Why Bad Things Happen To Good Technology

In most companies, innovation is the responsibility of the technical side of the organization. The research and development staff is supposed to come up with the cool new technologies, and the rest of the company takes them to market.

But that model doesn't assure success, as the recent history of innovation shows. Betamax lost out to VHS. Macintosh, to a lesser degree, lost out to Windows. We still use color-TV standards from the 1940s, despite many initiatives to improve picture quality.

Put simply, bad things can happen to good technology. And much of what can happen is due to the business model the company uses to commercialize the technology. This is the next wave in innovation: to innovate the business model that commercializes promising new ideas and technologies. Doing so is, for the most part, a simple process of trial and error. But at most companies it also requires the removal of some barriers to such innovation.

EMBRACING CHANGE

What are those barriers? Perhaps the most basic is simply this: Companies get trapped by their own success. Once a company's business model has proved effective, the tendency is to seek out additional opportunities that fit that model—and to play down any technologies that don't fit that model.

For example, a company that is accustomed to a business model based on charging money for products might overlook a technology that works best with a model based on free distribution with an advertising mechanism to produce revenue.

International Business Machines Corp. is one example of a highly successful company that saw the need for innovation in its business model and reinvented itself to great effect. By experimenting with new approaches, the company evolved from a model of vertical integration of its own proprietary products and services to a much more open model that includes cooperation with other companies in developing and commercializing technologies.

In the 1960s and 1970s, IBM was regarded much as Microsoft Corp. is regarded today: a very large, enormously successful, extremely well managed company, that effectively was a near monopoly. But by January of 1993, the company was in need of a new approach. That month, IBM announced what was then the largest loss in U.S. corporate history, $5 billion for 1992, along with the latest in a string of layoffs. Soon after that announcement, IBM fired its chief executive officer and brought in the first outside CEO the company had ever had in its history, Lou Gerstner. IBM's business-model innovation was born out of this financial crisis.

CUTTING DOWN, BUILDING UP

Mr. Gerstner's arrival at IBM led to significant cost-cutting and a final round of layoffs. But this by itself isn't business-model innovation. Where that began was through a fervent hunt for new revenue sources.

One experiment was to offer IBM's semiconductor lines to act as a foundry for other companies' products. This brought in new revenue and increased the utilization rate of IBM's equipment and facilities. A related experiment was to create a research alliance to share the high costs and significant risks of pioneering leading-edge semiconductor processes.

IBM's need to generate greater profits also led it to rethink its whole approach to managing its patents and technology. The company was able to raise hundreds of millions of dollars a year by licensing its intellectual property.

These initiatives and other experiments in open-source software and information-technology services have transformed IBM's business model. More than half of the company's $90 billion revenue in 2005 came from its IBM Global Services arm, a business that didn't exist 15 years earlier.