History Of Innovation And How The Concept Of Innovation Evolved

Innovation, in the modern sense, is about coming up with solutions to defined or not defined problems that can create a new world. Breakthrough innovations might try to solve, in a whole new way, well-defined problems. Business innovation might start by finding solutions to well-defined problems and continuously improving them.

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Innovators as heroes of our times

Innovation is at the center of the debate in many endeavors. From business to medicine and politics. In any of those fields, you will listen to the interviewed experts emphasizing how “innovation” led to the field’s evolution.

As you will learn, innovation became an integral part of today’s public dialogue, and it acquired a positive meaning only in modern times.

Indeed, in the past innovation wasn’t coupled with evolution or betterment of things.

Today when we think of innovation, we usually refer to technological (or more precisely, IT) innovation.

However, that is only one facet of a concept that can have multiple meanings and applications.

As a result, innovation has become an empty concept, meaningless, and used by many but understood by a few.

On FourWeekMBA, I’ve been looking at hundreds of organizations that dominate our times to understand the several facets of innovation.

As we’ll see, companies can evolve based on several types of innovation, each with its features.

When “innovation” meant a death penalty

“E pur si muove” (and yet it moves), Galileo Galilei

In 1633, when the Italian mathematician, physicist, and philosopher Galileo Galilei whispered “e pur si muove” (and yet it moves), he could not help but keep defending his theory for it was not the Sun to move around the Earth, but the opposite.

The Earth was not, anymore, at the center of the Universe.

That breakthrough idea would lead to a scientific revolution in the centuries to come. And yet it was not well accepted, to say the least. The innovator, just like Galileo’s story, was a heretic.

The years in which innovation would become synonymous with betterment were still far to come.

The more those people, usually mavericks, outsiders, and in many cases individual explorers, built things that were extremely new (what we would later call “breakthrough”), the more innovators went from impostors to heroes.

From Marx to Schumpeter, the whole concept of creative destruction became widely accepted.

Fordism, mass production, process innovation, and assembly lines (the 1930s-1970s)

“Any customer can have a car painted any color that he wants so long as it is black.” Henry Ford

When Ford’s Model T got introduced in 1908, that was almost ready for mass production. And yet Ford would say “When I’m through, about everybody will have one.”

A few years later, in 1913, he installed the first moving assembly line. That would be the apex of mass production. According to history.com, “it took (Ford) to build a car from more than 12 hours to two hours and 30 minutes.”

Fordism is well represented by the quote, “Any customer can have a car painted any color that he wants so long as it is black.“

And it would become a core paradigm for most of the first and second part of the 20th century. And it would be applied to many industries.

A standardized product is improved primarily through the manufacturing processes and division of labor to make it possible to scale and be mass-produced.

Ford combined the car (made for the first time by Karl Benz in the 1800s) and improved on top of the idea of the assembly line (an idea that started being developed centuries before) for the mass production of cars.

The car would no longer be a product in the hands of a few rich people.

A mass product needed to be culturally manufactured first. For that, it needed to be functional and affordable but also desirable.

That is how you developed a competitive advantage, and it was also the force that enabled mass production.

When Ray Kroc took over McDonald’s, he leveraged the existing “Speedy Service System” developed by the McDonald’s brothers (what we would later call “fast food”), which was an incredible process development able to provide an improved product at a faster pace as recounted in digital business models map.

For decades the process, plus the product and the mass appeal, would become the dominant mode of transforming small businesses into mass manufacturers.

The lean manufacturing years and the optimization of the supply chain (the 1970s-1990s)

“The Japanese auto industry should] catch up with America in three years. Otherwise the Japanese auto industry will never stand on its own.” Kiichiro Toyoda (1945), quoted in: Kazuo Sato (2010), The Anatomy of Japanese Business, p. 135, source wikiquote

Born in Japan, the lean manufacturing model became dominant in the western world as Japanese companies (Toyota would be the bedrock for this model starting in the 1930s) proved their ability to scale their small size nonetheless.

That happened through applying the Kaizen, or a process of continuous improvement of the supply chain where wasted resources would be gradually reduced to reach perfection.

Lean manufacturing would further help organizations introduce gradual improvements but quickly, with an iterative and fast process.

It dominated the western world from the 1970s to the end of the 1990s, representing the peak for lean manufacturing.

To be sure, lean manufacturing is still a popular operating model today, and methodologies built on top of it (like Lean Six Sigma) are still popular in the management world.

In the peak era of mass production and lean manufacturing, the competitive advantage would be achieved by optimizing supply-side processes.

The years of financial innovation, private equity, and leveraged buyouts

“What’s worth doing is worth doing for money.” Gordon Gekko in Wall Street, source: imdb.com

While the private equity industry was born in the late 1940s, it had been in the shadow for most of its years.

But when the 1980s came, a “financial innovation” called leveraged buyout would become the prime mode of domination.

In short, private equity firms would take over companies with a mixture of equity and debt (primary debt), thus leveraging on what was a financial optimization model at the time.

The private equity fund would take over a company by pumping massive debt.

The debt would be issued on the market as a bond, which given its risky features and low credit quality, would also get the name junk bond.

This new financial model, which would become the bedrock for private firms over the years, worked something along these lines:

The private equity firm uses the target company assets as collateral for the leveraged buyout.
It starts with a listed, public company that gets delisted.
The private equity firm pumps debt, which gets issued as obligations (what over the years would be called junk bonds) to repay the debt used in operation.
At the same time, the private equity firm aggressively performs cuts to make the balance sheet looks good.
The cash flow generated by the target company gets used to repay the debt.
And the debt itself carries (in theory, as in practice, many. of those LBOs would bankrupt target companies) smaller costs compared to equity, as the company could expense its interest at costs, thus reducing the taxable income (the so-called tax shield).
The private equity firm would eventually (if the LBO would turn successful) exit with a massive return with sales of the target company or the listing.

LBOs became very aggressive during the 1980s, culminating in the take over of RJR Nabisco, Inc., an American conglomerate, with a battle for its control that would be recounted in the book “Barbarians at the Gate: The Fall of RJR Nabisco,” later turned in a popular HBO movie.

Financial structure optimization would be used as a competitive advantage during that time.

To be sure, leverage buyout would continue throughout the 2000s and after the explosion of the dot-com bubble.

However, the 1980s represented the apex of this era. And in the meantime, another form of private equity financing would dominate after the 1990s: venture capital.

Dot-com bubble: a technological Cambrian explosion

“Great markets make great companies.” Sequoia’s Don Valentine, source: somethingventured.com

As a form of private equity financing, venture capital also started during the 1950s.

However, it would show its potential when a few capital firms financed a whole industry that would become multi-billion dollar markets (Computer first, Internet later).

During the 1970s, venture capital firms like Kleiner Perkins and Sequoia Capital were born, and over the years, the number of venture capital firms would skyrocket.

Venture capital initial rise in the private equity industry

If you recall, though, during the 1980s, another form of private equity financing would be quite popular (leveraged buyout), and venture capital firms would primarily focus on small technological firms (at the time, those were the outsiders), that over the years became the first tech giants.

Venture capital firms developed a different model focused on the so-called “startup.” Indeed, venture capitalists would finance those startups along several stages of their journey (from idea validation to aggressive growth).

But the impact of venture capital would become even more apparent when, in the middle 1990s, the new technology would prove commercially viable: the Internet.

Silicon Valley would become the center of that revolution. Venture capital firms would double down on the bets placed on internet companies.

In the end, missing a small bet would have meant losing the next tech venture going for a trillion-dollar market.

That gold rush brought the dot-com bubble.

The new gold rush

The apex of that bubble was a company called Webvan. The first e-commerce company for groceries, Webvan, was a brilliant idea backed by the smartest venture capitalists.

The company had acquired almost a billion in venture capital funds and was ready to roll. Webvan IPO’d in 1999, just to blow up in 2001 when the dot-com bubble exploded.

Indeed, Webvan’s idea was great.

In 2007, Amazon would start AmazonFresh; in 2017, Jeff Bezos’ would further complete the acquisition of Whole Foods.

Today the integration between AmazonFresh and Whole Foods is proving brilliant and viable.

But was it just a matter of timing? Indeed, timing mattered, and yet Webvan did have a customer base. Yet it was burning cash at incredible speed.

A viable business model is needed

If the company had iterated with a viable business model, it could have survived the bubble and slowly built a viable company.

Yet Webvan, endowed with massive amounts of capital allocated for market domination (there was no market yet at the time), went all-in with a strategy intended to appeal to everyone, building a massive infrastructure with huge operating costs.

As Webvan highlighted in its financial statements in 2000:

Webvan's facilities do not currently operate at or near their originally designed capacity. Webvan does not expect any of its  facilities to operate at designed capacity in the foreseeable future. Webvan cannot assure you that any facility will ever operate at or near its designed capacity.

Webvan ran ahead of its business plan without a reality check. It wasn’t just the peak of the gold rush in Silicon Valley and the fall of the dot-com.

It also showed the weakness of a venture capital model trying to dominate the upcoming Internet era based on capital alone.

In this era, the competitive advantage would be achieved with growth capital, aggressive growth, and speed over efficiency (which LinkedIn’s co-fonder called Blitzscaling).

Software ate the world, super angels on the rise

“Software is eating the world” Marc Andreessen

As the dot-com bubble burst, the surviving venture capital firms would pick up.

The dot-com bubble has brought much attention to the potential commercial applications of the Internet.

And when the bubble burst, all those interested in the short gains also got kicked out.

The few (both venture capital firms and companies) who survived were craving to focus on the few “killer commercial applications” (e-commerce, media, and advertising) that were proving extremely viable.

In those times, super angels acted as “the smart money,” counteracting the previous madness of the dot-com bubble where a lot of “dumb money” had entered the game.

As reported in a 2010 article from FastCompany:

Super angels give startups much less money than VCs, but they expect a lot less in return. Typically, they don’t take a seat on the startup’s board; they take a small stake in the firm and hand over their funds in weeks rather than months. This frees up entrepreneurs to work on building great products rather than worry about satisfying their funders — which, after all, is the only way they’ll succeed.

The venture capital game would be shaped by that, becoming more agile.

In this era, growth capital was allocated to that product that was prone to product-market fit.

Lean startup and the birth of demand-side optimization frameworks

“It’s a methodology called the “lean start-up,” and it favors experimentation over elaborate planning, customer feedback over intuition, and iterative design over traditional “big design up front” development.” Steve Blank in Why the Lean Start-Up Changes Everything

Lean startup represents the first application of lean manufacturing principles to the demand side.

Previous models and frameworks looked at optimizing business processes to bring products to market more quickly or efficiently.

During the startup age, where “software was eating the world,” many products turned into bits and codes. Thus, (potentially) requiring less building time, making it possible to release them, even when not perfect.

From physical to digital, the whole playbook changed.

In short, the lean startup methodology wouldn’t look at the optimization to reduce waste in the supply chain (software has no additional marginal cost). Instead, it becomes a process of iteration where customers need to be brought early on in the product development process.

That’s because the primary risk isn’t more time to market or the ability to produce a product at scale but rather making sure to build something people want.

Where lean software development took inspiration from lean manufacturing. The lean startup methodology would take this further into the business world.

The lean startup practitioner doesn’t spend months crafting a business plan. Instead, the lean startupper focuses on testing the few untested hypotheses about the business quickly.

This implies that customers or potential customers need to be brought into the loop early in the product development cycle. Thus, making it possible to build a valuable product for a set of customers.

At the core of this methodology sits the customer development process, where several stakeholders (from customers to partners) can give feedback to help the entrepreneur build a viable business model with nine building blocks represented in the business model canvas.

During this iterative (or, at times, abrupt) process of change, entrepreneurs could build their business model and gain a competitive advantage.

From there, strategy moved from a primarily externally-driven framework (see Porter’s Five Forces) to an internally-driven framework (Osterwalder’s Business Model Canvas).

From the encounter of agile/lean product development, and customer development, an MVP (minimum viable product) would be released early on, and from there, build a viable business model.

This brings us to the era of demand-side business frameworks, where all that mattered was whether customers wanted it in the first place.

Welcome to the era of demand-side business frameworks and customer-centrism (customer obsession)

At the turn of the century, Amazon was among the company that survived the dot-com bubble; lucky or not, it had to master a new business playbook.

As Jeff Bezos highlighted in Amazon‘s 2018 Shareholders’ Letter:

Much of what we build at AWS is based on listening to customers. It’s critical to ask customers what they want, listen carefully to their answers, and figure out a plan to provide it thoughtfully and quickly (speed matters in business!). No business could thrive without that kind of customer obsession. But it’s also not enough. The biggest needle movers will be things that customers don’t know to ask for. We must invent on their behalf. We have to tap into our own inner imagination about what’s possible.

In this era, a competitive advantage is achieved via a customer-centered approach, where your loyal customers/user base becomes the most important asset.

Key Highlights

Defined Problems and Breakthrough Innovations:
- Breakthrough innovations often solve well-defined problems in new ways.
- Business innovation can start with solving well-defined problems and continuously improving the solutions.
Innovators as Modern Heroes:
- Innovation is a central topic across fields like business, medicine, and politics.
- Modern emphasis on innovation carries a positive connotation, unlike the past.
- Innovation was not always associated with improvement.
Evolution of Innovation Meaning:
- Innovation has become synonymous with technological/IT innovation.
- The concept has multiple meanings and applications beyond technology.
Historical Shifts in Innovation:
- Historical innovators faced skepticism and opposition (Galileo’s example).
- Innovators evolved from impostors to heroes with time and breakthroughs.
Fordism and Mass Production Era (1930s-1970s):
- Ford’s Model T and assembly line revolutionized mass production.
- Standardized products, process innovation, and division of labor enabled scale.
- Competitive advantage: Efficient manufacturing and mass appeal.
Lean Manufacturing and Supply Chain Optimization (1970s-1990s):
- Lean manufacturing from Japan emphasized continuous improvement.
- Optimized supply chain processes for efficiency.
- Competitive advantage: Optimized supply-side processes.
Financial Innovation, Private Equity, LBOs (1980s):
- Leveraged buyouts (LBOs) used equity and debt for takeovers.
- Debt-funded models aimed for financial optimization.
- Competitive advantage: Financial structure optimization.
Dot-Com Bubble and Technological Revolution (1990s):
- Venture capital fueled tech startups during the dot-com bubble.
- Internet technologies transformed industries.
- Competitive advantage: Aggressive growth and speed over efficiency.
Super Angels and Agility (Post-Dot-Com):
- Super angels brought agility to venture capital.
- Focused on “killer applications” and smart investments.
- Competitive advantage: Agility and smart funding.
Lean Startup and Demand-Side Optimization (21st Century):
- Lean startup methodology applied lean principles to the demand side.
- Focus on iterative development and customer feedback.
- Competitive advantage: Building products people want.
Customer-Centric Era (21st Century):
- Customer obsession emphasized customer feedback and insights.
- Competitive advantage through customer-centered approach.
- Innovation focuses on what customers need and can’t ask for.