Michael Maiello spoke with economist Tom Koulopolous on Forbes.com's Business Visionaries. (Click here to watch the interview.)
Mike Maiello: All right. Tom, thanks for joining us.
Tom Koulopolous: You're welcome, Mike. Thank you.
So, the topic is innovation. And the thesis is that innovation is not what we tend to think it is.
Right.
I don't just sit around waiting for lightning to strike in my brain and come up with that brilliant product.
It's funny. But, a lot of us, I think, we've been sort of brought up with this notion that innovation is all about the light bulb going off. Which is sort of the prototypical icon you have in mind when you think about innovation. And that's a view we've got from sort of the Edisonian perspective of the world.
Today, innovation is all about collaboration. It's not the lone genius off somewhere in a closet coming up with bright ideas. And frankly, we don't need more ideas. We have enough stuff to go around. What we need is more value in the world. And that's what innovation is.
So, you kind of have to change the way you look at your own relationship to the economy and the workplace. Because we were mostly brought up wanting to be imaginative heroes, right?
That's right. And none of this takes away from our ability to be imaginative or creative. I think we're all imaginative and creative in our own way. Granted, some of that gets driven out of us as we get older through schooling. And we could talk about that because there's some ways that we could perhaps not drive it out of children as readily.
But, look, you're right. The reality is you have to change the way you look at what innovation is. And in many cases, some of the best ideas that have come along recently have not been radical inventions. They've just been tweaking of what already exists. Even the iPod. Sort of the prototypical, the poster child of innovation over the last few decades.
Nothing was invented there. It was a new business model. It was a new market model and the componentry? It was all pretty much in place when Apple ( AAPL - news - people ) came to market with the iPod.
Meaning that there were MP3 players that were readily available and cheap, right?
You bet. And Tony Fidel who was the fellow who went to Apple, and really gave birth to the iPod, he went to a lot of those MP3 players and he said, "Hey, if we bring together this technology that already exists, we could develop a whole new marketplace." And everyone said, "That's crazy, Tony. Go some place else." And he finally ended up at Apple's doorstep, lo and behold.
And what's the role of style and panache in something like the iPhone?
There's always an element of style and panache in design to good innovation. I think you have to map it to the market. Into the psychology of the marketplace. Look at the flip video camera by Pure Digital. I mean, here's a device that was utterly simple and the marketplace embraced it, loved it. Today, you can personalize your flip any which way you want. It goes with colors and styles and patterns.
And they sold the company to Cisco ( CSCO - news - people ) for $560 million just a few months ago: five-year-old company, 100 people. I mean, that's innovation. They didn't build anything new. In fact, what they built was almost retro in many ways, right? Because Sony ( SNE - news - people ) and JVC were all building these complex camcorders and along comes the flip camcorder without even a zoom capability.
So, if I want a shot at being a part of a major success like that? I want to be in on the next flip phone, the next iPod, what kind of structure do I need around me? When I come to work, what has to happen?
Good question. The structure has a lot to do with it. The culture of the organization. The way in which it allows for failure in the organization. A lot of big companies don't like failure. Even short failures, small failures. And people are penalized when they fail. You want to create a company that tolerates a little bit of failure. Experimentation.
And a company that realizes innovation isn't about throwing more money at the problem. It's about taking things that are already there and creating a new business model around those things. And I think that's where the opportunity is today. To create those new business models. And they abound. They're everywhere. Amazon.com ( AMZN - news - people ) is a wonderful example. The Kindle is a great recent example. Change the business model, how you consume the information. I think that's the approach you want to take. Create some tolerance with failure and experimentation.
3M ( MMM - news - people )is a company that's often cited for allowing this failure. And sometimes profiting from outright failures. Can you talk a little about that?
Indeed. Well, I mean, the Post-It note is a classic example. But, 3M and the culture of tolerating failure of 3M goes back almost to the origins of the company. In fact, Dick Drew, who was the fellow who invented masking tape, was a fellow they had hired. He was a correspondence engineer. He didn't even have a degree.
And they hired him in the early days of 3M to go off and figure out how to build better abrasives. And Dick went to the body shops where they were painting cars. And he said, "You know what? What these folks need is not abrasives, but tape." And he went back to 3M and started playing around with tape.
And his boss said, "Dick, we're an abrasives company. We're not a tape company. Get off the adhesives kick." And Dick kept at it. And they couldn't fire him because they couldn't hire people at that point. And they couldn't afford new people. And after three years, Dick came up with masking tape. And at that point, the culture changed at 3M.
And 3M said, "You know what? We're not going to. We're going to tolerate failure. And we're not going to discipline someone for doing the right thing." And to this day, 3M actually allows its engineers to devote 20% of their time to non-project-essential activities. Things that don't have anything to do with their job day to day. What an amazing culture. And that has a lot to do with 3M's success. And they measure that. They measure that ability to innovate by how often their people come up with new ideas that they can repurpose. But, with the Post-It note, they weren't looking for that. They were looking for super glue. They weren't looking for a semi-permanent adhesive.
Here, they wanted an adhesive.
Exactly. They wanted a really fantastic adhesive. And along comes super, this sticky stuff that didn't really work very well. But, they filed it away. They put it in the corporate memory. And years later, they looked in the corporate archives and they found that they did have something that would work to create a semi-permanent Post-It note. And the rest has become history, as they say. So, you have to keep that corporate memory alive.
Now,Google ( GOOG - news - people ) has tried, I think, to take the 3M culture into the Internet age.
They've tried. It's not clear yet. It's early. It's not clear yet how well they will succeed. You certainly have to give them credit because they do experiment a great deal. And Google Labs is a wonderful example of that. If you go the Google site and you look at their Labs page, they're constantly recycling ideas and trying to find the next big thing.
They started a new venture fund now with a $100 million to invest in non-core areas. So, I'll give them credit. They're trying to do the right things. But market pressure is intense. When Microsoft ( MSFT - news - people ) and Intel ( INTC - news - people ) both tried to double down on their R&D investments recently during the economic downturn, they took quite a hit from their stockholders. Stockholders don't like to see that. They're very short-sighted. And it takes a lot of gumption and I think a lot of courage to invest long term in innovation.
Yeah. I wanted to ask you about that in our current environment because it's all good to say, "We tolerate failure." However, shareholders don't.
No.
And when things are really tight, as they are now, failure can be catastrophic.
Absolutely. That's a great question. I'll tell you what happens in that case. Large companies, unfortunately, just don't innovate as much in an economic downturn because stockholders don't tolerate failure. In fact, they barely tolerate maintaining the status quo when it comes to R&D investment. So, where will the innovation come from? It'll come from the small companies that don't have to account to stockholders. It'll come from the second-bedroom operations, the garage operations. And we forget that a lot of these companies--HP, Apple, Microsoft--these were all second-bedroom, garage operations.
In fact, at HP, they still have the HP garage that everything began in. So, these companies don't start big. They start small. And that's what I tell people. This is a great time for small companies to innovate. Because that really is where innovation ultimately is. The back bone of innovation is that small company mentality. That mentality.
And you're talking maybe even pre-venture level?
Absolutely. Small companies that are strapped for cash, don't have outside investors. Maybe have some family and friends. I think that really is ultimately where most of the innovation occurs. And we forget that 50% of all people employed in the U.S. are employed with companies of under 500 people. I mean, those are small, medium-sized businesses. And that's a big chunk of our employment base. So, we need those companies to be innovative, to come up with new ideas, and to capitalize on them.
Do you think the venture capital community is properly encouraging innovation at this point? It seems to me that they're being very hard on entrepreneurs.
Yes, unfortunately, when the economy gets tighter, VC comes with more of a burden. And I think that's what you expect. Look, venture capitalists are going to be more conservative in how they invest their money, and will require terms that perhaps extract a bit more leverage from the deal. What I encourage folks to do, small businesses to do, is to get the idea as far as you possibly can without outside capital.
But keep in mind that at some point scale has to take over. Speed to market is absolutely essential. And at some point, you have to give up a bit of that ownership stake. But hold on to it as long as you possibly can. That's the best way to build the idea. To have the latitude to build it. And then when the time is right, you give up what you have to give up to get to market in the fastest way.
What size are most of your clients? The people who come into your firm?
Most of my clients are actually large companies, Fortune 500 companies. But, what's fascinating to me. I didn't expect this, Mike. Recently, in the last 12 months, I've seen more medium-sized companies come knocking on my door. And I think part of that is because the innovation message really appeals to them. And they want to build a culture of innovation as early as they can.
They don't want to wait to be a big company to tackle that problem. They want to tackle it early. And that's good sign. I like that. I'm encouraged by that trend.
And how do people respond to this message of free to fail?
Surprisingly, small companies respond to it very well. Large companies have a tough time with it. If it's not really part of their culture, it's going to be very difficult to make it part of the culture in this economic climate. But small companies amazingly respond very well to it. And I think in large part because they realize that they have to somehow change the nature of how they operate, how they behave.
And it gives them an advantage to be more innovative. I call it the corporate canopy. It's kind of like a forest fire. The corporate canopy lets some sunshine in. Because the large companies aren't paying as much attention to when the small companies threaten them. That's a good thing for small companies because now they have some latitude. They can do things that otherwise might not last very long in the marketplace because a large company would co-opt their idea. So, I'm encouraged by what I see.
Do you find yourself ever butting up against the advice of other consultants? Particularly those who have that kind of input in/output out kind of equation, all you got to do is control your people.
Absolutely, when you deal with large companies, you absolutely come up against those sort of very operationally focused consultants. And, look, there's a role for healthy operations. The reality is that you have to perform well in the market to have a license to come back the next quarter and the quarter after that.
But, again, with smaller companies, I don't see that being the case. With smaller companies, there is a definite sense right now that there is an opening. That there's a bit of a green field to innovate. And if you can do that in three to four years time when the large corporates come back and start paying attention to innovation again, there will be a lot of value in those small companies. And M&A always follows a recession because those innovative ideas have to scale. And large companies will start buying those innovative ideas.
So, it's not too much to dream, then, for the entrepreneur to position yourself now for consolidation during the recovery?
Absolutely not. I think that is the ideal way to look at the three- to four-year horizon. Maybe five-year horizon. But the economy is turning around, apparently. It seems to be turning around a little bit. There is some light that's peeking through. And what I tell small companies is make that part of your strategy. Position yourself as innovative. That's a value that you have and that you bring to a larger organization. And that might result in an acquisition or a merger at some point.
Have you found that kind of risk aversion on the part of lenders, creditors and investors has translated to the smaller entrepreneur?
It has. And, unfortunately, we're not seeing enough involvement on the part of Washington, I think, to help that. Some of the community banks (I have to give them credit) are certainly trying very hard. Local and community banks are still trying very hard to support the entrepreneur. But, of the $1.4 trillion in stimulus and bailout between top and the Obama stimulus plan, I think less than 1% of it has gone to small business.
Don't tell AIG ( AIG - news - people ) that. They'll go after it.
But, that's incredible. Imagine, you know, you've got 50% of all the people employed in the country are employed by small business. And you've got 1% of stimulus going to small business. There's some things that are being done. The Obama administration is trying to sure up loans to small businesses and to guarantee more loans to small businesses.
But those are mostly for businesses that are already operating. Not those that might be starting up. So, I think we have to do a lot more to really encourage that sector of the economy.
Just because this might be our last chance to do so, I'd love to discuss GM and OnStar. Because that's another kind of amazing accidental story.
It is. And OnStar might be one of the few things, if not the only thing left at the end of the day that really has value from the GM journey, if you will, to be kind. Look, OnStar came out of nowhere. It was a complete accident. And Rick Wagner supported it. I mean, to his credit, one of the things that Rick Wagner did that I think really will be a legacy is the OnStar brand. And it's an incredible brand globally. It's being exported outside of the U.S. right now. We're not exporting much else from the U.S. automobile industry outside of the U.S. right now. So, I think it's an example of how even large companies can innovate if they try hard and if they put good intentions behind it. Unfortunately, one of the few examples in the automobile industry of where that happened.
Some of the OnStar origin is a little interesting. They had hired scenario planners from Shell who expected urban blight.
That's right. It's amazing how often we get the future wrong even when we apply very smart minds to it. And if you talk to Chet Huber, who still runs the OnStar division at GM, he'll tell you that when they first started OnStar, they had no idea that things like unlocking doors would have any value. Or that people would actually want to get directions from their OnStar system.
And today, OnStar can actually transmit a digital signature of the crash to the ER room. They're not doing that just yet. But they're experimenting with it. So that when you get to the ER room, the doctor knows what your injuries are before you even get there. And they had never even dreamed of this initially.
So, to do scenario-based planning is wonderful. But, the future's very difficult to predict. And the reality is it's why you have to tolerate failure. Because your journey to the future's always going to be an indirect one. And you have to have a built-in tolerance of taking those detours periodically. And they did for OnStar. And that's why I think it's evolved as a very successful brand.
What do you tell the small business owner or would-be business owner with an idea in terms of how to take care of themselves in the early years?
How to take care of themselves in the early years?
Yeah, financially.
Develop a passion for your idea and not only thick skin, but, I think a thick psychology that will allow you to deal with the turmoil, and the many detours that you will have to take. The biggest mistake entrepreneurs make is that they get so attached to their idea that they simply will not allow the market to shape it.
You have to market shape it. Don't get so attached to it that you're the only one who sees the beauty in the idea. This is like a mother and her baby. Every baby is beautiful to every mother. But some ideas? They have to change. Some quite radically, in fact. And I think entrepreneurs who will let the market take over, take the idea into their own hands and shape it are the ones who will be best off long term.
So, you have to have thick skin or a thick psychology to be able to do that. In terms of financially sustaining yourself, it's going to be a rough road. I have yet to find an entrepreneur who has not had to take longer than they thought it would take. That has not leveraged their home equity, refinanced their home. Done all kinds of things that otherwise rational people would not do. But you have to believe in that idea and believe it enough to let it grow. To let it expand beyond what your initial concept might have been of what it should look like. That's a tough thing. But it's a very important thing to do. And successful entrepreneurs let the market take over.
And who is the Innovation Zone written for?
The Innovation Zone. The book was originally for large corporates. And the intent was to get them to understand how they could create this culture. What I have found is that it's even more appropriate for small and medium-sized businesses who are trying to create this culture from the outset. And it gives you the foundation, the tenets that you need to establish a company where good ideas can thrive. And where people will get a fair shake when they come to you with an idea. And I think that's a good thing. Because our economy is going to grow because small businesses come up with new ideas. That's where the dreams begin.
So, I'm really encouraged to see that that audience, which I hadn't expected at the outset, has really embraced the book. But, look, at any point in time, innovation is a good thing. Whether you're one person in a garage or a 100,000 people in a global 2000 company. You still need to innovate. You have no choice in the matter, right? It's not an optional thing to do. So, I think there's food for thought for everyone there. But, it's encouraging to see small and medium-sized businesses really latch on to these ideas.
And this is book number eight?
This is book number eight, in fact. Yes. I have a passion for writing and my family has sort of followed suit in support of that passion.
You're typing number nine as we speak?
And I'm working on number nine as we speak.
Well, great. Hopefully, you'll come back when that's out. And thanks for joining us.
I look forward to it. Thank you, Mike.
Guy Kawasaki of How to Change the World
. In this interview, he explains how to ensure that your back is covered.
