The Innovation Show

“Innovation is the ability to see change as an opportunity — not a threat.” — Steve Jobs

When we bear weight, we introduce micro-fractures to our bones and micro-tears to our muscle fibres. These small injuries are not detrimental; instead, they are signals for our bodies to repair and strengthen the affected areas. Through a process known as bone remodelling and muscle hypertrophy, our bodies not only recover but improve, becoming denser and more resilient.

Similarly, innovation in business demands that we step into the realm of controlled stress. Just as our bodies need time to adapt and strengthen, organisations require periods of recovery and adjustment to integrate innovation fissures successfully. These periods of challenge are not setbacks but opportunities for growth, refinement, and advancement. The Spartan warrior mantra, “The more you sweat in times of peace, the less you bleed in war,” reminds us that preparation and adaptation in times of abundance are key to enduring future challenges.

Rather than wait until there is an imminent threat to look for innovation and new solutions in an organisation, it is more useful to incur regular small losses early to avoid big losses eventually. In a similar vein, it is better to experience micro-fractures today to avoid serious fractures when you are less capable of recovery.

Pitney Bowes — Getting Ahead of the Decline

“You have to, little by little, expand beyond where you are so that people believe you can succeed in it.” — Michael Critelli, former CEO and Chairman of Pitney Bowes, Innovation Show EP 510

The transformation of Pitney Bowes from a traditional mailing company into a leader in mailstream solutions exemplifies the principle of micro fractures and adaptation. On this week’s episode of The Innovation Show, former CEO and Chairman, Michael Critelli shares how the company actively leaned into micro fractures to build future resilience. Getting ahead of a declining market in traditional mail services, Pitney Bowes identified opportunities within the broader context of messaging and mail. They estimated that the market was potentially worth $200 to $250 billion, despite their modest share of just 3%. This realisation led them to undertake a series of strategic steps akin to the controlled stress applied in weight training.

By executing around 80 acquisitions of various sizes, Pitney Bowes engaged in a process analogous to the body repairing and strengthening itself after micro-fractures. Each acquisition was like a carefully placed exercise in an overall programme, not only matching the existing strategic capabilities but gradually extending the company’s reach into new, adjacent market spaces with credibility. This gradual, methodical expansion strategy mirrored the principle of muscle hypertrophy and bone remodelling, where each challenge is followed by recovery and strengthening.

Pitney Bowes’ approach of strategic acquisitions and deliberate expansion into related markets reflects the natural process of muscle strengthening following recovery. This strategy underscores the importance of carefully planned challenges and adaptations for successful business evolution. Even with a significant drop in its traditional business segments, similar to how muscles weaken with age, Pitney Bowes has survived by embracing change and adapting to new circumstances.

Kao: Navigating Uncertainty with Strategic Foresight

“You can be certain only about the uncertainty, which pretty much guarantees that the outcomes of your new initiative will be different from what you have planned.” — Rita McGrath

When uncertainty is high and an innovation hovers in a farther horizon (Horizon in McKinsey speak), then we invest as little as possible. In these circumstances, we implement experiments in small ways, collect data to see the impact of these actions, and then consider whether to continue down a particular path or shift to a new one. In our forthcoming series on her first book, “The Entrepreneurial Mindset”, our friend Rita McGrath shares the story of Kao.

The journey of Japan’s Kao Soap Corporation further exemplifies the micro-fracture effect in action. Kao, a centuries-old manufacturer of soap ventured far from its core business into the magnetic media industry by leveraging its expertise in surfactant technology. In the late 1970s, Kao sought to extend its expertise from the soap and toiletries sector to the competitive magnetic media industry. Kao’s venture into the floppy disk market was characterised by a careful, methodical approach to uncertainty and risk. Before committing to the manufacturing phase, Kao tested key assumptions about the market’s acceptable price points and quality expectations using prototype disks, subcontracting their production to gauge potential customer response. Once they experienced they learned if companies would buy a disk labelled Kao, now they could lift a heavier load.

Understanding the risks associated with large-scale manufacturing investments, Kao opted for a cautious entry into the market. The company acquired a single-line plant from an existing small floppy disk manufacturer. This strategic move allowed Kao to gain valuable insights and expertise from the original plant’s operations, minimizing the risks associated with starting from scratch. This approach not only provided Kao with practical learning opportunities but also ensured that the company could demonstrate its capability to produce high-quality disks at competitive costs on a smaller scale before escalating its operations.

Kao’s strategy highlights the importance of maintaining flexibility in commitments, especially when venturing into new or uncertain markets. By adopting a pay-per-use or subcontracting approach to initial production, Kao kept its fixed commitments variable, allowing for adjustments based on real-world performance and feedback. This prudent approach enabled Kao to avoid the precarious position of having to justify the closure of a new facility to investors after advocating for its potential. Through this step-by-step process of testing, learning, and gradual scaling, Kao not only mitigated risk but also built confidence in its new venture, exemplifying a strategic application of the micro-fracture effect in business innovation.

Postscript: The Impermanence of Success and the Necessity of Permanent Reinvention

“Success at best is an impermanent achievement that can always slip out of hand.” -Thomas Watson

In 1997, Kao’s strategic foresight and innovative endeavours positioned it as the world’s leading producer of floppy disks, alongside diversifying into other media like CD-ROMs. However, the journey of innovation does not end with reaching the pinnacle of success. Just as muscles can atrophy without continual exertion, businesses can quickly find their competitive edge dulled in the absence of ongoing innovation and adaptation.

Kao’s ascendancy in the disk manufacturing domain was challenged by the dynamics of the market and the entry of new competitors. The assumption that prices would remain stable in the face of increasing competition proved to be Kao’s Achilles’ heel. With no substantial competitive barriers other than manufacturing prowess, the market became a battleground of price wars, particularly with the entry of firms from mainland China. Leveraging lower labour costs and willingness to operate on thin margins, these new entrants drastically drove down prices rendering the once-profitable business untenable.

The rapid price collapse serves as a stark reminder of the innovator’s dilemma: success today does not guarantee success tomorrow. On April 23, 1998, Kao made the difficult decision to exit the floppy disk production. This strategic pivot, while marking the end of an era, underscores the importance of agility and the willingness to let go of declining ventures to focus on new opportunities.

Kao’s story is a testament to the relentless nature of competition and the constant need for innovation. It illustrates that in both life and business, resting on one’s laurels is not an option. Continuous effort, permanent reinvention, and ongoing adaptation are imperative for sustained success. Like the muscle that must be worked consistently to maintain its strength, a business must continually evolve, challenge itself, and explore new horizons to thrive in the ever-changing landscape of industry.

Thanks for Reading

We have just released a bonus series that was inspired by my chat with Ian Morrison. It is with Mike Critelli, the transformative CEO and chairman of Pitney Bowes, and his thinking in confronting industry challenges and steering the company towards innovation.

Mike will also feature in my new book.

The conversation highlights Critelli’s strategic foresight, the importance of listening to outlier data and maintaining adaptability in leadership to navigate the changing landscape of the mailing and digital communications industry.

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The Micro Fracture Effect: The Value of Micro Losses was originally published in The Thursday Thought on Medium, where people are continuing the conversation by highlighting and responding to this story.