The Innovation Show

Picture the scene: An Idea Bearer meets with the CFO and other executives to pitch an idea. Minutes into the meeting, visibly irritated, the CFO asks: “When will this be profitable?” And with that, the poison is injected into the veins of the idea, and it dies before it is born. Is the CFO wrong? Not from her perspective. Her job is to protect the business from deviation (and by association with you, the deviant). Her job is to ensure the business hits targets, maintains its share price, lives up to the expectations of the board, investors, and share price and does not invest in the wrong areas.

In this quote, Drucker recognises how decisions in incumbent organisations are made from a “butterfly’s perspective”. The CFO forgets that the business once struggled as a fledgeling caterpillar. The more mature the organisation and absent the original founding team, the more the CFO protects the butterfly and kills caterpillars. In addition, the CFO needs to realise that it must lay some new eggs to enjoy future growth. The fact that many eggs die for some to succeed is a significant hurdle many organisations must overcome. Based on their current understanding of the world, executives prioritise opportunities most likely to succeed from their existing paradigm (pattern/model of thinking). To them, they are seeking better butterflies; they do not have the patience to await a new butterfly’s lifecycle and the associated risks with a new caterpillar. 

Joseph Bower explains in his breakthrough work on Resource Allocation (as does Clark Gilbert in a forthcoming episode of The Innovation Show) that the resource-allocation process plays a crucial role in disruption because it leads incumbent firms to underinvest in disruptive opportunities (caterpillars). Incumbent firms master sustaining innovations (better butterflies) because their existing values prioritise them, and their processes and resources are designed to tackle those innovations precisely.

In addition, by their very nature, caterpillars (new business models, new corporate explorations) will yield initially small revenues. Those revenues will appear “not worth the effort” compared to the butterfly’s might. It makes sense just to sell more of your existing product/service in new territories. It is more efficient, and you are already proficient. 

In our series on the work of Clayton Christensen, Matt Christensen shares the innovator’s dilemma that incumbents face. Do we ignore the caterpillar, focus on a better butterfly, and cede the (initially insignificant) niche market to newcomers? The problem always plays out familiarly: incumbents discount a newcomer’s ability to move up-market eventually. They cannot foresee that a competing caterpillar will eventually become a butterfly. Clay Christensen writes, “One can rarely predict what specific innovations will occur to boost a disruptive firm up-market. What we can consistently predict, however, is that disruptive firms will be motivated to figure out a way to do it—because it is the path to improved profitability.“

The Birth of the Telephone

“What use could this company make of an electrical toy?” – President of Western Union, William Orton (on declining to purchase the telephone from Alexander Graham Bell)

Alexander Graham Bell did not invent the telephone to topple Western Union. He set out to help Western Union become a better butterfly, to improve its core telegraphy business. When Bell offered his telephone patents to Western Union for a mere $100,000 (a couple of million in today’s dollars), they turned him down. As Scott D. Anthony tells us in a forthcoming episode on The Innovation Show, we often interpret such a mistake as management myopia, but rather due to their focus on rapid and profitable growth, Western Union chose to focus on the butterfly and turn a deaf ear (excuse the pun) to the telephone.

In “Seeing What’s Next”, Clay Christensen and Scott D. Anthony tell us, “At first, the telephone’s growth had little impact on Western Union’s core business because telephone wires could only carry local calls. By 1900, only 3 percent of the average number of daily calls were long distance. But even then, it was clear Western Union had made a colossal mistake. Western Union reported an annual net income of roughly $6 million that year. The Bell telephone companies, reorganized underneath a single corporate entity called the American Telephone and Telegraph Corporation (AT&T), reported net income of more than $13 million. By 1910, the challenger consumed the incumbent, as AT&T acquired a controlling interest in Western Union. Although the government eventually forced AT&T to divest its interest in Western Union, AT&T became one of the world’s largest, most powerful, and most profitable companies—all based on a technology that Western Union didn’t think enough of to purchase for $100,000.

It is easy to put this mistake down to poor management and a lack of foresight, but was Western Union’s management really that incompetent? Consider these facts. Western Union’s management was smart enough to create what historians consider the “first nationwide multi-unit modern business enterprise.” Yes, they initially discounted the telephone, as did the inventor! “Initially, [Bell] presented the telephone as a novelty rather than a communications device capable of challenging Western Union.” Bell even patented his mechanism to use electricity to send the human voice across a wire under the name “Improvements in Telegraphy.” Even Bell was building a better butterfly.

“Neither telephone nor telegraph industry leaders could conceive of a world in which ordinary people would pick up a telephone just to chat with friends and relatives.” – Amy Friedlander ‘Natural Monopoly & Universal Service’

As Clayton Christensen reiterated throughout his work, capable managers do not become incapable overnight; they act in what they believe is in the best interests of the organisation they serve. For the executives in Western Union, there was simply no way they could have anticipated that the telephone would ever get good enough to be a competitive threat. As the great innovator Buckminster Fuller said, “There is nothing in the caterpillar that tells you it will be a butterfly.” 

This is challenging work. 

Next, in this series of Thursday Thoughts, we will explore how customers kill caterpillars as much as managers.

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