Innovation: the attacker's advantage.

Innovation: The Attacker's Advantage.

Richard Foster. Summit Books, $19.95. Talk of innovation is on the lips of every American business person, and correctly so. Our failures in steel and textiles, and among leading-edge industries as well, are as often as not failures of entrenched leaders to move in a spirited fashion to embrace the new.

One way out, the route of both George Gilder (The Spirit of Enterprise) and the much maligned Atari Democrats, is to engender more small business growth. The unleashing of venture capital in the wake of the tax changes of 1978 and 1981 was the watershed for this set of proponents. The economists Barry Bluestone and Bennett Harrison in The Deindustrialization of America state the case for the other side. The small business resurgence is fine and dandy, but what about the 27 million people so far dislocated by the ineptitude (and greed, argue Bluestone and Harrison) of the big companies? Writing off the big and waiting for an entrepreneurially induced Nirvana entails unacceptable costs, this set of analysts argues.

The microeconomists, that is to say management theorists who focus on the individual firm, have also joined the fray. The year 1984 brought The Change Masters from Rosabeth Most Kanter and 1985 was marked by Intrapreneuring from Gifford Pinchot III and Innovation and Entrepreneurship from Peter Drucker. Kanter, coming from a sociological background, analyzes the process of overcoming barriers to innovation within the sizable firm. Pinchot's effort is similar in result, though using very different language. He urges big firms to create internal entrepreneurs and tells them how to find and nurture such talent, including suggestions for setting up internal capital markets. Peter Drucker, as usual, is exhaustive in approach. Unfortunately, so many ideas--from a typology for sources of innovative ideas to details about structuring the firm--leave no coherent impression behind. All three views are limited.

Now, in early 1986, we have a truly sweeping and fresh approach to this crucial issue. Richard Foster, a senior partner at the consulting firm, McKinsey & Co., has written Innovation: The Attacker's Advantage. It can, as most good books can, be boiled down to a single, memorable idea. Big companies must learn to be "close to ruthless in cannibalizing their current products and processes just when they are most lucrative and begin the search again, over and over.'

Foster argues correctly that we are entering a world--from retailing to science and technology-- where discontinuities will come along more regularly than ever before. Smaller firms or bigger ones that have never participated in a particular arena have a crushing advantage over entrenched organizations. They are not trapped by the leader's almost inevitable hubris.

Leaders attempt to control the pace of advance (always a doomed strategy, says Foster) and are trapped by the reliance on numbers, which at any moment falsely lead them to vote in favor of the old. Incremental dollars spent on marginal improvement of today's technology will bring in more immediate revenue than incremental dollars bet on the new. Over a ten-year horizon, though, the argument falls apart. Foster argues there is a characteristic 10 to 20 times advantage of the new over the old, once it takes hold.

The book is well written, and describes in non-technical language case after case (sailing ships, artificial hearts, etc.); meanwhile, it does not ignore the hard data beneath the anecdotes and examines in detail, for instance, the attributes of the so-called "S-Curve,' which allows rather exact prediction of the course of development of an emerging technology (very slow takeoff, period of rapid advance, slow maturation).

The nuggets for me were the case studies describing leaders becoming ensnared by past success. Foster traces, for instance, du Pont's loss of leadership to Celanese when tire cord shifted from a nylon to polyester base. Du Pont, the unquestioned leader, defended its nylon tire cord winner but did hedge its bets with experimental efforts in polyester. Unfortunately, du Pont's polyester department upstarts were forced to test their experimental product at the tire cord development center run by the dominant nylon department. The kindly cautions and advice offered by the nylon department slowed du Pont's polyester project to a standstill. Meanwhile, Celanese, with no entrenched and profitable nylon position to defend, entered the market with alacrity and quickly captured a 75 percent market share.

Foster's analysis of RCA's entry into solid state electronics is equally compelling. The solid state organization was overseen at the top by the vacuum tube bosses, in no hurry to render obsolete their most profitable product line.

The book suffers one major disability, a lost opportunity. Foster is a technologist and provides, for instance, overly detailed advice for constructing S-Curves, including an extensive appendix. Yet the heart of the matter resides in his all-too-sketchy descriptions of the organizational contexts at du Pont, Celanese, RCA, Procter & Gamble, Monsanto, etc. The cases could have readily provided a much richer description of the important psychological and organizational forces that prevent the continued cannibalization of current winners.

Big steel came out of World War II with 40 million tons of open-hearth furnace capacity. Its leaders found it impossible to leave behind this "sunk cost,' as economists call it, and embrace the new basic oxygen furnace (BOF) technology. The result was a passing of the baton in steel leadership from the U.S. to Japan in surprisingly short order. The failure to incorporate technologies is the foremost strategic issue for America's large manufacturers, still captives, almost across-the-board, of patterns of post-World War II success.

Foster has devoted an entire book --the first ever--to the key microeconomic issue in innovation, the crippling inability of most sizable firms to "abandon the skills and products that have brought them success.' For every IBM, 3M, and Milliken & Co. (textiles) that does so, there are scores that do not. The issue demands much more discussion, for it relates directly to the debates raging on such sweeping macroeconomic issues as protection and industrial policy. We owe Foster a large debt for having so meticulously documented his case. Sadly, however, we are left in the end not being sure whether or not there is hope for big firms. I, for one, wouldn't bet money on them.