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 / Spring 2005 / Issue 38(originally published by Booz & Company)


Suits to the Rescue

But Insull’s most radical innovation was not technological. It was in the seemingly mundane practice of pricing. The big economic problem with selling electricity back then (and even today, for that matter) was the frequently extreme mismatch between supply and demand. A company had to build the generating capacity required to meet periods of peak usage, but those spikes tended to be short-lived; most of the capacity went unused most of the time. Given that the costs of power generation were mainly fixed rather than variable — and that the shelf life of electricity was extremely brief — the unevenness of demand destroyed a producer’s ability to turn a profit. The penalties only grew as operating capacity expanded.

Insull solved that problem by charging different rates to different customers, in order to boost demand during times when it tended to be slow. In particular, he drastically cut the price of electricity for home users. He knew that daily residential usage patterns would tend to run opposite to those of the big commercial users that accounted for most of the peak demand; residential demand was concentrated in the evening and early-morning hours, when most factories and shops were closed.

Then, to the consternation of his many small competitors, Insull offered to wire houses at no cost, to expand his clientele as rapidly as possible. It was clear that he was delivering kilowatts to the home market for less than the average cost of producing them. What he knew, though, was that every cent of added income would help offset the high fixed costs (while also bringing down the variable cost of producing each kilowatt), making huge generating stations both feasible and profitable.

Insull’s pricing breakthrough was, Sir Harold writes, “the single most significant innovation in the single most important technological advance of the 20th century.” And it paid off mightily, as Insull rapidly took over the market. By 1898, he had bought out all the other power generators in downtown Chicago. Within another 15 years, his rapidly growing utility — now named Commonwealth Edison — had become the dominant energy provider in the Midwest, and Insull himself had become one of the richest businessmen in the country. More important, Insull’s vision had democratized electricity, bringing its myriad benefits to the masses.

Insull’s essential act of innovation was to craft a coherent business strategy out of what, at the time, must have seemed a cacophony of contradictory technological, economic, and market forces: the scale advantages of centralized production, the high fixed costs of generation, the uneven nature of power demand, the frugality of the average consumer, the breadth of electricity’s potential uses. It was an act of innovation that could only have come from the mind of a person who was at home in the confines of a counting house.

An Unyielding Medium
Confines is a word worth pausing over. Many of today’s most vocal promoters of business innovation urge executives to tear down the obstacles to innovation within their organizations, to let creativity flow unimpeded. That can certainly be good advice; mindlessly bureaucratic controls can stifle good ideas. At the same time, though, such counsel ignores the value of obstacles in structuring creative thinking and routing it toward productive ends. Whether in business, science, or art, the greatest innovations tend to emerge only within the presence of constraints — within a set of rules or laws that provide rigid boundaries to the mind. Unconfined, thought grows frivolous.

The great 20th-century composer Igor Stravinsky wrote, in The Poetics of Music, “You cannot create against a yielding medium.” Stravinsky’s innovations were nothing if not revolutionary, but he knew that he could not have produced them if he had not been constrained by the traditions of music and the mathematical strictures of tone. “Let me have something finite, definite,” he wrote. “My freedom will be so much the greater and more meaningful the more narrowly I limit my field of action and the more I surround myself with obstacles. Whatever diminishes constraint, diminishes strength.”

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