Information Age (IA): Innovation has been the central theme of your business life, in your investments and the companies you have founded and run. Why are you so captivated by the whole notion of innovation?
Doug Richard (DR): The reason for that is simple: because the evidence is there to suggest that companies that are predicated on delivering innovation to the marketplace tend to grow faster and reach higher levels of success. They tend to be 'large-scale' businesses overall. Innovation-driven business is the core of wealth creation today.
There was a famous economist in the early part of the century, Schumpeter. He basically took traditional macro-economic theory and introduced the notion of innovation into it. He wrote about something called 'creative destruction'. Somebody once said that the best billion-dollar business is one that rises out of a $150 billion market. The great example of that recently is [Internet telephony company] Skype. Skype recently sold for $2.5 billion [to eBay] by participating in the process of destroying the entire telecoms industry, which is worth hundreds of billions. That's what Schumpeter means by creative destruction – that phoenix-like act where somebody destroys an incumbent and in the process creates a new business model.
We define innovation both narrowly and broadly. Innovation-based start-ups are companies that either have an invention or innovative process that they seek to exploit in the market. Innovation can be anything as fundamental as new science. But it can also be process innovation. Good examples of process innovations that are hugely successful are Dell, eBay and Google. Dell in particular is interesting because it didn't actually invent anything new. Where its innovation lay was in its ability to change the nature of the ordering and delivery for a PC: it went direct to the consumer when no-one else did; it built the computers on demand and to customer requests so there were no inventory costs and therefore the company lowered its total cost of operation. So there was a business process innovation that was as revolutionary as any product innovation, and which made Dell made it the largest PC company on the planet.
IA: Is that process of creative destruction then limited to start-ups?
DR: No, not in the least. It's just very difficult for companies that are entrenched or established [to engage in it]. It is difficult for them to see beyond the boundaries of their current client base and current revenues, to see where they might also act in a new way. It is very difficult for an existing corporation to take on board particularly radical ideas and it's even more difficult when they have to cannibalise their existing businesses. In fact, if you don't cannibalise yourself you lay yourself open to someone else doing that to you.
IA: That takes a certain amount of nerve. Do you think that companies which continue to innovate have particular characteristics?
DR: It's not so much a matter of the management being brave as them re-aligning their thinking. It's not particularly brave if what you'redoing is preserving your own existence. We all are lulled into the belief that our current business models will continue for some sort of unimaginable time period into the future. In fact the timeframe [for any business model] is getting shorter and shorter, and it becomes a question of becoming aware of how quickly the business's historical revenue streams can falter, shatter, and completely diminish.
Take Kodak: there's an example of somebody that didn't see the change coming. With the traditional silver nitrate photography process, it had a decade's worth of warning that this was going to die and they used up three CEOs working out how they were going to go digital. They needed to re-invent the corporation from the ground up. Years ago Kodak had potentially limitless capital in the form of its bolstered share-price. And it should have been far more aggressive. It should have sensed it could be out of business in five years and do everything necessary to prevent that. It's taken a whole decade of missed attempts, while dozens if not hundreds of digital opportunities have arisen, all of which they could have taken.
IA: If Kodak had to go through three CEOs, before it woke up and responded to the threat, does it follow that 'creative destruction' is driven by people? Or can businesses put processes in place to avoid complacency?
DR: I think that it is down to people certainly. The business is no more than the sum of the people that make up it. The only example I can think of where one can put in place a process that can help drive this kind of thinking is the route that Shell steered over the last 20 years. They're famous for what's known as 'scenario management' where they will paint scenarios of the future, the senior executive management spend time laying out the potential directions the future holds. And they treat them with gravity: they look at a world that 'keeps on running out of oil' and they ask themselves, 'When it does, what kind of business are we?'
They've done quite an adept job at distributing revenue base into many other activities over the last 15 years, and I put it down to the fact that, even though they are a massive corporation, they are extraordinarily well disciplined at scenario planning.
IA: We've talked a lot about innovation. Do you see the IT organisation as having a major role in fostering and delivering that innovation? Or is it merely there as a support function?
DR: In any corporation, a given technology can be one of two things to the business: it can either act to support the business by making it more efficient or it can be an underlying threat to a business. In other words, technology is outside each business – technology is larger than any given corporation. You can either make it a core part of your business and take advantage of it to its fullest extent and probably re-invent your business along the way – or someone else will.
The one thing that is certain is that enabling technologies will arrive that will change the assumptions that everyone holds to be true. And it will either destroy or empower the business, shift the playing field so that losers become winners, second tier will become first tier, first tier will crumple. Who would have thought that Marconi was going to become invisible over the course of a decade: the decline of a company whose management guessed incorrectly about technology and didn't act upon it with sufficient vigour?
IA: What innovations – ones that change businesses – are currently exciting you?
DR: Quite a few – one area is mobile applications. We are going to see some considerable shifts in that area over the next 12 months. Mobile applications will result in all manner of location-based services, massive cost reductions in the delivery of what you do as a business, new ways of communicating between peers, friends, neighbours, and new types of content being delivered to your handset. There is a lot of engineering going on right now and some people are going to make a lot of money on the piping and plumbing [of future mobile telephony].
The other area I'm particularly interested in over the next 12 months is what I would call 'innovative printing'. This where you can start to print things that couldn't be printed before: [semiconductor companies] are starting to print chips; [display companies] are starting to print displays. These are the kinds of things that just change everything. It almost becomes hard to figure out what the applications are because the innovation tends to come first and then people slowly come up with creative uses for it. Take the idea of printed chips: these chips become disposable, infinitely cheap and they create the possibility of low-cost, highly-disposable chips that can be scattered everywhere – who knows what we can do with those sorts of developments?