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Published: October 26, 2006

 
 

Purpose and Innovation

Some companies avoid this stalemate. They innovate radically, and instead of just winning battles they achieve peace, either by so changing the rules that they come to dominate the industry, or by carving out their own niche, which they alone occupy, at least for a while. This is the achievement of enduring advantage; once this state is reached, radical achievement breeds further radical achievement. Competitors no longer feel constrained to innovate “just enough” to beat the competition. They are free to discover new forms of competition.

Each of our entrepreneurs refused to play by the rules—they were driven by Purpose to innovate in a radical way. Tom Watson was driven to search out the potential of the data processing industry, the scope of which he thought he alone recognized. But he did not want to just lead the industry, which he did anyway; he wanted to bring it to its potential. Accordingly, he took huge risks and invested heavily in research in the 1930s, helping to make IBM impregnable. In doing so he created a tradition of innovation that helped keep the firm dominant and at the edge of development, even when technological competition became tougher in the 1950s.

Sam Walton’s management system was driven by his single-minded commitment to offer the best possible prices to his customers. Built up over many years, it was nonetheless a radical innovation for his industry, and other companies, such as K-Mart, were forced to imitate him. But they lacked his Purpose, and it was he and his successors who made the system work and came to dominate the industry.

Henry Ford wanted to use machinery to improve things, and that meant democratizing the automobile. Accordingly, he invested hugely in capacity, installed the moving assembly line, slashed prices and attempted to control the entire value chain from raw materials to showrooms.7 He created new forms of advantage—scale, automation—that for a time, at least, allowed him to dominate the industry.

Siegmund Warburg knew that he had to be one of the elite. He did not mind running a small bank, but he could not tolerate simply doing routine work for routine clients. Accordingly he innovated and pushed his clients to innovate, inventing the hostile takeover industry and the Eurobond industry, both of which he came to dominate.

Warren Buffett wanted to be an excellent investor—which meant being a rational investor. He knew that the best way to achieve this was by staying as far away as possible from Wall Street. Unlike our other entrepreneurs, he has not dominated or changed his industry, but he has achieved a kind of peace. Instead of winning an empire he has established autarchy, his own island where he is supreme and left alone. He is spared the endless battles for relative position faced by other investment managers. He does not choose to be like Napoleon, to set out to conquer the world. He is content to stay in his hometown of Omaha.

In their book Built to Last, Jim Collins and Jerry Porras have presented some other examples of entrepreneurs and corporations that have been driven by Purpose to innovate in a radical way, and that ended up changing their industries. These include Walt Disney, who, they tell us, wanted to make people happy. When he made Snow White, the first full-length animated feature film, people thought he was mad; he came to dominate this part of the industry. In the fifties he set up Disneyland—without any market data to indicate there was demand for this new product. Again, he was driven by Purpose to take a risk, he innovated and he changed the industry.

 
 
 
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PURPOSE: The Starting Point of Great Companies
 
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