or to hold on for just one more blockbuster?

Dilemma #3, Microsoft Office:  Microsoft itself is arguably in the middle of an innovators dilemma but I thought I would pose the case for one of its most profitable jewels, Office being very much in the middle of a technology revolution itself.  Office is everywhere, you can’t do business without the ability to open and edit Word, Excel and PowerPoint documents and this has ensured that the Office suite has remained the standard install for companies worldwide for many years.  The knock-on effect of Office being the choice of your company is that you are far more likely to install it on your home PC as well, and why learn two different systems?  So where is the dilemma?  Well, Microsoft knows that it won’t be long before the idea of having to boot up a desktop or notebook to balance the household budget or write your resume will be gone.  People will expect to run their households from their tablets and phones while sitting on their sofa not hiding away in the home office.  So, Office for tablets?  Where is it?  The problem is that fully functioning office products are complex, far more complex that we are used to dealing with on tablets and phones.  Microsoft’s choices seem to be a) cut back on the functionality (losing their technical advantage), b) teach us a new way of interacting (losing the synergy with the company office) or c) lose the home space all together.  You might be thinking that you would still be tied into the Office suite simply because even if you change your home tablet away from Office, other people will still send you Word documents. The simple fact however, is that file type is almost irrelevant these days. Download a free service like Open Office and you will see it is quite capable of opening Word docs and even saving them in Word format so on Monday morning your company PC will be compatible with your weekends endeavor.

1         http://www.forbes.com/sites/andygreenberg/2012/05/09/hbos-game-of-thrones-on-track-to-be-crowned-most-pirated-show-of-2012/

2         www.morningstar.com

Are Start-Ups More Innovative Than Large Established Firms?

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Start-ups are typically considered to be free-thinking, risk-taking, and open-minded – characteristics that are universally agreed as necessary for incubation of radical or disruptive innovation. Meanwhile large companies are viewed as too results-focused and risk-averse to create anything besides slow incremental innovations. Is this commonly-held assumption truth or fiction or something in-between and are start-ups or large firms better positioned to successfully commercialize innovation?

Who or where you ask these questions will generally inform the final answer. At most big corporations they focus on the extremely high failure rate for start-ups (even the ones that obtain VC funding) while in the converse situation they’ll point to the radical or disruptive work done by Twitter and Facebook and compare it to the relatively incremental product improvements being churned out by their larger counterparts.

cubicle farm
Is it better to be bigger?

In “Why Small Companies Have the Innovation Advantage”[i]  Sam Hogg argues that small companies are more innovative because, besides differences in culture (valuing entrepreneurship more highly) and organizational structure (making faster decisions), they are built to take risks that a larger company cannot justify. However, justifying innovativeness based on risk tolerance alone just doesn’t make sense. The counter-argument could be made that big companies have a better process to balance risk – by ensuring that innovative projects with the highest potential for success are funded while those that do not meet internal standards are killed or allowed to leave for external development (where failure cannot hurt the bottom line) or that bigger companies are better positioned to understand their markets.

This counterargument leads to a point made regarding 3M in a past Schumpeter column in The Economist[ii] – that large companies “can combine the virtues of creativity and scale. 3M likes to conduct lots of small experiments, just like a start-up. But it can also mix technologies from a wide range of areas and, if an idea catches fire, summon up vast resources to feed the flames.” If one is to take this side of the discussion fully, one then assumes that large companies have the knowledge and resources to determine what areas to work in and which ideas to fund toward development and thus have the advantage in innovation.

That entrepreneurial people can have a bigger impact by leveraging the resources of a larger company to drive innovation is a sentiment shared by no-less than Sean Parker[iii], who feels that many talented engineers and product designers starting their own companies could have a bigger impact at the larger firms they are flocking away from.

So, if big companies have inherent advantages in scale, expertise, and distribution that make them more capable of capitalizing on innovation, how can we explain the downfall of Blockbuster or Kodak, two companies with market leading positions that missed the opportunity to innovate in their space? It appears the advantage in resources and skills is not enough to ensure innovation.

Some suggest that by acting like start-ups big companies can effectively utilize their strengths to make real, transformative innovation.[iv] That means taking risks, getting passionate talent that can be directed toward a single goal, interacting with the customer more often, and streamlining bureaucracy.

Steve Jobs’ own description of Apple[v] shows that he bought into this theory – that to be innovative companies, regardless of size, need to embrace a culture that encourages innovation. At Apple that culture meant a focused strategy, a willingness to tolerate tension in favor of working together, and instilling a cross-disciplinary view of how the company can succeed. All-told, this strategy hasn’t worked out too poorly for Apple but probably can’t be expected to work or be as easily deployed at other large companies lacking the strong leadership Steve Jobs’ offered.

Jobs’ would have likely agreed with a point made in the Schumpeter column mentioned earlier2; “The key to promoting innovation (and productivity in general) lies in allowing vigorous new companies to grow big, and inefficient old ones to die.

On the balance, a fair conclusion would be that start-ups do generally embody characteristics that allow innovative ideas to succeed along with an inherently high tolerance for risk but can lack the resources and connections to effectively capitalize on them while bigger firms offer better systems, skills, and distribution channels but can stifle innovation through a reluctance to accept risk and overly-complicated bureaucracy that frustrates entrepreneurs.

Are start-ups more innovative? Only when large companies chose to stifle their ability to make meaningful innovation real.

What is the lesson for the Osmotic Innovator? Structure teams within your organization to value the things that allow innovative ideas to move forward and succeed. Even if the CEO doesn’t value a start-up culture like Steve Jobs you should do your best to encourage the same values in your teams’ innovation efforts.

Ensure clear focus – make sure the strategy, mission, and customer for your organization is always front and center

Tolerate tension and argument – people should be willing to speak-up, dissent with listening allows for the best ideas to move forward, product improvements to be made, and builds ownership

Accept balanced risk –maintain a portfolio of projects that exhibit different degrees of risk, without accepting risk few disruptive or radical ideas will be allocated sufficient resources to succeed

Give people responsibility – encourage your team to be entrepreneurs that take on leadership and ownership of the ideas they are passionate about

[i] Sam Hogg. Why Small Companies Have the Innovation Advantage. Nov 15, 2011. Entrepeneur. http://www.entrepreneur.com/article/220558

[ii] Big and clever. The Economist. Dec 17, 2011. http://www.economist.com/node/21541826

[iii] Eric Schonfeld. Sean Parker: “Little Startups Are Ridiculously Over-Funded” TechCruch. Nov 15, 2011. http://techcrunch.com/2011/11/15/sean-parker-little-startups-are-ridiculously-overfunded/

[iv] Tomkubilius. 4 Ways Big Companies Can Act Like Start-Ups to be More Innovative. Story of Design by Bright Innovation. March 30, 2011. http://storyofdesign.com/2011/03/30/4-ways-big-companies-can-act-like-start-ups-to-be-more-innovative/

[v] Nilofer Merchant. Apples Startup Culture. Bloomberg Businessweek. June 14, 2010. http://www.businessweek.com/innovate/content/jun2010/id20100610_525759.htm