Sustainable Innovation: Build Your Company’s Capacity to Change the World 9780804795029

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Sustainable Innovation

Innovation and Technology in the World Economy martin kenney, Editor

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Ivory Tower and Industrial Innovation: University-Industry Technology Transfer Before and After the Bayh-Dole Act martin kenney and richard florida, eds.

Locating Global Advantage: Industry Dynamics in the International Economy gary fields

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Sustainable Innovation Build Your Company’s Capacity to Change the World

Andrew Hargadon

STANFORD BUSINESS BOOKS An Imprint of Stanford University Press  •  Stanford, California

Stanford University Press Stanford, California © 2015 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, or in any information storage or retrieval system without the prior written permission of Stanford University Press. Special discounts for bulk quantities of Stanford Business Books are available to corporations, professional associations, and other organizations. For details and discount information, contact the special sales department of Stanford University Press. Tel: (650) 736-1782, Fax: (650) 736-1784 Printed in the United States of America on acid-free, archival-quality paper Library of Congress Cataloging-in-Publication Data Hargadon, Andrew, author.   Sustainable innovation : build your company’s capacity to change the world / Andrew Hargadon.    pages cm — (Innovation and technology in the world economy)   Includes bibliographical references and index.   ISBN 978-0-8047-9250-9 (cloth : alk. paper)   1.  Industrial management—Environmental aspects.  2.  Technological innovations—Environmental aspects.  3.  Sustainability.  4.  Social responsibility of business.  I.  Title.  II.  Series: Innovation and technology in the world economy.   HD30.255.H364 2015  658.4′063—dc23 2015004653 ISBN 978-0-8047-9502-9 (electronic) Typeset by Newgen in 11/15 Minion Pro

Contents

Acknowledgments ix Introduction 1 1 Sustainable Innovation

11

2 Betting on Change

34

3 Challenges to Sustainable Innovation

55

4 Nexus Work

80

5 Managing Science and Policy

105

6 Recombinant Innovation

127

7 Designing Revolutions

147

8 Business Model Innovation

169

9 Beyond Capabilities

186

Notes 203 Index 227

Acknowledgments

The original research project that laid the foundation for the central arguments of this book began with a phone call from Andre de Fontaine, then Markets and Business Strategy Fellow at the Pew Center on Global Climate Change (now the Center for Climate and Energy Solutions). He was calling to offer support for investigating low-carbon business innovation by companies. The project culminated in a published report, The Business of Innovation: Bringing Low-Carbon Solutions to Market, that summarizes lessons learned and distills insights on how to further advance low-carbon business innovation. The leadership at Pew Center, including President Eileen Claussen, Judi Greenwald, Janet Peace, Sam Wurzelmann, Nick Nigro, and especially Meg Crawford, enabled and encouraged me to look beyond the usual suspects in the management of innovation to find those capabilities that directly addressed the challenges of low-carbon innovation. Many individuals, companies, and organizations contributed to the development of that report. I thank the following people for their assistance in developing the case studies: Tina Edvardsson, Amy Ericson, Bob Hilton, John Marion, Guillaume Mehlman, and Scott Sherrin at Alstom; Brian Burton, Martin Daum, Randy DeBortoli, Mark Groeneweg, David Hames, Paul Menig, Alan Pearson, and Amy Sills, Jessica Altschul, Oliver Britz, Steve Cannon, Helge Janzon, Markus Kemner, Berthold Keppelar, Klaus Land, and Markus Paula at Daimler; Mark Gorzynski, Peter Hartwell, Engelina Jaspers, Nancy Keith-Kelly, David Lobato, Chandrakant Patel, and Tony Prophet at Hewlett-Packard; and Don Albinger, Mike Andrew, Bruno Biasiotta, Iain Campbell, Mark Chatelain, Kim Metcalf-Kupres, Clay Nesler, Craig Rigby, Derek Supple, Mark Wagner, Tom Watson, and Mary Ann Wright at Johnson Controls.

x  Acknowledgments

Over the course of the research project and in the workshops and lectures that followed, it became clear that the arguments of the report were equally applicable to areas of sustainability that went beyond carbon and even climate change. The established companies and new startups taking on issues and opportunities of water scarcity, environmental destruction, toxic waste (or toxic raw materials), famine, obesity, and social inequities faced the same challenges as those companies attempting to reduce the carbon emissions of their offerings. This initiated a second phase of research involving companies and people pursuing the range of sustainable ventures, including Susan Mac Cormac, founder of Morrison and Foerster’s clean technology practice; Kristin Groos Richmond, cofounder and CEO of Revolution Foods; John Bissell, cofounder and CEO of Micromidas; Michael Clayton, founder and CEO of Trace and Trust; and many more entrepreneurs and innovators fighting this good fight from the trenches. Their conversations, insights, questions, and answers contributed greatly to the ideas of this book, and I wrote it with the next generation of leaders like them in mind. The focus of the book is on the challenges of sustainable innovation in many different sectors and the capabilities needed for it, and it’s my hope that executives facing these challenges will find it useful. You might say I was raised in innovation—my undergraduate and master’s degrees are from Stanford’s Product Design program, and I worked for IDEO Product Development and Apple Computer, did my early research on some of the most innovative companies in history, took a job researching and teaching innovation, and founded the Child Family Institute for Innovation and Entrepreneurship. Beyond a childhood spent hiking in the Sierras, my introduction to sustainability began in earnest when Dan Sperling, founder and director of the Institute for Transportation Studies at University of California, Davis, and I cofounded the Energy Efficiency Center at UC Davis in 2006. It was the country’s first such center dedicated to the identification, development, and effective commercialization of energy efficient technologies. It represented the combination of Dan’s understanding of the issues surrounding the technologies and policies of clean technology and energy

Acknowledgments  xi

efficiency with my focus on innovation and commercialization. Much of what I learned about the challenges of sustainable innovation came from working with Dan, Ben Finkelor, Joe Krovoza, and the gang of dedicated and talented researchers at the center, as well as the network of external partners that surrounded and supported the center, like Sacramento Municipal Utility District, Pacific Gas and Electric, Sempra, Southern California Edison, the Public Utility Commission, the California Energy Commission, Walmart, and the National Resources Defense Council. Many of my direct experiences with entrepreneurs taking on the challenges of sustainability came from working at the Institute for Innovation and Entrepreneurship. In the ten years of its existence, we have worked with over a thousand researchers interested in commercializing their work. The lessons we’ve learned in working with them, codified in our Entrepreneurship Academy programs, are similarly focused on providing them with a growth mind-set—that they can dramatically expand the bounds of their influence by learning new skills and connecting with others whose capabilities complement their own. I am grateful to my friends and partners at the institute for their support throughout this project: Cleve Justis, Nicole Starsinic, Niki Peterson, and particularly, Wil Agatstein, a great friend, mentor, and colleague who left us far too soon. My colleagues Joe DiNunzio and Steve Lewis of Fido Management were always patient and invaluable sources of conversation and insight—and always brought me back to measuring the value of these ideas against the short- and long-term needs of company leaders. Martin Kenney participated in many of the crucial conversations, offering pints, provocations, and perspectives that run throughout this book; he served as one of the best minds in and memories of a field as eclectic as innovation. Margo Beth Fleming, my editor, provided patient, subtle, and sometimes not-so-subtle guidance that helped me shepherd my original research and ideas into the confines of this book. Thanks go to her and to everyone else at Stanford University Press who make this happen daily.

xii  Acknowledgments

Annie and Cody again provided everything from advice to insight to sustenance to support to delight. I couldn’t have done this without them. Finally, my father, Fred, whose conversations over the years have left me so much to remember and reflect on, will always remain the first reader I write for. I will miss you.

Introduction

Sustainable Innovation takes on a challenge confronting increasing

numbers of corporate leaders today—responding to the emerging opportunities and threats collectively called “sustainability.” Whether it’s climate change, water scarcity, environmental destruction, toxic waste or toxic raw materials, famine in developing (and even developed) economies, obesity in developed (and even developing) economies, or the social inequities that amplify all these threats, the first questions to come up are usually strategic. If the effects of climate change are real and imminent (and they are), what should we do to remain competitive? If capital markets begin accounting for the true costs and risks of unsustainable environmental and social practices (and they have), what should we do? If customers and entire markets start shifting preferences toward more sustainable goods and services (and they are), what should we do? And if federal, state, and even local policies change what my company, my suppliers, and my customers may do (and they are), what should we do? Nobody wants to chase after every fad or jump at the sight of his or her own (carbon) shadow, but at the same time, nobody wants to miss a significant strategic opportunity or be blindsided by sudden transitions. This book is written for the many executives who recognize their company’s need for sustainable innovation—the ability to see the

2  Introduction

changing conditions of their market, define the emerging opportunities and threats, and develop bold new strategies in response. To the question “What should we do?” the most important answer is that there is no single, simple answer. There is not even a short list. Every company, in every sector, will feel the effects of sustainability differently and, for the most part, indirectly—not through melting ice caps or distant famines but through the shifting market preferences, newly competitive technologies, and bolder regulatory policies of its customers, suppliers, competitors, and other market forces. Leaders need to determine their best path given their own circumstances. They need to stop looking for the right answer and start building organizations capable of recognizing and responding to their own emerging opportunities and threats through innovation and capable of maintaining the pace of change needed over the long term. To be clear, sustainable innovation means two things. First, from the Bruntland Commission’s formal definition, it means generating, developing, and launching new products and processes that “meet the needs of the present without compromising the ability of future generations to meet their own needs.”1 But as true sustainability remains a virtual impossibility in today’s industrial society, I amend this definition to mean introducing new products and processes that are more sustainable than current alternatives—that consume fewer environmental resources, foster the health of individuals and communities, and are affordable for consumers and producers alike. Second, because a single innovation will neither support an organization nor drive fundamental change across an industry, it is also about building an organization capable of sustaining the pace of innovation over a decade or more. Companies that can do this will thrive; those that can’t won’t. In conversations with company executives about sustainability, I find that few feel prepared to set bold new strategies let alone commit to the major innovations required to achieve them. Just a decade ago, that was fine—after all, the need to address sustainability affected only a handful of industries. For energy producers, carmakers, and chemical, seed, and pesticide companies, it was a threat to their core business models. For niche grocers and food and clothing companies, it was an opportunity

Introduction  3

for differentiation and growth. And almost everyone else could ignore it. Now, nobody’s safe. The opportunities and threats of sustainability are reshaping every industry, yet few leaders and companies are prepared to make the strategic investments necessary to respond through innovation—whether that means developing new products and services, new raw materials and manufacturing processes, new suppliers and distribution channels, or even new customers. In part, that’s because it’s not clear what you’re dealing with. Sometimes sustainability looks like shifting market preferences: high-mileage cars, energy efficient appliances, wholesome foods, or organic cotton (or conversely, boycotts, investor activism, or increased insurance rates). Sometimes it looks like competing technologies: rooftop solar, hybrid cars, biopesticides, and LED bulbs. Sometimes it looks like changing policies: mileage standards, Energy Star ratings, carbon cap-and-trade programs, or increases in the minimum wage. And sometimes it just looks like a quagmire of all three. Three obstacles stand in the way of setting bold new strategies. First, when facing the uncertainties associated with sustainability, most companies (like most people) avoid taking action, preferring to wait for something to happen that will reduce the uncertainties for them. Unfortunately, that something tends to be someone else’s innovation, at which point the die is cast. Second, when companies are moved to action, it most often means copying what others are doing. Organizational researchers call this “mimesis,” and it means, essentially, seeking safety in the herd. Those who copy others often turn to the off-the-shelf solutions highlighted in the pages of the business press: hire a guru, appoint a chief sustainability officer, put solar on rooftops, and declare ­victory— all without changing your core businesses. Think of Ford Motor Company’s much publicized $15 million, ten-acre grass roof installed over the iconic River Rouge factory that was once the very icon of innovation and is still churning out trucks getting twelve miles per gallon.2 For a car company whose industry’s products generate roughly a third of the carbon emissions in the United States, few actions could have generated more visibility with less impact. Ask anyone on Wall Street how that went. Third, companies develop a new line of green products that

4  Introduction

compete with their existing offerings, confuse their customers, burden their suppliers, and strain the knowledge of their sales reps. Burned, these companies retreat to business as usual. Recall British Petroleum’s $200-million-plus investment in solar and promises of moving “beyond petroleum,” only to scuttle its BP Solar business in 2011, citing the lack of market growth and profitability—just as the industry was entering a phase of phenomenal growth.3 These obstacles reflect an underlying issue in pursuing sustainable innovation: without the right ­capabilities— the right tools—companies cannot expect to see, let alone respond effectively to, the new opportunities and threats reshaping every market. This book outlines this set of capabilities and describes how to identify, assess, and develop those that fit your strategic goals.

The Journey Sustainable Innovation summarizes five years of research into the capabilities companies need to drive this type of innovation. In 2010, the Pew Center on Climate Change (now the Center for Climate and Energy Solutions) approached me to study successful low-carbon innovations that were developed and introduced into the market by large companies. I said no. I was concerned it would mean just greenwashing the same old advice for managing “regular old innovation.” But after talking with executives, entrepreneurs, and policy makers, trying to figure out whether there was a difference between low-carbon innovation and regular old innovation, I found something that was both surprising and, in hindsight, obvious. Surprising in that, despite fifty years of research into the management of innovation, little if any effort has been spent exploring how best practices differed depending on the sector and situation of a company and its particular strategy. Obvious in that, once you accept that the challenges of innovation differ depending on where and when it takes place, there is no such thing as regular old innovation. The challenges you’ll face and the capabilities you’ll need to overcome them will differ dramatically depending on whether you’re pursuing innovation in the early days of a new technology and market (such as the rapidly evolving landscape of smartphones today or the Internet in

Introduction  5

the 1990s) or a century later, when the technologies, competitors, and market infrastructure are mature and deeply entrenched (such as the factories of the automotive industry or the fields of modern industrialized agriculture). With this in mind, I changed my answer and agreed to investigate those contemporary companies and companies from earlier centuries that had succeeded in their sustainable innovations and those that had failed. These cases included new high-speed rail projects from across the globe; an innovative school lunch program launched in Oakland, California; the reinvention of the diesel engine; the development of gigabit virtual conferencing solutions; the first electric grids built over a century ago; and the smart grids of today. For contemporary companies, I spoke with the corporate leadership who oversaw these innovation projects, the development teams in the trenches working to make them realities, the scientists and engineers in research and development who supported them, and the sales and marketing teams who brought them to market. For historic cases, I dug deep into the archives and technical artifacts that documented the early days of the new ventures, new technologies, and new industries. I wanted to understand what made the development of sustainable innovations different. Were there common challenges facing corporate leaders and managers pursuing sustainable innovation, and if so, was there a common set of capabilities that enabled these companies to recognize and overcome them? While the findings and recommendations that follow come from this intensive research program, they also come from working alongside many entrepreneurs, corporate leaders, scientist-inventors, policy makers, and investors who have successfully (and sometimes unsuccessfully) pursued sustainable innovations. In 2004, I founded what would become the Child Family Institute for Innovation and Entrepreneurship at the University of California, Davis. For ten years, the institute has been helping university scientists and engineers identify and develop the commercial potential of their research. That meant working with large companies as well as angel and venture capital investors looking to benefit from the almost $1 billion in research conducted at UC Davis in areas such as clean energy, sustainable agriculture, food, transportation,

6  Introduction

and energy efficiency. In 2006, on the basis of the success of the original program, I helped found the country’s first Energy Efficiency Center, dedicated to the identification, development, and effective commercialization of energy efficient technologies. Energy efficiency offers the most cost-effective way to reduce the carbon emissions that are contributing to global warming, and yet thirty years of energy efficiency technologies were sitting unused. The center’s focus was again on bringing those technologies into the marketplace. The Energy Efficiency Center represented a groundbreaking public-private partnership—a true collaboration between industry, government, and university partners with the goal of meeting the demands for innovation in energy efficiency. Working with inventors and entrepreneurs, emerging ventures and established firms, suppliers and customers, and state and federal regulators and nongovernmental organizations, I saw firsthand the challenges that stood in the way of even the most promising of opportunities. No matter what the technology, the need, or the regulatory goals, the same obstacles kept cropping up. While everyone knew the right thing to do—the right technologies to pursue, the right market opportunities to develop, the right policies to follow (or better yet, lead with)—few had what it took to get there. At the institute and the center it became clear early on that the most pressing need in commercializing university research was building the right set of capabilities around the core research and researchers, and “right” differed depending on the core technology, the target market, and the most promising business models. Roughly sixty companies and over $100 million in venture funding later (as well as valuable technologies now licensed to established corporations and significant changes to state and federal policies), the lessons of these innovation efforts have greatly informed the research and its findings presented in this book. Finally, these findings come from two decades of research in the field of innovation management. My academic career has been focused on understanding the challenges and effective practices involved in innovation in general and entrepreneurship in particular. In that time, I have studied not only the detailed technical and social histories of some of the most profound technology revolutions but also the everyday work

Introduction  7

of modern engineers, scientists, marketers, entrepreneurs, and corporate leaders as they struggle to create revolutions. The histories provide a powerful perspective—they show how these remarkable events unfolded in a particular time and place, and they help us see how the current context similarly shapes the opportunities and threats of today’s efforts. The modern cases demonstrate that innovation is a process pursued by real, really talented but still mortal people working in moments when their actions may shape history.

One Size Does Not Fit All A major theme of this book is that generic models of innovation— which recommend best practices promised to work in any and all organizations—provide less practical value than models that account for the differences between industrial sectors, market conditions, and corporate strategies and that recommend approaches and capabilities based on those differences. Think about it: imposing Google’s innovation practices on anything other than a large (and obscenely profitable) Internet search advertising company is tantamount to malpractice. Lean methodologies may work well for new Internet ventures but not for building new hardware companies, let alone raising organic pigs or running community banks. Focusing on common best practices does little for the management of innovation. After twenty years of practicing, researching, teaching, and consulting in innovation and ten years of working with entrepreneurs and large companies to pursue sustainable innovations, it is clear to me that the most effective innovation strategies fit the landscape in which they’re pursued. The disconnect between a company’s innovation strategy and its competitive landscape occurs because there is a lack of vocabulary, misleading (and misguided) approaches, and hubris. With respect to the first, lack of vocabulary, the distinction is not between regular old innovation and sustainable innovation; it’s between sustainable innovation (innovation focused on displacing incumbent and less sustainable practices) and other types of innovation. Unfortunately, we lack a good vocabulary for distinguishing between these different types of

8  Introduction

i­nnovation. Such differences do appear in practice. For example, the National Venture Capital Association defines the investment focus of funds in terms of seventeen specific industry sectors, including software, biotechnology, industrial and energy, media and entertainment, and financial services. The venture capitalists managing these funds typically have sector-specific backgrounds (in terms of both their relevant knowledge and social networks) that give them a competitive advantage when investing in and building new ventures in these sectors. The variation in practice of what’s treated as a single process in theory has the same implications for innovating in other contexts, too, like consumer products, transportation and logistics, health care, education, fashion, manufacturing, packaging, e-commerce, mobile computing, big data, or financial markets. Each is characterized by its own set of challenges, and to innovate effectively in each requires its own blend of capabilities. To complicate matters, these contexts overlap—pursuing sustainable innovation in consumer products will present challenges different from those in transportation. Without a clear vocabulary, entrepreneurs, corporate leaders, investors, and policy makers fail to recognize how the capabilities that enabled innovation in one sector or one moment in time may not be as effective elsewhere or, worse, may undermine efforts. The second difficulty comes from mistaking invention for innovation, a misguided approach that has challenged many recent efforts to pursue innovations in clean energy. As the public became aware of the dramatic implications of climate change, there were increasing calls for the moon shot or Manhattan project of clean energy and a subsequent and bold investment in new, science-driven inventions. These models are dangerously misleading, first, because these were not inventions. As J. Robert Oppenheimer, who directed the Los Alamos Scientific Laboratory, once said, these projects did not generate breakthrough science or technology—instead, they integrated knowledge and technologies that already existed: “The real things were learned in 1890 and 1905 and 1920, in every year leading up to the war, and we took this tree with a lot of ripe fruit on it and shook it hard and out came radar and atomic bombs. . . . [T]he whole spirit was one of frantic and rather ruthless

Introduction  9

exploitation of the known.”4 Second, they did not require broad market adoption—the government was the sole customer of these projects (and paid in advance). And finally, the research and development activities of these programs were highly centralized and the solutions relatively independent of external networks of researchers, suppliers, investors, distributors, customers, and consumers. By contrast, today’s clean energy solutions often attempt to scale up new scientific breakthroughs that will, in practice, require a broad network of market partners and depend on rapid adoption by millions of customers. Their development processes need to reflect these differences. The third difficulty is hubris. Entrepreneurs and innovators alike, having found success in one context, credit themselves over their circumstances. After posting tremendous returns investing in early Internet companies in the 1990s, the venture capital community turned its sights on clean technology as the next sector vulnerable for disruption (and not coincidentally, ripe for raising new funds). The Department of Energy saw the same opportunities, and soon everyone was talking about how, if we turned Silicon Valley’s brainpower and entrepreneurial talents on the problems of climate change, we would soon solve all our problems. My colleague Martin Kenney and I studied the failure of the venture capital model as an investment vehicle—and as federal policy—for clean technology ventures.5 After Solyndra, Fisker Automotive, A123, and other expensive, highly visible, and ultimately failed startups, it became clear that innovating in clean technology would be no easier for the same talent (and money) that brought us eBay, Facebook, and Google than it was for others. The capabilities needed for the Internet revolution were not the same ones needed to disrupt the centuriesold industries of energy, agriculture, and transportation. Sustainable innovation poses a set of challenges different from those of many recent models of innovation—Google, Apple, and Facebook being dominant models. In some cases, these differences are c­ ategorical— it is fundamentally different to innovate with particular social or environmental objectives in mind than it is to innovate within the flow of an industry’s technologies and consumers. Innovation follows the path of least resistance, and developing new consumer behaviors in new

10  Introduction

markets faces less resistance than attempting to replace old behaviors in old markets. The Apollo moon shot met with less resistance than the entrenched oil and gas companies have put in front of federal policies advancing fuel efficiency. In other cases, these differences are more relative. For example, all innovation requires some integration with science and policy, but sustainable innovation requires significantly more—and more-effective—capabilities for integrating with science and policy; all innovation benefits from strong networks spanning the value chain, but sustainable innovation requires building and coordinating these networks. In short, innovating in response to the emerging threats and opportunities collectively called sustainability is hard, but more importantly, it’s different. Understanding the different nature of the challenge offers a valuable perspective on what capabilities will be necessary to pursue sustainable innovation in your company and market. In the end, all innovation—developing and delivering something new—requires developing different capabilities than you had before. The unique challenges of pursuing sustainable innovation require particular strengths, often different from the ones in companies focused on innovating in e-commerce, social media, health care, education, or other sectors. Business has been a major promoter of unsustainable practices and can play an equally disproportionate role in reducing their impacts. As this book discusses, this is a significant opportunity as well as a responsibility, but the capabilities responsible for our past successes will not be the ones to drive the next generation of changes.

Chapter 1  Sustainable Innovation

Draw two circles, overlapping slightly. Label one “sustainability” and

the other “innovation.” Now shade the overlap between them. This is where the challenge of sustainability meets the promise of innovation and the promise of sustainability meets the challenge of innovation; this book is for those who create and compete in this space. Call it “sustainable innovation”—the development of new products or processes that consume fewer environmental resources, foster the health of individuals and communities, and are financially viable for producers and consumers alike. It has a second meaning, too. This space is also about creating organizations capable of innovating time and again at a pace they can sustain. Add another circle intersecting the first two and call it “information technology” (IT); this is where the information revolution shapes, and is shaped by, both sustainability and innovation and enables sustainable innovations. Change the label to “automobiles,” “agriculture,” or “energy,” and it describes the space where sustainability and innovation will drive change in a technology or market. If you want to get more complicated, you could add a fourth circle and see how, for instance, IT and automobiles converge with sustainability and innovation, maybe by making smarter engines that increase efficiency and reduce emissions. The combinations are endless.

12  Chapter 1

The point is that the topics of sustainability and innovation—our two original circles—are vast. Nevertheless, they overlap in distinct and specific places. Not all aspects of sustainability require innovation—­ reducing your factory’s carbon footprint through improved lighting or cooling, employee carpooling, or switching from Styrofoam cups to glass mugs in the break rooms are not innovation. And not all aspects of innovation are sustainable—the latest pizza delivery application on your iPhone, for example, will not be our salvation. The key is understanding where, when, and how sustainability and innovation overlap in your company, your markets, your industry. This book is about the challenges companies will face and the capabilities needed to overcome them in the pursuit of sustainable innovation. It’s not a promise that sustainable innovation is a wise or profitable strategy. I hope we’re past that now. It’s not a sermon on our obligation to save the planet for future generations, although this motivates many of us. It’s not an inventory of sustainable technologies, although a better understanding of innovation sheds light on competing alternatives. And it’s not a pitch about the most effective policies to support sustainable innovation, although a better understanding of innovation informs policy. It is based on the results of five years of research on sustainable innovation and ten years spent working alongside corporate leaders, entrepreneurs, investors, scientists, and policy makers attempting to bring sustainable new technologies to the market. From that work came an understanding of the capabilities that enable companies to discover and pursue opportunities for growth or pivot from emerging threats through innovation. Who will face these challenges? Everyone. The demand for sustainability is spreading across all sectors, all markets, and all niches, like ripples from a rock dropped into a pond. It’s already brought new opportunities and new threats to those sectors where we would most expect them: energy, transportation, and construction. But the waves keep expanding outward, creating disruptions in places few expected. A number of companies have embraced this reality and aggressively pursued sustainable innovations. Some did so because they were relatively small and nimble and had these values baked into their culture

Sustainable Innovation  13

and customers. Think of Patagonia, Body Works, Smith and Hawken, North Face, Revolution Foods, and Tesla Motors. Others did so because they were large and, for whatever reasons, were the first to experience the threats emerging today and see the opportunities in them. Consider General Electric, Interface, Walmart, Nike, Morrison and Foerster, Unilever, Johnson Controls, and many others. In other words, some of these companies chose to find and pursue opportunities for sustainable innovation; others were forced to. Yet these companies are only the most recent. The last several centuries may be a history of industrialization, but they are also a history of innovations that responded to and overcame the environmental and social challenges of their time, dramatically changing the fates of companies, industries, and entire nations. James Watt’s steam engine dramatically improved the efficiency of existing engines and, by doing so, brought steam power to the factories, railroads, and ships of the first industrial revolution. Thomas Edison’s electric lighting reduced the demand for coal gas (and its accompanying environmental costs) and brought electric power into homes, offices, and factories. Henry Ford’s mass-produced automobile replaced horses, then more populous in New York City alone than across the United States today, and their attendant feed and manure. We can and will learn from many of these cases, from their mistakes and successes. Whether you’re in an established firm or are starting one, if you want to positively influence the environment and society or simply survive the coming changes, this book is meant to help you.

Why Now? Many executives have asked, “Is it worth rethinking, and rebuilding, parts of our organization for sustainable innovation, or is this just a passing fad?” After all, the modern sustainability movement began around fifty years ago with Rachel Carson’s Silent Spring, which raised public awareness that pesticides were devastating the environment.1 The backlash led to the creation of the US Environmental Protection Agency; the banning of DDT, leaded gas (tetraethyl lead), ­chlorofluorocarbons

14  Chapter 1

(CFCs), and other industrial chemicals; and the enactment of a raft of new federal regulatory policies: the Endangered Species Act, the Clean Air and Clean Water Acts, and roughly a dozen other federal environmental laws in the 1970s. The oil crises of the 1970s provided a temporary boost for alternative energy: the modern wind and solar industries emerged, the first modern electric vehicles hit the market, building codes began requiring installation of insulation and other energy efficient practices, and the corporate average fuel economy (CAFE) standards for fuel efficiency were created. Indeed, most of the seminal research on climate change was done in the 1970s. But let’s face it: despite all the scientific and regulatory efforts, the last fifty years of the environmental movement have been characterized by more sound and fury than progress. The last decade brought a surging consensus on—and often direct experience with—the realities of climate change and related challenges. This has led to a growing awareness of how a changing environment can and will affect us. The latest Intergovernmental Panel on Climate Change report provides increasingly dire warnings of ecological collapse, famine, flooding, and pestilence.2 That’s reinforced by a 2014 Pentagon report that calls climate change a “threat multiplier[] that will aggravate stressors abroad, such as poverty, environmental degradation, political instability, and social tensions.”3 And corporations are now feeling the direct effects: disruptions in supply chains and operations caused by remote flooding or drought, repercussions from use of toxic materials or equally toxic labor practices by suppliers, the rising costs of insurance and capital, rapidly shifting customer preferences that are the result of growing awareness, shifting demographics, and the radical transparency of the Internet age. But will this be enough to make sustainable practices stick? Will it give permanence to shifting market preferences, emerging technologies, and bolder regulatory policies? Or will the pressures subside again, leaving those companies that committed to sustainable innovations high and dry? History and unfolding events suggest that the past half century of sound and fury is coming to an end and that when such periods end the world changes rapidly.

Sustainable Innovation  15

Long Fuse, Big Bang History may not repeat itself, Mark Twain supposedly said, but it sure does rhyme. From the past, we can learn valuable lessons about how change happens over time. Cycles of innovation, for example, tend to have a long fuse and a big bang. Or as the late economist Rudi Dornbusch noted, things take longer to happen than you think they will, and then they happen faster than you thought they could.4 Take electric lighting. In the first decade of the 1800s, with the first electrochemical batteries, European scientists began experimenting with electric light. Two technologies quickly emerged—arc lighting, which sent sparks jumping a gap between conductors, and incandescence, which heated a conductor. For the next seventy-five years or so, these technologies evolved in parallel and with almost no effect on business or society until, in 1882, Edison turned on the Pearl Street Power Station in Manhattan. Within the next decade, the modern utility model of electric power was born, along with the electric utility and equipment companies that would dominate this sector for the next century. Long fuse, big bang. Don’t be fooled—a lot happened during the period of seeming calm that preceded the big bang. The time from when electricity was first captured in batteries to when Edison opened his Pearl Street station was anything but quiet. The technology was evolving as scientists and entrepreneurs explored new ways to generate, transmit, and use electricity. The first commercial application to emerge was the telegraph, and its broad diffusion led to the development of better batteries and wiring, as well as an entire generation of scientists, technicians, and tinkerers in the United States and Europe working in and around the technologies of the telegraph, including young Edison.5 But this system still relied on electricity generated from chemical reactions in batteries. The first commercially viable generators, or dynamos, were developed in the late 1860s, and by the late 1870s the new dynamos were powering strings of arc lights that lit New York’s Brooklyn Bridge and Central Park.6 Soon after, entrepreneurs were building and selling isolated electric systems—

16  Chapter 1

combining steam engines, dynamos, wiring, and lights for use in ships, hotels, and office buildings and even personal use in mansions. For seventy-five years, the elements of electric lighting slowly emerged and evolved. Then, with Edison’s introduction of the first commercially viable utility model of electricity generation, distribution, and sales, it took only a decade for the major elements of the industry to solidify. Ironically, Edison’s system, which relied on direct current (DC), would be quickly challenged by Westinghouse (founded in 1886) and other companies promoting systems based on alternating current (AC), which had the advantage of being better at transmitting electricity over distance—a feature made useful only by the utility model Edison pioneered. And while the electric power sector has grown, it has barely changed in form since. Today’s major companies Siemens, General Electric (the consolidation of Edison’s companies), Westinghouse, and Alstom (originally Thomson-Houston) were born in this period.7 Such periods of relative calm followed by revolutionary change are more common than you might think. That same pace of change describes the early days of the railroad, the automobile, and the Internet. The railroad industry had been developing for half a century when the first commercially viable system, the Liverpool to Manchester Railway, launched in 1830. Then, within less than two decades, it spread across Europe and the United States. The automobile industry began in the mid-1800s with steam-powered vehicles (trains without tracks). The first commercial automobiles emerged in the 1890s, led by entrepreneurs like Gottlieb Daimler, Wilhelm Maybach, and Karl Benz. By the turn of the century, however, there were more electric- and steampowered cars than internal combustion engines, and the industry faced confusion and uncertainty over which direction it was heading. Ford’s Model T, introduced in 1908, marked a pivotal moment. In the decade that followed, almost all the major American automobile manufacturers as well as their major parts suppliers would be founded, including Chevrolet, Chrysler, Buick, Cadillac, and General Motors. The Internet, born in the 1960s as a project sponsored by DARPA (Defense Advanced Research Projects Agency) to connect mainframe computing resources on separate college campuses, spent almost three decades evolving in

Sustainable Innovation  17

universities and national laboratories before, beginning in the mid1990s, companies like Amazon, Google, and Facebook (not to mention a host of companies that enable the backstage operations) emerged to become today’s consumer- and corporate-facing infrastructure.8 Again, after thirty years of tinkering, the major players and basic structure of the industry emerged and were set within a decade. Long fuse, big bang. In large part, the speed and scope of the big bang depend on the events of the long fuse. By the time Edison began his work on electric power, the central elements of the revolution were already in place: the technologies of lighting, generators, and wiring; a public ready for electric lighting; and scientists, engineers, investors, entrepreneurs, and investors prepared to join in. Edison’s task was not developing the individual elements so much as seeing how and when they might come together and what they might become and then building a company able to make that vision a reality. The impact doesn’t come from any one technology or entrepreneur but rather from the interactions of many independent elements that seem to converge suddenly. Over a decade or so, advances in one begin to drive, and be driven by, advances in others until everything changes, seemingly overnight.

The Elements of Sustainability In the last fifty years of the sustainability movement, elements have emerged that are setting the stage for rapid changes within and across industries over the coming decades. We can see, for example, how the science of sustainability and its effects have come into focus with shifting consumer preferences and bolder policies at the federal, state, and local levels. These elements are converging in different forms for different markets, bringing the promise of sudden and significant impact. The science of the effects of unsustainable practices includes our understanding of climate change, ability to track greenhouse gas emissions and measure their impact, and understanding of agriculture, nutrition, water use, and so many other aspects of modern society. But more importantly for corporate leaders, it includes accepted theories and standards for modeling and measuring the impacts and risks

18  Chapter 1

associated with sustainability. For a long time, we’ve known that the assets of the natural environment (clean air and water, forests, biodiversity, and climate stability) have value and, conversely, that their depletion has costs. But until we could agree on how to predict and measure those assets and costs, it was difficult to make decisions based on them. That has begun to change. For example, Dow Chemical is working with the Nature Conservancy to develop a set of tools, metrics, and models for valuing nature in business decisions. The investment firm KKR is working closely with the Environmental Defense Fund to develop analytic tools for managers to assess and track improvements on a range of environmental metrics.9 Insurer Swiss Re is working with cities to model the expected economic costs of natural disasters and identify infrastructure investments in, for instance, “[improving] education, reinforcing sea defenses, retrofitting buildings and changing building codes” to reduce potential losses.10 Finally, the Sustainable Accounting Standards Board (SASB), founded in 2011, is working with investors representing over $17 trillion in market capital to develop a common reporting standard for disclosing risks associated with sustainability. Reaching consensus on sustainability metrics enables businesses to account—as both assets and liabilities—for their relationship with the natural environment. This practice will have significant impact as lenders, investors, and insurers make choices based on these accounts.11 In parallel with these developments, new technologies have emerged and evolved. The economics of clean energy technologies has improved to the point of competing evenly with traditional (read carbon intensive) energy sources. For example, over the last thirty years, the cost of wind energy has fallen by more than 90 percent, from fifty cents per kilowatt-hour to under five cents, where it now competes with new natural gas plants. It took forty years to install the first fifty gigawatts (GW) of solar power and then another two and a half years to install the next fifty GW (doubling again to two hundred GW by 2015).12 Solar costs have dropped dramatically as well. In 2008, US residential consumers paid seven dollars per watt for best-in-class systems that in 2013 had dropped to less than four dollars. The bulk of these reductions came from lower hard costs (modules and other equipment), but the industry

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is maturing rapidly, and a recent McKinsey study estimates that accompanying reductions in the costs of financing, customer acquisition, regulatory incentives, and approvals will reduce the overall costs to around $2.30 by 2015 and to $1.60 by 2020.13 Even LED lighting, a relatively recent arrival to the clean technology scene, has shown dramatic improvements: efficiency (in terms of light output per watt) nearly doubled in the last four years while prices for bulbs fell more than 85 percent.14 Michel Di Capua, head of North America analysis for Bloomberg New Energy Finance and author of another recent report, noted, The changes unfolding in the U.S. energy industry have been profound and, by the typical time scale of the industry, abrupt. The effects of these changes will be felt in seemingly every nook and cranny of the American economy, from military bases to manufacturing plants, from homes to highways.15

These technologies have been around for almost half a century, and yet we are only now seeing their rapid performance improvements and cost declines. In addition to the usual clean technology suspects, other technologies have emerged to enable yet more sustainable products and services. From connected energy monitoring systems for home and business, such as Google’s Nest, to the connected city and smart grid technologies offered by IBM, GE, and other industrial giants, information and communications technologies and the Internet have created entirely new opportunities for sustainable innovation. The Internet has also changed the market conditions for many companies by providing the means for radical transparency (whether your company wants it or not). Consider environmental disasters like the ExxonMobil pipeline leak that spilled twelve thousand barrels of crude oil in a suburban Arkansas neighborhood in 2013 or the coal ash spill that sent eighty-two thousand tons of ash into the Dan River in North Carolina in 2014; health and safety issues like the discovery of lead paint in toys made for Mattel in 2007 or the building collapses and fires that, in separate accidents in 2012 and 2013 alone, killed over a thousand garment workers in Bangladesh doing contract work for global brands like Walmart, Gap, and Bonmarché;

20  Chapter 1

or unsafe and inhumane practices like the cruel treatment of slaughterhouse cows and confined pigs.16 Incidents that were, unfortunately, relatively common but went unnoticed now can become overnight sensations and trigger rapid public outcry and policy responses. Finally, what customers—whether individual consumers or large corporations—value influences what problems are solved by new combinations of these technical possibilities. These values cut both ways. On the one hand, they define what markets want and are willing to pay for. Consumers and corporate buyers are increasingly deciding which products they will buy and use on the basis of a set of defined economic, environmental, and social values. For example, Walmart announced its goal of being powered 100 percent by renewable energy and, by 2020, closing in on that goal by buying seven billion kilowatt-hours of renewable energy globally annually,17 and McDonald’s, the world’s largest consumer of beef, announced its commitment to purchase sustainable beef starting in 2016.18 Less visible but often just as influential is that many corporate buyers are now conscious of and calculating their environmental footprint when buying industrial solvents, toilet paper, computers and printers, cafeteria foods, and so on. One Hewlett-Packard marketing executive told me that, as computers and printers become commodities, customers were increasingly making decisions based on sustainability measures like energy consumption and carbon footprint.19 And I can personally attest to the increased quality of my own university’s catering services because Purchasing increasingly favors locally grown and organic ingredients. On the other hand, market preferences are also redefining what will no longer be tolerated. This social contract reflects public opinion about what companies should and should not be allowed to do. You see the changing social contract at work with cigarette companies that, in the 1960s, were making decisions about nicotine content and marketing that are now so far out of favor as to be the subject of billion-dollar lawsuits. The lenders, insurers, and lawyers of energy utilities are now asking whether a coal plant will be an asset or a liability for the next twenty to thirty years of its life. And when the social contract changes, bolder government policies are not far behind. But perhaps most influential of

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all are the voices of investors—particularly institutional investors and analysts and others involved in the capital markets of large corporations. For them, the choices are less about ethics than about liabilities. As stock prices and the costs of capital become closely connected to a company’s long-term exposure to sustainability issues—as measured by accepted accounting standards—management begins paying more attention. Sure, when individual and corporate customers start shifting their buying preferences, companies notice. But when investors, lenders, and lawyers start shifting their preferences, CEOs start to notice. That said, the ultimate tipping point may still lie ahead. As one analysis of a 2014 Gallup poll concludes, Americans’ belief that global warming is not a serious threat to their way of life may help explain why they see it and the environment more generally as a lower priority for government than issues that affect them more immediately, like the economy and healthcare. However, Americans’ average concern about global warming may shift in the future, even if there is no obvious change in environmental conditions, as today’s more skeptical older Americans are replaced by younger Americans who are more likely to view global warming as occurring and as a potentially serious threat to their way of life.20

Thus, the real shifts in consumer preferences will come from those younger consumers who are just now acquiring purchase power. Together, these developments across science, technology, and markets converge in policy makers’ taking bolder steps toward reducing unsustainable practices. California has traditionally led the way with its early efforts to regulate air quality and vehicle emissions, energy efficiency in appliances and building construction, and environmental regulations. More recently it has again led by making significant policy shifts in the electric and transportation sectors with its Renewables Portfolio Standard (RPS), created in 2002, accelerated in 2006, and revised in 2010 to require investor-owned electric utilities to purchase increasing amounts of renewable energy (33 percent by 2020), and its Global Warming Solutions Act of 2006 (AB 32), which introduced a carbon cap-and-trade program and low-carbon fuel standard ­requiring

22  Chapter 1

reductions in the carbon intensity of transportation fuels. At the federal level, new fuel economy standards, set to double by 2025 from 2011, encourage the introduction of new engine technologies and new fuels for passenger vehicles. At the same time, local and state governments around the country and the developed world are enacting bold programs to promote solar financing, low-carbon fuels, and renewable energy sources.21 To prepare for these changes, companies will need the right capabilities.

Right Tools for the Right Job The challenge for any leader is to build an organization able to thrive, or at least survive, when change hits its markets, and that means ensuring it has the right capabilities for innovation. Pick up any list of the most innovative companies (dozens are published every year), and two things become immediately apparent. First, there is no shortage of role models. Second, other than the crowd favorites, like Apple, Google, and Facebook, there is barely any overlap between the lists. Everyone seems to have their own idea about what makes a company innovative. No single definition fits all these companies—some are behemoth multinationals employing hundreds of thousands, others start-ups with less than a hundred; some are in heavy industries, others iPhone apps; some are in the United States, others in developing countries. Anyone trying to copy what these companies do is left with a Rorschach test rather than a recipe. Do you think a foosball table will foster a creative culture? There’s a company on a list that swears by it. Want everyone to have the time and motivation to develop their pet projects? In-office massages? Your own four-star cafeteria? It’s all there—but will it make a difference?22 The research on innovation offers more tangible findings, grounded in rigorous studies but only marginally more relevance. The best practices that correlate most strongly with generating, developing, and delivering successful innovations are, not surprisingly, cross-functional product development teams, heavyweight team leaders, boundaryscanning activities, prototyping, and a tolerance for risk. But realize that these practices apply to all companies. They are the most general and

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generalizable, not necessarily the most important, determinants of any one company’s success—including yours. To understand why building an innovative organization is so hard, know that you cannot just add new practices or people—or for that matter build a creative space, change the reward system, move the cheese, or hold an offsite—and expect innovation to suddenly flourish. Remember Google’s much vaunted practice of hiring only the smartest people? They retreated from that notion after finding that it had no correlation to which people and which teams performed well. “Google famously used to ask everyone for a transcript and G.P.A.’s and test scores,” explains Laszlo Bock, the company’s senior vice president of people operations, “but we don’t anymore, unless you’re just a few years out of school. We found that they don’t predict anything.”23 It turns out that how people approach the kinds of problems Google faces, how they work with each other, and how they work within the culture at Google matters far more. Or take group brainstorming, the practice of bringing people in your company together for several hours to generate as many ideas as possible. Brainstorming works in a company like IDEO, where participants are trained designers who often work in a range of industries, the culture rewards crazy solutions and failure (or at least dumb ideas), and there is little hierarchy and nobody waits to see what the boss will say. It does not work in companies where participants have worked together and on the same projects in the same industry for years, the culture punishes failure (or even bad ideas), and there is a strong hierarchy and a domineering boss.24 To understand why adding smart people doesn’t make the organization smarter and why introducing a creative practice doesn’t make the organization more creative, we need to understand how people, practices, tools, organizational structures, resources, IT systems, and incentive schemes all relate to one another in an organization. When these elements support one another to accomplish an activity (e.g., innovation, low-cost manufacturing, or safety), we call it a “capability”—a strength, a skill, competitive ­advantage—of the organization. This perspective emerged in the early 1990s in the field of strategy to describe what gives a firm its competitive advantage in its particular

24  Chapter 1

businesses. Firms have many capabilities, but only a few are critical to competing effectively—like delivering electricity reliably to homes and businesses, mass-producing cars, or designing and selling iPhones. For electric utilities, their effectiveness depends on how well they manage the generation or procurement of energy (including long-term and spot-market contracting), maintain system-level reliability, keep widespread capital assets functioning, and work within a highly regulated environment. For car companies, it’s the ability to manage complex development projects, maintain large-scale manufacturing and supply chains, do mass marketing, and provide long-term service and support. Apple’s high-end strategy, on the other hand, depends on cutting-edge design and marketing; technological innovation; integrating software, hardware, and content; and managing a global and flexible supply chain. To be honest, I never liked the word “capabilities.” As someone who studies what people are doing (or did), I prefer to be grounded in the concrete details of their work and of the tools, routines, organizational structures, incentive structures, and norms and values of that work. The label “capabilities” represents an abstraction from all that messy reality, one that enables clever economists and strategy professors to talk about a sterilized version of work that can be isolated, studied, and even easily transplanted. At the same time, however, it’s dangerous to talk about what people are doing in a company—brainstorming, playing foosball, risk taking, and so on—as if those things are truly independent and are valuable in any company. Throughout the book, I talk about capabilities, and when I do, remember that it means the interactions in organizations between people, practices, cultures, structures, and tools that enable organizations to be good at what they do. In relatively stable times, you need the right capabilities to compete effectively, but when conditions are changing, you also need the right capabilities to innovate effectively. These are called “dynamic capabilities” because they enable your company to change—to take advantage of opportunities, respond appropriately to threats, and identify, build, adapt, recombine, reconfigure, integrate, align, and in other ways maintain your competitive advantage amid shifting tides.25 While some best practices are common across all firms and markets and can be adopted

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broadly, the right capabilities for innovation are specific to the strategic objectives of each company and the particular challenges it will face in pursuing those objectives. The strategy and challenges of a ten-monthold Internet start-up will not be the same as those of a fifty-year-old electronics company like Hewlett-Packard, which will differ from a hundred-year-old industrial goods maker like General Electric. The different strategic objectives companies set for themselves, the different markets they compete in, and even the different moments in time will determine the particular capabilities they need to succeed. Pharmaceutical firms rely on their ability to effectively manage clinical trials; government contractors rely on their ability to write and present competitive proposals; sports and entertainment organizations depend on their ability to find, sign, and develop new talent. Organizing for sustainable innovation requires identifying those capabilities that match the challenges that sustainability presents for your company.

Watt’s Woes What happens when you don’t have the right capabilities for innovating? Consider one of the world’s most significant innovations—James Watt’s steam engine—and how close it came to never seeing the light of day. Watt’s steam engine plays an outsize role in any history of the first industrial revolution. The rapid diffusion of steam power, from its first use in coal mines to foundries, factories, railroads, and ships, facilitated the equally rapid growth in coal mining, iron production, armory and textile factories, and global demands for the raw and finished goods moving through the entire system. As Britain led the world into the modern industrial age, the steam engine led Britain, and Watt led the steam engine. The story begins in the middle of the eighteenth century, when the market for coal, techniques of coal mining, and the potential of steam power were well established and the steam engine, already fifty years old, was a bottleneck to England’s growing demand for coal. It ends in approximately 1800, with the bottleneck broken and steam engines spreading from mines into foundries and manufactories to power the Industrial Revolution.

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To be more precise, Watt’s particular story begins in 1763, when he was an established maker of scientific measurement equipment, living in Glasgow and, through his work, socializing closely with professors at Glasgow College. The college owned a broken demonstration model of a Newcomen steam engine, the dominant engine design, and Watt lobbied hard for the opportunity to repair it. Like so many others at the time, he wanted to learn how it worked in hopes of improving on it. His approach differed, however, from competitors in one fundamental way; rather than attempting to improve the Newcomen engine by tinkering and testing various changes, he took a scientific approach, pursuing a fundamental understanding of the Newcomen engine in particular and of steam power in general. In a year spent making rigorous measurements and calculations, Watt discovered that roughly three-quarters of the water converted to steam was, at least theoretically, wasted: In the state in which I found the steam engine, it was no great effort of mind to observe that the quantity of fuel necessary to make it work would forever prevent its extensive utility. The next step in my inquiry was equally easy—to inquire what was the cause of the great consumption of fuel. This too was readily suggested viz., the waste of fuel which was necessary to bring the whole cylinder, piston, and adjacent parts from the coldness of water to the heat of steam, no fewer than 15–20 times in a minute.26

Making less steam would mean burning less coal in the boiler, which, in turn, would mean more profitable mining operations. Watt spent the next year trying to improve on the existing design of steam engines. At the end of that year, Watt had his epiphany and developed his first and most fundamental improvement to existing steam engines: a separated condenser. Steam would enter the separate condenser, rather than the piston chamber itself, and as the steam condensed, a valve connecting the two chambers would share the resulting vacuum and pull the piston inward. Watt’s idea promised a 75 percent reduction in fuel costs, and his process of discovery looked no different from the efforts of many scientists today working in universities, corporate laboratories,

Sustainable Innovation  27

or ­garage start-ups to reduce the costs of solar or wind power, improve the internal combustion engine, or make lightbulbs yet more efficient. If we stop Watt’s story here, we can draw a straight line between his two years of scientific pursuit, the breakthrough idea, and the revolution that followed. Except it is neither fair nor accurate to stop the story with Watt’s idea. Over the next decade, Watt would, in order, hide his invention from the very colleagues who helped him work on it; go into debt to launch his venture; go broke; take work as a surveyor; sell a twothirds interest in his idea to an investor, Dr. John Roebuck; resume work on his designs; go broke again; and return to work as a civil engineer. At no point was he ever able to build a working engine of his own design. What went wrong? Watt answered that himself when, in the fall of 1769, he wrote a letter to Roebuck revealing his hard-earned insights into the capabilities he lacked in turning his idea into a reality. The letter was actually a plea for Roebuck to sell some or all of his shares in Watt’s venture to another investor, Matthew Boulton, whom Watt had met while traveling. Boulton had turned his family business into the largest establishment in England making metal piece parts and assemblies (buttons, buckles, watch chains, inexpensive clocks, etc.). In 1764, he built the Boulton and Fothergill manufactory in Soho, a state-of-theart factory exporting metal goods to all trading countries. Moreover, his success gave him connections to leading scientists and philosophers (Boulton was part of the Lunar Society, which included Erasmus Darwin, Josiah Wedgwood, and other leading minds), political figures, and European royalty. In his letter, Watt outlines the reasons why Boulton would be such a valuable investor: 1st. From Mr. Boulton’s own character as an ingenious, honest, and rich man. 2dly. From the difficulty and expense there would be of procuring accurate and honest workmen and providing them with proper utensils, and getting a proper overseer or overseers. . . . 3dly. The success of the engine is far from being verified. If Mr. Boulton takes his chance . . . it lessens your risk, and in a greater proportion than I think it will lessen your profits. 4thly. The assistance of Mr. Boulton’s and Dr. Small’s ingenuity (if the latter engage in it) in improving and perfecting the

28  Chapter 1

machine may be very considerable, and may enable us to get the better of the difficulties that might otherwise damn it. Lastly, consider my uncertain health, my irresolute and inactive disposition, my inability to bargain and struggle for my own with mankind: all of which disqualify me for any great undertaking.27

Watt found the hard way that success depends on not only a good idea but also the capabilities needed to develop and deliver on that idea— something he now acknowledged he was manifestly unqualified to do. This dawning humility, perhaps most of all, earned Watt his place in history. Unfortunately, Roebuck refused the offer. With no money to continue funding experiments, Watt was forced again to take on several projects (including building the Monkland Canal) to support himself. Three years later, Roebuck would himself go broke. Boulton offered again to buy his two-thirds share in the engine patent, and this time, Roebuck’s creditors, “none of [whom] value[d] the engine at a farthing,” accepted the offer.28 On closing the deal, Boulton brought Watt’s current engine prototype to his factory works, and Watt likewise moved to Birmingham and took up work within Boulton’s existing manufactory. Together, they formed the Boulton and Watt Steam Engine Company, and from this partnership grew a network of connections that finally enabled Watt’s ideas to become a reality. Aided by the skilled craftsmen and metalworking tools of the Boulton manufactory, Watt redesigned his steam engine for manufacture.29 Through his political ties, Boulton successfully lobbied Parliament to pass the Steam Engine Act of 1775, extending Watt’s 1769 patents for twenty-five more years. In addition to the resources within Boulton’s company, Soho and neighboring Birmingham provided a network of complementary expertise and equipment. In the 1700s, this was England’s Silicon Valley. The leading metalworks and factories were all here and formed a dense network of suppliers, producers, customers, and investors. This community provided access to people, ideas, and technologies from a range of ironworking ventures. But perhaps most valuable to Boulton and Watt was the rela-

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tionship it soon brought with one of Boulton’s business acquaintances, John Wilkinson, who provided a breakthrough as important as any Watt himself produced. One of the persistent challenges in steam engine design came from the poor fit between the piston and cylinder. Existing metalworking techniques could not create a consistent fit: too loose a fit dissipated the vacuum in the cylinder, too tight caused excessive friction. The problem provoked traditional solutions (e.g., leather disks, rope rings, cork, vegetable oil, tallow) that did not work with the new engine design. Fortunately, Wilkinson had just developed and patented a method for boring extremely accurate cannon cylinders. Using the same tools, he machined a new steam engine cylinder that enabled Watt’s original prototype engine to finally work. Wilkinson would serve as the sole supplier of bored cylinders for Boulton and Watt’s steam engines for the next twenty years. So what can we learn from Watt’s brush with failure and ultimate success? Looking back, there is no mistaking Watt’s contribution to the steam engine and the steam engine’s contribution to the Industrial Revolution. But looking closer, we can also see that Watt first pursued his innovation without thought to the capabilities he would need to bring his idea to reality. Only after learning from his bitter experiences, described in his confessional letter, and adding the capabilities he ultimately found in Boulton’s ironworks and connections did he succeed. Without those capabilities, Watt’s idea for an improved steam engine would have gone no further.

Lessons Learned Watts’s story illustrates the three most important findings I have culled from my in-depth case studies over five years, the academic literature, and a decade spent working with executives, entrepreneurs, and investors on sustainability. These findings provide the means for you to move beyond treating sustainable innovations as good and valuable, to focusing on the hard work of building an organization capable of making them happen.

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The Idea Is Nothing Without the Right Capabilities to Bring It to Market The biggest challenges within innovation are not in coming up with new ideas but rather in recognizing the convergence of technologies, market trends, and regulatory shifts taking place, in connecting and developing those ideas into functioning innovations, and in delivering them to the market at the right time and at the right scale. Indeed, as the long-fusebig-bang nature of change shows us, the idea is often the easiest achievement. Edison was not the first to build networks of electric lighting let alone invent the lightbulb. Today’s successes, whether it’s Nest’s smart thermostats, Tesla’s electric vehicles, or Opower’s energy efficiency innovations, are no different. Recognizing the capabilities required to make innovations real may sound simple, but it’s far from easy. Consider some of the more prominent casualties of the recent past. Fisker Automotive designed a beautiful electric vehicle and raised over $1 billion in investment and government grants before going bankrupt in 2013. Despite having highprofile executives and strong marketing, the company lacked the ability to develop and manage the complex supply chain and development process of bringing a modern automobile to market. Similarly, A123, the advanced-battery maker founded on the brilliant research of an MIT professor, stumbled in the attempt to build a reliable and scalable manufacturing system. And Solyndra, a promising solar power technology, also raised over $1 billion but failed to reach scale in its manufacturing operations and was plagued with performance issues. These companies are far from alone: take also Abound Solar (thin-film solar), Ener1 (battery maker), Beacon Power (flywheel battery maker), Pacific Ethanol (biofuels), Synthetic Genomics (biofuels), Better Place (swappable electric vehicle battery network), and Serious Energy (efficient building materials). Had it not been for Boulton, Watt would have been on this list. And those are just the individual ventures, whose failures can’t be hidden in corporate balance sheets. In 2008, Chevron announced a $370 million joint biofuels venture, Catchlight Energy, with Weyerhaeuser, only to quietly shelve it two years later. In 2009, ExxonMobil

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announced it would spend up to $600 million to develop algae-based biofuels, only to defund the project the following year. I should note two points before going any further: (1) the founders and everyone else involved in these efforts were very smart people, and (2) it’s easy to second-guess failures. That said, these failures offer invaluable lessons that success hides too well. Certainly, inherent scientific, engineering, and financial limitations and uncontrollable shifts in market trends or regulatory factors are implicated in each of these ventures. But that’s the point. With the right capabilities, many of these flaws and shifts could have been foreseen before spending millions. Where You Want to Go Dictates What You Need to Get There As I have suggested, the mix of capabilities each company needs to pursue innovation is unique. Innovating in industrial products is different from that in consumer goods; in mobile apps, from education; in health care, from agriculture. The bottom line: when you need to innovate, your first step should be figuring out where you’re trying to go, what challenges you’ll face getting there, and what you need to overcome them. That means committing to sustainable innovation and then crafting an innovation strategy that aligns your development efforts with your company’s larger strategic objectives. The first section of this book describes the role of commitment and resulting innovation strategies in identifying and building the necessary capabilities for pursuing sustainable innovation. Chapter 2 focuses on the link between your commitment to a strategic plan for sustainability and the innovation strategy that gets you there. Commitment represents more than a single decision—it is itself a capability embedded in and supported by your company’s people, structure, culture, and reward systems. That commitment, in turn, enables an innovation strategy. As importantly, your innovation strategy defines what you’re not pursuing. When James Watt conceived of his separate condenser, his objective was clear: to make his fortune by commercializing this dramatic improvement to the steam engine. So convinced was he that this outcome was within his grasp that he hid his invention from the very colleagues who had supported his research, lest they steal

32  Chapter 1

his idea. Ten difficult years later, Watt understood what capabilities he needed but did not have. While this is one of the first and most important questions to ask before launching an initiative, most learn this the same way Watt did—the hard way. We’ll look in detail at how companies across a range of industries and sectors recognized, in emerging opportunities and threats, the need for sustainable innovation and how they developed the right strategies for responding. We’ll also consider how a company’s existing capabilities often prevent it from seeing the need for new ones. Finally, Chapter 2 formalizes the process with which companies can craft an innovation strategy. Understanding where and how you need to innovate, in turn, helps you determine the challenges you’ll face in getting there. Fortunately, while there are as many unique challenges as there are innovation initiatives, only a handful define the pursuit of sustainable innovations. Chapter 3 identifies the five most prevalent of these challenges: innovating in a context of declining (rather than expanding) resources; leading change in existing (brownfield) rather than new (greenfield) markets; quickly reaching significant scale with the reliability of mature technologies while remaining profitable; navigating multiple sources of uncertainty; and overcoming the public’s and policy makers’ biases for tomorrow’s breakthrough innovations. In my research, not every challenge was present, but all companies had to overcome a majority of them. Additionally, many of these challenges are absent or de minimus in the pursuit of other types of innovation. There Is a Set of Common Capabilities for the Pursuit of Sustainable Innovations Chapters 4 through 8 discuss the remaining five capabilities that have enabled companies to successfully develop sustainable innovations. Chapter 4 describes nexus work: building new networks by seeing and connecting the emerging elements of the long fuse—the relevant technologies, people, resources, and organizing principles—in circumstances in which little structure, little precedent, or few established relationships exist. Nexus work is an early and essential capability because it represents, in essence, the means to develop the other capabilities

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described in subsequent chapters. Chapter 5 covers the capability of knowing the relevant issues in science and policy, recognizing how those issues are evolving, and at best, guiding the path of that evolution in ways that enable sustainable innovation. Companies with this capability can see opportunities and threats taking shape and use that to develop an innovation strategy. Chapter 6 describes the capability for recombinant innovation, which enables companies to reduce uncertainty and achieve scalability by assembling innovations from extant technologies and resources. Chapter 7 tells how to harness the power of design to introduce revolutionary technologies in ways that require only evolutionary changes in consumer understanding and behavior. Chapter 8 addresses the critical capability of companies to include business model innovation with new products or processes in order to maximize the value proposition to consumers and other partners and the profitability of the offering. Chapter 9 summarizes research findings and points out some threads common to all the capabilities. After reading this book, you should have a detailed sense of the steps to take to develop a successful strategy to pursue sustainable innovation and determine the right capabilities to get you there. Or instead you could follow Watt’s long and winding path: conceive of a new product or service, toil away at it for years at great cost, and then, years later, find your own Matthew Boulton with the capabilities you were missing all along.

Chapter 2  Betting on Change

First and most importantly, companies must be able to commit to

the pursuit of sustainable innovations. I don’t mean bold pronouncements by senior leadership, so many of which are quickly and quietly unraveled by political infighting, dubious middle management, reluctant investors, or recalcitrant suppliers, distributors, and customers. I mean deliberate, patient, long-term commitment to do what’s necessary to adapt the organization in the face of foundational shifts in the environment. In this way, commitment is a capability, not a single decision at a single moment. Some companies are good at it and others not. That’s because it entails more than green-lighting a project, writing a check, or issuing a press release—it requires the initiation and cultivation of ongoing support from the organization’s key leaders and contributors, processes and structures that link strategic plans to the necessary investments in innovation to the ultimate launch and support of new offerings or new processes, and reciprocal and coordinated commitments by employees, customers, suppliers, regulators, and investors. As a capability embedded in people, practices, structures, and tools, commitment looks different in each organization. Commitment in large and hierarchical companies like the military or Walmart—organizations built for execution—is not the commitment of flat or loosely coupled organizations

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like professional firms or multidivisional firms, organizations built for autonomy and experimentation. The ability to commit is not unique to companies pursuing sustainable innovations, but it is all the more critical because sustainable innovations typically require longer development times and have slower market adoption, demand wholly new skill sets and strategies that differ significantly from current ones, and often threaten to compete with and position existing offerings (the ones generating the revenue today) as unsustainable. Let’s look at commitment in action. When Henry Ford started the Ford Motor Company in 1903, he was far from alone. Eighty-eight other US car companies were founded that same year, fifteen in Detroit alone. Within the year, twenty-seven of those companies failed, and within two years sixty-four were gone. The commercial automobile market was only a decade old and still rife with confusion and uncertainty about the size of the market and the organization of the industry’s assemblers, parts suppliers, dealers, and customers—even the core technologies (just three years earlier, more steam- and electric-powered vehicles sold than gasoline-powered ones). And yet two years later, the industry crystallized around structures and technologies, reducing many of the uncertainties that had held back entrepreneurs, investors, and potential owners. Like everyone else, Ford hand-built cars in small numbers, but he also saw the direction the market was going, saying at the time, [The] greatest need today is a light, low-priced car with an up-to-date engine of ample horsepower, and built of the very best material. . . . It must be powerful enough for American roads and capable of carrying its passengers anywhere that a horse-drawn vehicle will go without the driver being afraid of ruining his car.1

Henry Ford was personally committed to pursuing this larger opportunity, but it represented a major shift in strategy from the small-batch, highly profitable business Ford had initially created, and getting the commitment of the rest of the Ford Motor Company was not so easy. It would have been easier without the company’s initial success. Within its first two months, Ford sold 215 cars; by the end of the first year, it had shipped 1,000 cars. In October 1903, four months into

36  Chapter 2

­ perations, the company paid investors a dividend of 2 percent, a month o later it paid out 10 percent, and two months later, another 20 percent. Within fifteen months, Ford had returned, in dividends, the equivalent of everyone’s original investments. At the end of two years, dividends totaled 300 percent. So while Ford wanted to dramatically expand his company in line with his vision of building a low-cost, rugged, and high-quality car for the masses, some of his investors and board members were reluctant to fix what wasn’t broken. At the time, he didn’t know what he was going to build or how, he just knew it wasn’t going to be what he had been doing so far. New vehicle, engine, and component designs; new materials and manufacturing methods; growing access to fuels; changing driving preferences; and better road conditions were converging to change the market dramatically. Only through a bitter power struggle and, ultimately, buying out several original investors was Henry Ford able to gain the control necessary to set the company on the path toward mass production. But even that was just the beginning. Henry Ford knew his strategy required capabilities his company didn’t yet have but that were out there already—people, materials, designs, manufacturing equipment, organizational structures, suppliers, dealers, and so on—and he brought in or promoted people with the skills or backgrounds in these areas. As Douglas Brinkley, author of the definitive biography of the Ford Motor Company, Wheels for the World, says, “Henry Ford made one of the world’s greatest fortunes partially off the genius of others, but it was he who drew them together and provided the spark of opportunity,”2 to which we should add, the direction of his vision and the drive of his commitment. Once committed to Henry Ford’s vision, his people worked to gain the commitment of suppliers, who had never before been asked to make so many parts, of such high quality, and for as little money as Ford required, and the commitment of dealers around the country, who would have to pay cash up front for their orders. Over the next eight years, from 1906 to 1914, the Ford Motor Company and its suppliers would radically redefine the automobile and the process by which it was produced. The company would go from pro-

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ducing over 1,600 Model T’s in the first full year of production to over 265,000 seven years later (55 percent of the new mass market). It would go from buying parts and assembling cars one at a time to vertically integrating the company and building cars on an assembly line, it would go from hiring skilled craftsmen to hiring unskilled laborers, and it would form all-new organizational units and metrics capable of handling these changes. In short, Ford didn’t bet the company on an innovative idea; he bet the company on a strategy, and as that strategy evolved, he pursued in parallel the necessary capabilities to make it work. Today, the ability to make such commitments remains just as challenging and just as critical. Take the hybrid electric vehicle. Far from being a novel technology, the first prototype was built in 1899 by Ferdinand Porsche. The next major push came in 1993, when the Detroit car manufacturers in partnership with the US government (and roughly $250 million of federally funded research per year) designed and built prototype vehicles that could reach eighty miles per gallon. Unfortunately, those prototypes were completed three years after Toyota introduced its first model Prius to the Japanese market. An updated version hit the US market in 2000 and a significantly improved model in 2004 (winning a host of awards). Toyota’s commitment to hybrid technology was far from easy. According to Dan Sperling, head of UC Davis’s Institute for Transportation Studies and author of Two Billion Cars, Toyota treated the Prius as an experiment—one that had only a 5 percent chance of succeeding. Its initial success in the Japanese market surprised even its own executives. And in the US market, where its success was again surprising, Toyota did itself no favors, launching only in limited markets, charging a roughly $5,000 premium over comparable traditional models, eschewing advertising, and refusing to offer discounts or incentives. And yet it quickly outsold such popular models as the Ford Focus and Dodge Caravan. Meanwhile, Detroit’s carmakers avoided committing to hybrid cars, preferring instead to focus on the reality of high margins from their SUV sales and the allure of the fuel cell vehicle, which offered lower costs and greater performance without the commitment of designing, manufacturing, and selling an actual car.

38  Chapter 2

Toyota’s success reduced the uncertainty around hybrid electric vehicles. It also showed that producing hybrid cars provided critical capabilities that would later be needed for building all-electric and fuel cell vehicles.3 This was enough to prod General Motors, Ford, and Chrysler to make the leap as well, albeit too late. By 2013, ten years after the Prius’s introduction, hybrid sales reached 495,685 units and four of the five top-selling models were Toyotas: the Prius, the Camry Hybrid, the Prius c, and the Prius v (the Ford Fusion Hybrid placed fifth). All told, Toyota, including its Lexus division, accounted for over 70 percent of the hybrid market. Ford ranked second with 14 percent.4

The End of the Beginning Commitment is not the end, not even the beginning of the end, as Winston Churchill might have said, just the end of the beginning. It is critical to pursuing any overarching strategy because it defines your innovation strategy—what next steps and new capabilities will be required for making sustainable innovations. Consider the following examples of commitments from early movers in sustainable innovation: • In 1993, Honorary Chairman Eiji Toyoda encouraged the executive vice president of research and development, Yoshiro Kimbara, to create G21, a committee to research cars for the twenty-first century. Within two years, the company revealed a hybrid concept car at the thirty-first Tokyo Motor Show. Toyota has since sold more than three million hybrid vehicles. • In the mid-1990s, Daimler’s top executives committed to developing a new technology platform that would sustain their innovation efforts for the next two to three decades. In 2005, the company introduced its clean diesel platform, which now powers its diesel cars and trucks around the world. • In 2005, General Electric’s leadership announced its ecomagination strategy, committing to technology solutions that reduce critical global impacts and save money. In the first five years, the company invested over $5 billion in clean technology R&D,

Betting on Change   39

launched 110 ecomagination products, and earned over $85 billion from ecomagination products. • In 2010, Unilever announced its Sustainable Living Plan, promising three significant outcomes by 2020: improving the health and well-being of more than a billion people, halving the environmental footprint of the manufacture and use of its products, and enhancing the livelihoods of hundreds of thousands of people in its supply chain. • In 2011, Procter & Gamble’s CEO Robert McDonald announced the ambitious goal of acquiring eight hundred million new customers by 2015 primarily by shifting the company’s emphasis from the developed markets of the West to the developing markets of Asia and Africa. • In 2014, McDonald’s announced its decision to begin purchasing sustainable beef in 2016, with the ultimate goal of purchasing sustainable beef worldwide. It’s easy to announce a major new sustainability initiative, talk about how tomorrow’s technologies are emerging in your laboratories today, or claim you will disrupt century-old industries with the swipe of your hand. It’s an entirely different thing to do it. These announcements followed rather than led the commitment to pursue sustainable innovations. It’s the commitment we’re interested in—how it emerges and aligns with a company’s overall strategy, who makes it and with what information, and how it shapes innovation. Your innovation strategy is the contract that defines what your commitment means. The most important activities in planning an innovation strategy are (1) committing to a set of priority initiatives that align to the corporate strategy, (2) determining and developing the right capabilities to move those initiatives forward, and (3) creating a feedback mechanism such that, as you move forward, these new activities and capabilities continually revise your strategy. Without commitment to a clear strategy and specific set of initiatives, it’s hard to know what capabilities you need. Without the right capabilities, it’s hard to recognize the potential and pitfalls of initiatives and commit to their p ­ ursuit.

40  Chapter 2

For Ford’s development of mass production, one of his first acts was to bring in Max Wollering and Walter Flanders, who knew what Ford didn’t about manufacturing and so could build the right capabilities to meet the challenges ahead. Of course, they joined because they saw Ford’s commitment to making mass production work. In this way, Ford moved both his commitment and capabilities forward in parallel. Those charged with sustainable innovation must be similarly prepared to progressively build greater levels of both commitment and capabilities as they move forward.

What’s the Problem? Unfortunately, three related challenges often prevent companies from setting and pursuing long-term innovation strategies. The capabilities that got you where you are today are, almost by definition, not what you’ll need tomorrow. Worse, those existing capabilities might actively prevent you from seeing and building the next ones. Tending a Thousand Flowers Top management teams often manage strategic planning and innovation independently because they are either reluctant to dictate where innovation should happen or don’t think it’s possible. This separation of planning and innovation often comes from a strong belief that novel ideas drive the innovation process: without a truly creative insight there’s nothing to move forward, and with one, there’s nothing to stop it. We’ll talk about this in more detail in the next chapter. For now, just know that many top management teams are reluctant to dictate where the company should focus its innovation efforts, particularly with regard to those opportunities with the potential to disrupt the organization and markets. That reluctance gets reinforced by organizational structures that physically separate R&D from the operating units and strategic planning, missions that explicitly focus R&D on opportunities three to five or even ten years out while business units own the near term, cultures that promote scientific research and invention but focus their business units on identifying and delivering market-oriented solu-

Betting on Change   41

tions, and pursuit of dozens of different innovation projects but ability to launch only a handful of new products or processes at a time. The result: I have yet to meet company executives who are satisfied with the relationship between their R&D and business units, let alone with how corporate strategy informs and is informed by the company’s innovation efforts. When it comes to innovation, it’s tempting to think that we should let a thousand flowers bloom. But effective innovation requires more than pretty ideas; it takes focused commitment and dedicated resources to turn an idea into a new product, platform, or even business unit. Companies can develop only a few of these initiatives at any given time, and that means ensuring that investments in innovation are driven by and drive the strategic needs of the company. Remember what the Cheshire Cat told Alice: Alice: Would you tell me, please, which way I ought to go from here? Cheshire Cat: That depends a good deal on where you want to get to. Alice: I don’t much care where— Cheshire Cat: Then it doesn’t matter which way you go.5

In company after company, when strategic planning and long-term innovation efforts operate independently, a domino effect emerges. Without an overarching strategic plan guiding investments in innovation, individual projects often have unclear or unrelated objectives. This creates, in turn, a portfolio of projects with relatively weak contributions to the company’s long-term performance but also no strategic justification for canceling them. With so many projects, no single project gets the commitment necessary for identifying and investing in the right capabilities to make it successful. Fighting the Last War A second and related problem in linking strategy and innovation is that of not getting out of our own way. The risk of letting strategy dictate innovation efforts is that the company’s leadership determines what new technologies and processes should be developed and what new opportunities should be pursued. Yet generals are always fighting the last war.

42  Chapter 2

Military leaders rise to command on the basis of their success with the technologies and tactics of the last war and have great difficulty letting go of those capabilities when conditions change. Henry Ford once said, “Businessmen go down with their businesses because they like the old way so well they cannot bring themselves to change. One sees them all about—men who do not know that yesterday is past, and who woke up this morning with their last year’s ideas.”6 This is why Western Union passed on the telephone, why the dominant vacuum tube manufacturers passed on the transistor, why IBM and Hewlett-Packard famously passed on the personal computer, why Microsoft passed on the Internet, and why Intel passed on the smartphone market. We see the world’s threats and opportunities through the lenses of our existing capabilities, making it difficult to recognize what new ones we need until it’s too late. As a result, companies tend to pursue innovation opportunities with the capabilities they already have, not the ones they need. 7 In stable environments, this works perfectly well. But when the capabilities we needed to be competitive last year are no longer the ones we need to compete next year, those capabilities become barriers to change. Worse, the very nature of capabilities makes them difficult to root out and change. Capabilities are not isolated people or practices or tools. If they were, competitors would easily replicate them and they’d no longer hold any competitive advantage. Instead, they are distributed and mutually interdependent people, practices, and tools—and norms and worldviews and procedures and accounting measures and performance metrics and many other factors. Taking down old capabilities and building new ones is not easy. But it’s necessary if, when the world changes, your company wants to change with it. What You Don’t Know You Don’t Know Finally, your innovation strategy isn’t about what new ideas to pursue, what new markets to enter, or what new best practices to adopt. It’s about using your company’s competitive strategy to determine the few high-priority innovation initiatives to pursue and then identifying the capabilities you’ll need to deliver on them. Taking time to figure out which capabilities you need—more specifically, which ones you need

Betting on Change   43

but don’t already have—can spell the difference between success and failure. Few companies have the discipline to do this. This is typically a problem of large companies, but start-ups are equally susceptible when they believe the novelty of their technology or vision—what got them funding or their first customers—is enough for success. So while long-term corporate strategy should guide the selection and set the objectives of innovation efforts, those same innovation efforts should guide the direction and objectives of a company’s longterm strategy. As a process, innovation is what you do when you don’t know what to do. But think about how we move through the four quadrants of knowledge—what we know we know, what we know we don’t know, what we don’t know we know, and what we don’t know we don’t know. Most of us, as well as most companies, are comfortable doing what we know we know how to do. That’s business as usual. In turbulent times, there’s even a tendency to double down on those activities. This is Clayton Christensen’s Innovator’s Dilemma—companies tend to respond to threats by building more of what they already know how to build and selling it to customers they already know how to reach. When pushed, we’ll try doing what we don’t know we know: in other words, we’ll try solving the problem by combining pieces of what we already know how to do. This is the equivalent of fixing a leaky faucet with duct tape, gum, and other stuff we find around the house. If we know what we don’t know, then we can go out and get it—like hiring a plumber to fix the faucet, or a consultant to build our website, or a new supplier to provide us the right capabilities. The biggest challenge comes when we don’t know what we don’t know. In fact, the more radical a departure from what we are already doing, the more of our efforts will fall into this quadrant. Anyone who tries to shortcut the process of learning what you don’t know you don’t know can easily run aground. Moving forward involves iterating between building the right capabilities, rethinking your innovation strategy, and if necessary, reorienting your competitive strategy. Building the right capabilities means bringing in the right people, developing the right organizational structures, and acquiring and working with the relevant tools. With these in place, you gain a better

44  Chapter 2

­ erspective on the landscape in which you’re operating, the real chalp lenges to worry about, and the real capabilities you need to reach your goals. Try to shortcut this process and you can end up overinvesting in the wrong people or technologies. The failures of A123, Fisker Automotive, Solyndra, and others, like Watt’s initial experiences, demonstrate what happens when companies try to build new solutions while staying comfortably within what they already know how to do. And they were all undone, in many ways, by what they didn’t know they didn’t know. Recognizing what you don’t know you don’t know enables you to invest in learning it before you get too far along in defining and pursuing your next innovation efforts. Further, by explicitly defining what you’ll need to know how to do, what you already know how to do, and what you don’t—your innovation strategy—you make clear to everyone in the company what capabilities they’ll need to be effective tomorrow. To sum up, your innovation strategy at best prioritizes the initiatives that will achieve your company’s overall strategic objectives, recognizes the challenges ahead, and takes stock of what you’ll need to get there. At worst it reflects your current capabilities, reinforces the existing political stalemates in your organization, and ignores what you don’t already know. The more aware and explicit companies are in setting their innovation strategies, the easier it is to avoid these common traps.

Pursuing Innovation with a Growth Mind-set Organizations respond differently to the need for innovation—a difference that reflects in many ways what the psychologist Carol Dweck and her colleagues found in how schoolchildren differed in their approaches to similar challenges. In her book Mindset, she attributes the differences to having fixed versus growth mind-sets. For those with a fixed mindset, Dweck says, “every situation calls for a confirmation of their intelligence, personality, or character.” Every situation becomes a moment to be evaluated, to succeed or fail, to look smart or dumb, to win or lose— to have what it takes or to fall short. On the other hand, if you have a growth mind-set, your actions are “based on the belief that your basic qualities are things you can cultivate through your efforts. . . . [E]very-

Betting on Change   45

one can change and grow through application and experience.”8 Every situation becomes a chance to learn what you don’t yet know, what you can develop, how far you’ve come, and how far you have to go. Innovation represents one of those challenging situations. People with a fixed mind-set approach it as a test of their innate creativity and intelligence and, if it’s too uncertain, will avoid the situation if they can. Those with a growth mind-set see it as an opportunity to learn, to develop new skills. These mind-sets differ depending on the context. Some kids may approach sports with a growth mind-set but math with a fixed mind-set. In fact, studies of everyone from four-year-olds to medical students to adults show that those with a fixed mind-set tend to avoid situations in which they may not perform well, while those with a growth mind-set are attracted to them, believing them an opportunity to learn something new. Educational researcher Benjamin Bloom studied 120 outstanding achievers (Olympians, concert pianists, sculptors, mathematicians, etc.) and found that most were unremarkable as children; their later success rested largely on their continued commitment and their network of support. He found that these mind-sets are largely a product of their environment: kids learn to see math or sports from a fixed mind-set when their teachers and schools divide them as gifted or not, when tests measure the students and not the teachers or coaches, and when our culture reinforces the notion that intelligence, character, creativity, and other traits are innate.9 While fixed and growth mind-sets are products of the environment, they can be changed by perspective and behavior. Carol Dweck says, As you begin to understand the fixed and growth mindsets, you will see exactly how one thing leads to another—how a belief that your qualities are carved in stone leads to a host of thoughts and actions, and how a belief that your qualities can be cultivated leads to a host of different thoughts and actions, taking you down an entirely different road.10

Just becoming aware of the different mind-sets—the different ways to react—can change how people approach challenging situations. Instead of avoiding uncertainty and the threat of poor performance in the belief that it tests their innate ability, they can view a situation as

46  Chapter 2

an o ­ pportunity to gain valuable insight and develop new skills. This is true for kids and adults alike. The most significant difference in people’s expertise, the psychologist Robert Sternberg notes, “is not some fixed prior ability, but purposeful engagement.”11 Organizations are not individuals, but their leadership, norms, values, reward systems, structures, activities, histories, identities, partners, customers, and investors conspire to create behavior that looks just like fixed and growth mind-sets. When the culture and politics of an organization are negative and competitive, when budgeting and planning is hotly contested and viewed largely as a zero-sum game, or when innovation is seen as threatening to those with established territory and status, the result is very similar to kids avoiding difficult math problems. The same effects happen when quarterly earnings reports or executive bonuses emphasize current performance over long-term commitments to developing the organization. Conversely, when leadership recognizes and invests in the growth of people and capabilities, when structures emphasize sharing and collaboration, when reward systems support learning, and when histories and identities tell a story of learning and growth, the behavior of people in the organization reflects a growth mind-set. Focusing on innovation as a process of growing—of adding new skills and experiences, new structures and processes, new cultural values and reward systems—changes the approach from a test of your capabilities for innovation to an opportunity to grow them. But it takes, as Sternberg said, purposeful engagement. It takes a willingness to explore what you don’t know you don’t know and a commitment to identify and develop those capabilities. As Jack Welch of General Electric once said, self-confidence is “the courage to be open—to welcome change and new ideas regardless of their source.”12 That means questioning your current capabilities and rigidities and seeking out new people, ideas, technologies, activities, and organizational structures that will enable you to take on challenges you could not before. A fixed mind-set makes you focus on how others will judge you, while a growth mind-set focuses on how others can help you improve. Andrew Carnegie once said, “I wish to have as my epitaph: ‘Here lies a man who was wise enough to bring into his service men who knew more than he.’”13

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This difference comes out in your innovation strategy and the choices behind it every day. Are you trying to prove how valuable you are—as a company, leader, or manager—when you could be getting better? Are you hiding your deficiencies instead of identifying and strengthening them? Are you focusing on customers, investors, and partners who support your current strategies and offerings or seeking out others who will challenge you to grow?

Modern Tales of Woe, Smart-Grid Style Chapter 1 ended with three lessons, illustrated by James Watt’s struggle to bring to market arguably the most important innovation of the first industrial revolution. First, an idea is nothing without the right capabilities to bring it to market. Second, where you want to go dictates what you need to get there. And third, there is a common set of challenges and capabilities in the pursuit of sustainable innovations. This chapter describes the challenge of connecting where you want to go with what you need to get there. Perhaps the best way to see how an innovation strategy works is to look at what happens when it doesn’t. Consider the experiences of high-profile utility companies that launched highly innovative smart meter programs. Smart meters are replacing the hundred-year-old technology sitting in the metal and glass box connecting a house to the utility power grid. They record power consumption (and note the time of use), upload that data, let utilities know about power outages, and hold the promise of benefits yet undiscovered. And in a boon to the utility’s bottom line, they promise to improve the efficiency of the grid as well as replace the many meter readers roaming neighborhoods.14 Smart meter programs are one element of a larger move toward smart grids—upgrading the nation’s electricity grid to track the load on and performance of everything from long-distance transmission lines to local distribution networks to individual businesses and residential consumers. In 2007, the smart grid was a perfect storm of (1) a huge growth opportunity for IT companies selling products and services, estimated at $30 billion, (2) the promise to dramatically reduce operating expenses

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for utility companies, and (3) the sanctity of a bold new initiative to fight climate change. Industry players like General Electric and IBM were working hard to open that market, and doing so required regulatory approvals and favorable policies at state and federal levels. In addition to lobbying heavily, these companies bought Super Bowl ads selling the promise of a smart grid right alongside beer, chips, and Viagra. The ads showed the future, here already, and with grand benefits to individual consumers, businesses, utilities, and the climate. Xcel Energy was one of the first utility companies to announce an initiative, which they called SmartGridCity, to begin installing two-way communicating smart meters. Xcel chose to install the meters in the fifty thousand homes of Boulder, Colorado. They forecast the project would cost $15.3 million. Almost immediately, the innovation project began coming off the rails. The technical performance of the network was far more complicated than expected, the communications software system proved inadequate to manage the load, and the utility proved incapable of developing new consumer devices to take advantage of the metering information. By 2012, project costs had tripled. In 2011, they had asked the Colorado Public Utility Commission for a rate hike that would pay them $27.9 million; the next year, they returned to ask for an additional $16 million.15 In the latest blow, the project and its cost overruns prompted the City of Boulder to consider taking over the pilot and forming its own municipal utility. Nothing scares utilities like the prospect of one of their territories seceding. These stumbles show that Xcel’s leadership team vastly underestimated the new capabilities it would need to pull off the planned initiative. The utility lacked the management skills to bring together the new hardware and software components; to design, build, and roll out the new communications networks; and to design, build, and market consumer devices that used the new information. Moreover, they failed Marketing 101—the ability to develop a product that customers actually wanted. Sure, these are not easy tasks. But they’ve been done before elsewhere by many others, and they have been done since in other utilities’ smart meter initiatives. A report by the SmartGrid Consumer Collaborative suggests that Xcel might have failed because, like most

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utilities, it refers to its customer as ratepayers.16 Even Randy Huston, Xcel Energy’s director of IT infrastructure, acknowledges the company failed its customers: “Everything we’ve done is in the interest of the customer,” he says. “We’ve just really sucked at explaining that. And I apologize for the language.”17 Xcel is not alone. Pacific Gas and Electric has had many of the same experiences. The Northern California utility launched a $2.2 billion rollout to over ten million homes in 2007 and became what one industry watchdog called “the national poster child” for how not to roll out smart meters.18 Its rollout in Bakersfield, for example, coincided with a new tiered plan that dramatically raised rates for energy use in peak times (afternoons in Bakersfield in the summer regularly hover over one hundred degrees Fahrenheit). Customers saw 50 percent jumps in their utility bills and blamed the meters. PG&E explained that the higher bills were the result of the rate hikes, an unusually warm summer, and customers not shifting demand to off-peak times when rates are lower. Nothing like blaming the customer to engender goodwill. That rollout went so badly that it prompted a class action lawsuit, with a state senator calling out the utility’s executives for a public hearing, and a costly moratorium on the project.19 What happened? For one, Xcel, PG&E, and others across the country were swept up in the promise. There were good intentions all around, but these were new technologies that would radically change how the utility managed old and new information flows across broad territories on a network with millions of nodes in highly visible initiatives. Publicly owned utilities, like Xcel and PG&E, had developed a set of capabilities that enabled them to deliver power cheaply and reliably, on a one-­hundred-year-old technology platform, not to mention manage their customers and costs through the utility commissions that regulated them and set their prices. For these utilities, rolling out a smart grid would obviously take all new capabilities—or so we can say from a distance. Compare these experiences to the rollout conducted by Sacramento Municipal Utility District (SMUD). The project started in late 2009 and was completed, across six hundred thousand residences and businesses,

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in 2012 on time and on budget; it is widely considered to be a major success. It even won the 2012 Smart Utility Award, given by a preeminent industry trade publication, with special notice for its focus on the community as the “primary benefitting entity.”20 Being a nonprofit community utility, they couldn’t afford to jump headfirst into a new smart grid initiative. Instead, executives had to develop a sound business case for the new technology and for the new business model it would require to work well. SMUD recognized from the beginning the importance of customer acceptance. It made dedicated efforts to inform customers of what the smart meters were, what they did and could do, and how and when they would be installed, and it offered live agents to talk to anyone who had questions. In addition, they made sure the benefits of the new ­technology—for the customer—were a priority. This included developing new services (like a smartphone application that enabled consumers to pay bills, manage their accounts, and view outages and restorations in real time) and radically improving old offerings (like remotely turning on and off services for customers). Also, because the company had developed strong technical skills within its own R&D and engineering groups, it could understand the critical issues that a successful launch required—scale, reliability, privacy, and security. Rather than believe what its vendors were pitching about the wonders of new smart meter technology, SMUD’s engineers set their own specifications for the new meters and for the communications network and software that would be needed to run the system. In fact, vendors couldn’t meet the initial specifications because most of their technology was still more hype than real. In addition, SMUD took time to understand and plan the order, scale, and scope of the rollout—for example, building the communications network for the smart meters and testing it extensively before installing the individual meters.

Crafting an Innovation Strategy Remember the two circles I had you draw at the beginning of the book? Now add a third circle that overlaps the other two—your company’s

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strategy. Much of that strategy relates to doing more of what you’re already doing, like expanding sales in an emerging market, boosting advertising spending, or cutting operating costs, so there’s no overlap with innovation. Some of that strategy might depend on innovation but with no clear overlap with sustainability (and there may even be some focus on sustainability without innovation, like putting solar panels on your roof). We’re interested in the space where all three circles ­overlap— where a clearly articulated strategy requires sustainable innovation. Such a strategy, with the commitment of the organization behind it, defines your objectives and, in doing so, enables you to recognize the challenges you’ll face and the capabilities you’ll need to achieve them. Heed the Cheshire Cat’s advice to Alice: if you don’t know where you’re going, any road will get you there. If you don’t have an innovation strategy, any capabilities will get you there. Or maybe not. A welldefined innovation strategy allocates the limited time, attention, and resources of the company—everywhere from the top management team to the engineering teams of new product development to the sales and marketing budgets of the operating units. It highlights the absence of initiatives that directly contribute to your strategic focus—often the case when R&D is tasked with exploring distant possibilities and the business units are focused on incremental changes to existing products. But not having any innovation initiatives is better than having too many, which can often ensure that none get the focus and commitment necessary to succeed. As a result, building an organization capable of sustainable innovation requires having a clear company-level strategy that guides focus and commitment to a specific set of innovation initiatives. To begin with, consider these four simple questions: • What is your strategic response to sustainability over the next two to five years? • What three innovation initiatives will be responsible for the bulk of that response? • What particular capabilities will make those initiatives successful? • Which of those capabilities are you missing now, and how will you develop them?

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Developing an innovation strategy is a chicken-and-egg process. Without a clear strategic plan to guide investments in innovation, it is difficult to commit to a limited set of initiatives, let alone to building the capabilities they require to succeed. Yet without the right capabilities, it’s difficult to define the particular needs of each initiative and its contribution to the company’s strategy. As a result, the planning process should be iterative—identifying potential opportunities and threats, seeking out the right capabilities inside and outside the organization, defining the potential and challenges of each initiative, and refining the strategy accordingly.

u Mind the Gap Crafting an innovation strategy involves four steps, with the purpose of understanding what new capabilities you will need to effectively pursue sustainable innovation. In essence, your innovation strategy articulates the gap between your company’s strategic objectives, the necessary initiatives to achieve those objectives, and the capabilities you have (and the ones you need) to develop and launch those initiatives. Such a gap analysis can range from a relatively simple napkin exercise to a more formal and extensive planning process. Whether it’s on a napkin or a whiteboard, alone or in committee, its ultimate objective is to commit your company’s limited resources to a small set of projects with clear objectives and determine the capabilities necessary to be successful. 1. Define your firm’s overall strategic growth targets. These cover a range of activities, from increasing investments in some activities to shutting others down. Not all of it is innovation—maybe not even very much. They can include strategic investments in building out emerging market infrastructure, reducing operating costs in response to competitive pressures, boosting advertising, or reducing prices to increase market share. Whatever the specifics, the most important part is that they clarify the organization’s priorities.

• Are your firm’s strategic direction and specific objectives clearly defined?

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• If so, how certain is the commitment of the top management team (and the rest of the organization) to achieving those objectives?



• Does the plan specifically identify sustainability-related opportunities and threats?

2. Define those targets in your overall strategy that do depend on innovation: these can be new products and services, new operating processes (e.g., new manufacturing, marketing, or IT processes and tools), or both at the same time. Establish how the overall portfolio of innovation projects will be measured—for example, by overall revenue, market share, or earnings—and measurements for individual projects, like minimum thresholds for revenue or earnings below which a project is not worth pursuing.

• Does your strategy provide clear criteria by which to measure and compare innovation initiatives?



• Does the strategy call for growth through sustainable innovation initiatives?

3. Assess each initiative in the pipeline of projects under way in your company. Make clear the expected contribution of each to the overall strategic mission and to the specific criteria established earlier. Rank, or simply categorize, each initiative as a priority or nonpriority, on the basis of its expected contributions. How many initiatives can the top management team realistically support? Typically, that number is between three and five. Certainly the company can support more incremental innovations but not those projects critical enough to make it onto the strategic radar. This is where it gets interesting fast, because the new product or process development teams responsible for developing these innovations, the business and manufacturing units responsible for implementing them, and the sales and marketing teams responsible for selling them will all get nervous about committing to a set of specific criteria (which also makes this a good test of their shared understanding of the strategic value of these initiatives and of their commitment to each one).

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• Do you have clear agreement on the number of new initiatives that the company can effectively support?



• How many among the top priorities are sustainable innovations? If none, is that because threats and opportunities don’t exist or because the company doesn’t yet have the necessary capabilities to recognize these threats and opportunities?

4. Define the needs of each priority project. What challenges will you face in each project, and in turn, what capabilities will you need in order to support its development and launch? Consider these needs across the entire value chain, from creating, producing, selling, delivering, and supporting the innovation.21

• Are there gaps at the project and portfolio level between the capabilities you need and those you already have?



• And importantly, are there capabilities you don’t know you don’t know yet? Do you have a plan for identifying and acquiring the right capabilities?



• Finally, what are the capabilities you need to drive sustainable innovations?

Note that steps 3 and 4 are recursive: the more relevant the capabilities you have and draw on, the better you can define and prioritize initiatives. Conversely, the more the wrong capabilities dominate the decision-making process, the more incremental initiatives will be prioritized. Thus, developing an innovation strategy helps in identifying what you don’t know you don’t know and in proceeding carefully toward the right capabilities and initiatives. The particular needs will be different for each company and at each given point in time, making it impossible to build a generic strategic response. And yet they are central to crafting your innovation strategy. Fortunately, a relatively limited set of capabilities and a relatively common set of challenges are relevant to all companies pursuing sustainable innovation. We’ll consider the set of challenges in the next chapter, followed by the remaining capabilities in Chapters 4 through 8.

Chapter 3  Challenges to Sustainable Innovation

A student at the Princeton Theological Seminary leaves one build-

ing on the way to another, where he will deliver a short talk on his faith. ­Lying in his path is a clearly disheveled and likely unconscious man. Does this student, who has dedicated his life to serving his faith and preparing for the ministry, stop to offer help or quickly walk by? This mirrors the parable of the Good Samaritan, in the Gospel of Luke, which describes a Jewish traveler who was beaten, robbed, and left on the road to Jericho. First a priest and then a Levite come by—both holy men—and both avoid the man. Finally, a Samaritan comes by, who helps the injured man despite their differences. In 1973, the social psychologists John Darley and Daniel Batson recruited forty students from the seminary, including our student, to ostensibly give a brief talk in a nearby room. It was an experiment to test the Good Samaritan parable: who would stop to help someone in apparent distress. Only there was a difference: onethird were told they were late, one-third were told they were on time, and one-third were told that they had extra time. The results? Of the subjects who felt they had time, 63 percent stopped to help the distressed man; of the subjects who were just on time, 45 percent stopped; and only 10 percent of those who were late stopped to offer help.1 This study became one of the first and most influential to demonstrate what’s now called the fundamental attribution error, the tendency

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we all have to overestimate how much other people’s behavior comes from something intrinsic to their nature rather than from the particulars of the situation. We see someone run a red light and assume that she runs all red lights, she is careless or selfish, and would likely cut in line at the grocery store if given the chance. Similarly, when someone does exceptionally well in a given situation, we assume she will do well in other often very different situations. As Lee Ross and Richard Nisbett, Stanford professors and authors of The Person and the Situation, explain, “People are inclined to offer dispositional explanations for behavior instead of situational ones, and they make inferences about the characteristics of actors when they would do well to make inferences instead about the characteristics of situations.”2 In other words, the situation is often a better determinant of success than someone’s competence, and we’d do well by understanding why. As Napoleon once noted, “I’d rather have lucky generals than good ones.”3 Consider how this applies to innovation. We see a company launch an innovative product and immediately wonder what it was about its people or management practices that led to its success rather than considering the particulars of its situation. People asking for the Google of clean energy or the Manhattan project of agriculture don’t realize that building a search engine at the dawn of the Internet involves a very different situation than building a renewable energy technology in today’s 150-year-old energy sector or redefining the value chain in 100-yearold agricultural industries. The latter is not impossible to redefine; it is simply a different situation that presents, in turn, different challenges to overcome. Recognize the power of the situation on your own innovation efforts, and you will recognize how a new set of tools gives you power to see beyond what others see and to make your ideas a reality. What makes the pursuit of sustainable innovation different from other innovation efforts—in mobile apps, fashion, media, health care, education, e-commerce, and so on—is the mix of challenges you’ll face in this situation. Current case studies as well as historic ones reveal five major challenges that define the pursuit of sustainable innovation. Understanding them provides insights into what works and what won’t in

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bringing innovations to market and in building an organization capable of doing so time and again. None of them are necessarily unique to the pursuit of sustainability, yet together they illustrate why not all innovation strategies are, or should be, alike. Having a clear and strategic commitment to pursuing sustainable innovation makes it possible to define your competitive landscape, the market, technologies, science, and regulatory policies. Whether you’re pursuing clean energy, agricultural production, food processing, water management, transportation, manufacturing, retail, or e-commerce, some challenges will dominate, others will be easily overcome. This chapter describes the five challenges and how they might shape your innovation strategy. What differentiates one sustainable innovation from another is often the mix of these challenges for each situation and strategy, so understanding them becomes the first step to crafting an innovation strategy.

Declining Resources The defining challenge of sustainable innovation may just be achieving economic growth despite declining resources. Think about it. For the last half century, the information revolution has benefited from Moore’s law, which predicted that the number of transistors on integrated circuits would double roughly every two years. Under these conditions, innovation means imagining what life will be like next year, when computing ability will be twice what it was last year. What makes this challenge unique is that most innovation—like most business in general—has since the end of World War II ridden on the dramatic expansion of production and consumption. Global markets expanded, cheap labor became available overseas, computing and communications technologies proliferated, and even capital markets grew with the availability of cheap money and a tolerance for debt. Established companies like IBM, 3M, General Electric, and the US auto industry and new companies like Apple, Microsoft, Cisco, and Oracle grew along with this unprecedented expansion. And this recent expansion follows similar growth over the past two hundred years—the modern

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industrial era that saw exponential increases in both production and consumption.4 The term “resources” covers a lot of territory but, in the end, means the many different inputs on which your company depends to provide the goods and services it does. On the supply side, it’s everything from the raw materials needed to make products to the legal, social, financial, and technical infrastructure that makes those resources available. On the demand side, it’s the market preferences and regulatory environment that dictate which products and behaviors are acceptable and valuable. Most companies have a good idea of what physical resources they depend on. Some are acutely aware. The oil and gas, timber, and mining companies meticulously account for their resource stocks. They make their living extracting, processing, and delivering natural resources to markets, and in fact, their value hinges on their reserves-to-production ratio. Reserves represent the amount of a resource (e.g., barrels of oil, cubic feet of natural gas, or board feet of timber) a company owns and can economically recover. Production represents how much of that resource the company can extract in a single year. In essence, the reserves-to-production ratio defines how much profit a company can expect and for how long. Naturally, these calculations are subject to enormous debate (and deception) because knowing what resources exist and how profitably they can be recovered directly affects each company’s stock price. But the energy companies aren’t alone—declining physical, social, and financial resources now define the landscape of opportunities and threats across almost every industry. For the major food companies, drought and extreme heat threaten crop production around the world. The global water shortage that many see as imminent in the next several decades could reduce global cereal production by 30 percent by 2030—what Nestlé CEO Paul Bulcke calls the greatest threat to food security in the near future.5 Rising sea levels, flooding, and storm surges threaten agricultural and industrial production in large swaths of developed and developing countries. Beyond Hurricanes Katrina and Sandy in the United States, severe flooding in Thailand in 2011 displaced 2.2 million people, flooded 14.8 million acres of land, damaged 16 percent of rice farms, inundated more than eight thousand factories, and

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caused $41 billion of damage to the economy. Because Thailand is home to more than 30 percent of global computer disk drive production, the flooding harmed companies in other nations (drive manufacturer Western Digital reported a 60 percent drop in quarterly revenues, while Dell, Hewlett-Packard, and Apple also reported lost profits) and hastened the decline of an industry whose product was being steadily replaced by solid-state memory.6 Even snow has become a threatened resource for companies and towns that depend on the business it brings. According to a study commissioned by the City of Aspen, continued climate change was projected to end skiing there by 2100 (likely sooner), and long before then the season will begin later, end earlier, and see far less snowfall throughout.7 The social resources many companies depend on may run out even sooner. One such resource is the social contract: the tolerance of a society for a particular set of products and processes. Despite their best efforts, the cigarette companies didn’t run out of customers—they ran out of public tolerance for how they attracted and kept their customers. Fast-food and soda companies like PepsiCo, Coca-Cola, Unilever, Nestlé, and Mars worry that sugar will become the next nicotine. Health-conscious consumers have been avoiding soda in favor of teas and bottled water—leading to a 16 percent drop in sales since 1998. Indeed, New York City’s attempt to ban the sale of sugary soft drinks larger than sixteen ounces reflects a larger groundswell of local bans on the sale of soft drinks in school vending machines. The public’s growing awareness of smoking-related deaths in New York City (around seven thousand), obesity-related deaths (around five thousand), and efforts of the soda and snack food companies to engineer irresistibility into their offerings threatens the social contract that has allowed these companies to sell what they want where they want.8 Similarly, the sports apparel industry and particularly its leaders, such as Nike, Adidas, Puma, and Patagonia, are threatened by the specter of labor abuses and environmental damages rampant in the low-cost contract factories of developing countries. This problem has spread to the computer industry, where Apple’s reliance on low-cost labor to produce its iPhones and iPads sparked protests.

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These threats to a company’s social contract are translating directly into financial terms, and both the market and Wall Street are rewarding (and punishing) corporate reactions. Pepsi’s new strategy, for example, prominently includes growing its “good-for-you”—more nutritious convenience foods—business by $20 billion by 2020 through expanding the current product lines and adding new ones.9 Adding more sugar or finding cheaper labor may have seemed a cheap and easy way to innovate, but just as the future liability of smoking-related death and disease is now a tangible part of tobacco companies’ stock prices, insurance rates, and even capital costs, today’s soda makers are beginning to see how practices that seemed legitimate just five years ago are now bringing unexpected liabilities. The same goes for apparel and electronics manufacturers and the retailers that carry their products. Innovating by doing more with fewer resources is harder than doing more with more or cheaper resources, but knowing those resources your company depends on to do business—not just raw materials but also social and financial resources—is important. And knowing which ones are at greatest risk of declining (and how fast) is even more critical to charting your sustainable innovation strategy.

Brownfield Versus Greenfield Markets The terms “brownfield” and “greenfield” originated in describing the difficulties of modernizing existing factories as opposed to simply building new ones. Existing factories, originally designed for particular modes of production, can be difficult to upgrade, so when major changes are needed, it is often easier to just find a green field and build a whole new factory. This distinction has since been applied to upgrading old IT or accounting systems versus building new ones and even continuing old product lines versus starting over. The same principle applies to attempting to innovate in old and established versus young and emerging markets. Brownfield markets are often large and have entrenched practices and technologies, incumbent customers and competitors, supporting and specialized infrastructure, deep-rooted business relation-

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ships, and extensive government regulation. Greenfield markets are, by comparison, young, typically small, and have few established practices and technologies, little-to-no specialized infrastructure, newly arriving customers and competitors, fluid and emerging business relationships, and relatively little government oversight. Most unsustainability comes from the sheer scale of the technologies or markets involved. A few cars are sustainable, a few billion are not; a few people living in poverty may be regrettable but sustainable, a few billion are not. When Edison’s Pearl Street station ushered in an era of coal-powered electricity it was a much cleaner solution than the alternatives: kerosene, whale oil, and gasified coal. Now it is not. Most of the opportunities and threats driving sustainability will come in large, mature markets like energy, transportation, agriculture, and construction, which present very different challenges from those in younger markets like information technology, Internet applications, and social media. Understanding this difference is crucial. Launching a moon shot, or a search engine (in the mid-1990s), or a search engine’s attempt at a moon shot is a greenfield problem. Indeed, many of our current models for innovative companies—Microsoft, Amazon, Google, Facebook, and Apple—enjoyed their best growth years in step with growing, greenfield markets. So too did Ford and General Motors in their early days. In a greenfield market, it may be fine to have a twenty-something, hoodiewearing, socially inept programmer setting your company’s innovation strategy, but it’s not so fine in brownfields, where understanding existing business relationships and regulatory policies often spells the difference between success and failure. But this is one of the lesser aspects of the challenge.10 The challenge of innovating in brownfield markets has three dominant aspects. First is the entrenched technical infrastructure that supports the incumbent systems and, as a result, resists change. The capital assets of energy suppliers, such as power plants, have an average lifespan of over forty years. The demand-side systems are equally ­complex—transportation, appliances, buildings (industrial, commercial, and residential), and industrial equipment—and integrated with

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this existing supply system. In developed economies, these systems have been in place for over a century. As a result, new products and processes designed for mature, established markets must often be designed to fit within the complementary systems that make up the rest of the infrastructure. In the early 1800s, the countries that adopted rail travel were those that did not already have well-established regional or national transportation systems (at the time, canals). In France and Holland, for example, the initial economic advantages of rail travel were dampened, and the costs of constructing bridges and crossings relatively high, because canals were already in widespread use. High-speed rail faces similar challenges today in the United States, where highway systems and short-hop air travel present competitive alternatives. By contrast, innovations introduced in the early days of wholly new markets, like the semiconductor, personal computer, and Internet, could establish themselves as the cornerstones from which to build new systems. Developing countries and new industries offer similar opportunities. China’s rapid development has represented a significant greenfield opportunity. In the 1990s, it leapfrogged the traditional copper wire telephone network, moving directly to cellular communications. Now, it pursues similar opportunities in rail and energy infrastructure, embracing high-speed rail and nuclear, wind, and solar power. Second are the entrenched economic systems that set the costs and benefits—the business proposition (whether a company can make money) and value proposition (whether a customer actually benefits)— of emerging technologies. The business proposition for new technologies is often hindered by direct and indirect subsidies for incumbent competitors. Direct subsidies come in the form of land grants, tax breaks, access to public resources, and favorable regulations. Energy efficiency innovations, for example, often depend on energy policies and pricing; the benefits to adopting, for example, new energy-efficient electric home appliances, computers, HVAC systems, or industrial motors can be undermined in markets where electricity is ubiquitous and low cost. Indirect subsidies come in the form of existing social, economic, and political support for current companies and technologies, includ-

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ing a trained labor force, local community support, institutional and regulatory sanctions, and monopoly grants. Similarly, entrenched physical assets can and often are used well beyond their amortization, thus providing incumbent competitors with extremely favorable economic terms. Third are the entrenched political systems that actively and passively resist change. Innovations can be slowed, if not outright prohibited, by regulations and often face active resistance from entrenched competitors and others who would benefit by perpetuating the status quo. Richard Lester notes, in his 2009 report, “America’s Energy Innovation Problem (and How to Fix It),” History is replete with examples of failed or aborted commercial demonstration projects, of interest-group politics and interregional conflicts delaying and constraining Congressional action, of political accommodations to the loudest voices in the energy innovation debate, and of a sometimes-dysfunctional government bureaucracy pushing particular projects, technologies, and subsidies long after their unsuitability has become obvious.11

This is not new. In the 1880s, Edison was forced to compromise his electric lighting system to integrate it effectively within the existing market and regulatory policies favoring the incumbent gas companies. Only as electric utilities diffused to markets that were not previously dominated by the political influence of established gas companies or became dominant themselves could the technology evolve along its own trajectory. And now, those same electric utilities are able to prevent solar and other distributed-generation technologies from taking hold—forcing these new ventures to enter niche markets like small-scale (rooftop solar) or large-scale (utility scale) projects, neither of which are necessarily the best scale for commercial success. Sustainable agricultural innovations face similar challenges as they attempt to fit within a model built around the industrial growing, harvesting, processing, transportation, and sale of its products. Suffice it to say, pursuing sustaining innovations requires overcoming the distinctive challenge of change in brownfield markets.

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Faster, Better, Cheaper; Pick Any Two In sustainable innovations, most of the attention goes to cutting-edge science, cool new start-ups, and the bold ideas that are going to lead us painlessly into a sustainable future. Yet for executives in established firms and founders of new ventures one of the biggest issues lies in the boots-on-the-ground challenges of bringing that science and those products to market. When companies stumble in bringing ideas to market, their stories become fodder for politicians and incumbents who want to disparage the very worth of new technologies—and so many companies stumble. Witness the political havoc wreaked by the demise of clean technology companies like Solyndra, A123, Miasole, and Beacon Power and the difficulties faced by others, like electric vehicle startups Fisker Automotive and Tesla Motors. But Solyndra’s fall was not an indictment of solar power and Fisker’s troubles were not an indictment of electric vehicles. They’re just evidence that good ideas, brilliant scientists, and dashing young entrepreneurs are not enough, and we will waste a lot of time and money if we think they are. When I worked at IDEO, we played in a city softball league and our team shirts read “Faster, better, cheaper. Pick any two.” It was an inside joke. Regardless of the promises we made, clients could have their work done ahead of schedule, at the best quality, and under budget. They just couldn’t have all three. It’s one of the laws that apply equally to all companies trying to innovate. But the IT revolution happened in greenfields where markets started small, had low expectations, and were willing to pay anything for the latest improvements—and followed Moore’s law. Apparently free of the limits of faster-better-cheaper, every year products were getting to market faster, performing better, and costing less than the year before. Manufacturers were able to make more of them, increase their reliability, and rake in a handsome profit too. The current supermodels of innovation—the Apples, Googles, and Facebooks—are relatively immune to the faster-better-cheaper trade-off. Apple has FoxConn to ensure their products come out faster, better, and cheaper because little changes in the manufacturing process (most of the changes are in the components and software). Google and Facebook launch new

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products by adding links to their website and assigning a few more servers to the task. If it’s buggy, they just call it beta. In the world outside the Silicon Valley, however, most companies and industries must live within the constraints of faster, better, or cheaper. Faster. For new products to have an appreciable impact, they have to quickly reach the same scale as the incumbents they’re trying to replace.12 Energy, automobiles, household appliances, industrial motors and manufacturing processes, and food are all huge markets. Take Tesla, which faced the scale challenge in introducing its electric Roadster. Founded in 2003, the company unveiled the Roadster in 2006, but the first production car wasn’t delivered until 2008. Even then, the company struggled over the next two years to build out the supply chain. By the end of 2012, Tesla had sold a total of only 2,400 Roadsters (by contrast, DeLorean sold approximately 9,000 cars in its single year in production). In 2013, Tesla’s S series sold 22,450 units.13 This is neither an indictment nor a vindication of the electric vehicle market—Toyota made and sold 18,000 Priuses in 1998, the first year the model was introduced, mainly because of Toyota’s previous experience and established capacity, and now annually sells over three million worldwide. Of the new all-electrics in 2011, Nissan sold roughly 10,000 of the Leaf, while General Motors sold almost 8,000 of its Volt in its first year. Instead, it’s a recognition that unless a company already has most of its supply chain built out, getting to scale quickly is extremely difficult. Any new manufacturers going after large markets, whether in automobiles, utility-scale energy, health, nutrition, agriculture, or water treatment, face the same challenges. Not only do you need to develop a new product, but you need to build out the supply chain and manufacturing capacity if the market embraces it. Designing a cool new electric car is like a dog chasing a bus—the real work begins once you catch it. Better. “Better” means producing new goods and services that perform as well or better than the existing ones. In many cases, that doesn’t mean they work flawlessly—the early days of the computer industry were characterized by frequent system crashes, hard-disk failures, and other reliability issues. So too were the early days of the automobile industry. But as markets mature, those problems become intolerable and

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in many cases even regulated against (e.g., the automobile, food, and energy industries).14 Reliability is easy if you’re willing to give up scale or profitability. Witness Solyndra, which despite having early problems with reliability, tried to move from laboratory-scale production to mass production. The company had developed a novel approach to solar panels, but it still had a buggy product when investors (and a $535 million loan guarantee from the Department of Energy) started breathing down management’s necks to scale up. They ran out of money while trying to fix their reliability problem and scale up production. Tesla and Fisker, too, experienced quality problems in their rush to meet promised production volumes and schedules. For Tesla, early transmissions failed in the field and a faulty rear hub required a safety recall of the first 345 units produced. For Fisker, a flawed battery assembly design caused a safety recall, and the test car for Consumer Reports shut down during the testing—problems that ultimately drove the company into bankruptcy. Big companies experience the same difficulties. General Motor’s Volt was hit by two embarrassing problems that emerged only in the field: a crash-induced risk of battery fires (which prompted a voluntary recall of 8,000 vehicles) and melting electrical plugs. But big companies have an advantage here as well, because it’s not just the reliability of the product that matters. When Walmart decided to install LED lighting in their parking lots, the decision hinged not on the energy savings but rather on the long-term reduction in maintenance costs (LED lights have a longer theoretical life than traditional metal halide lamps and need replacement less often). Walmart chose General Electric rather than a smaller start-up because it wanted to be sure the company would be around as long as the twelve-year warranty. Cheaper. Companies must ultimately be profitable. Scaling production and managing reliability is expensive, and getting it wrong is even more expensive. Wendy Graham, an executive at Air Products and Chemicals, which provides industrial gases and other process technologies for power generation, says, There is a real scale difference between typical innovation and lowcarbon innovation, especially the need to establish reliability and incen-

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tives for low-carbon solutions before energy industry customers will adopt them. Utility customers are interested in large-scale projects that have been demonstrated, and [that effort] can take hundreds of millions of dollars.15

Scaling too quickly or outpacing reliability brings unexpected material, operational, and warranty costs. It’s especially difficult when introducing new products into mature markets in which incumbents, enabled by long histories and established supply chains, enjoy reliability and low costs. Wind energy companies Clipper Wind, Sinovel, and Suzlon Energy all faced unexpected quality problems stemming from wide-scale deployment of new wind turbine technologies and designs. In 2008, Suzlon Energy had to “strengthen or replace 1,251 turbine blades—almost the entire number it has sold to date in the U.S.—­after cracks were found on more than 60 blades” installed and in use.16 The rapid deployment of wind turbines led to problems that proved extremely costly—almost fatal—to turbine manufacturers. Dealing with the faster-better-cheaper trade-off is especially important when introducing sustainable innovations. It’s one thing to experience dropped calls on your new iPhone when (1) it’s not the end of the world, (2) this thing allows you to do other things you never dreamed of, and (3) it’s going to be obsolete in two years anyway. It’s something wholly different when your livelihood or health depends on it, when it’s doing the same job something else is already doing reliably, or when its useful life is measured in decades (ten years for a car or truck, forty to sixty years for a wind turbine or solar plant). Bob Swanson, founding CEO of Genentech, was renowned for his strategic patience, his recognition that biotech had to proceed at its own pace regardless of the urgency of the market or investors. To Swanson, neglecting that pace meant risking worse mistakes in reliability or costs. The same holds true for sustainable innovation.

Risk and Uncertainty Everyone agrees innovation is a risky business, but few look past this offhand comment. Every new undertaking involves risk but, more

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i­ mportantly, every new undertaking is shaped by the nature of the risks involved. The most important aspect of this is understanding and responding to the nature of the risk that is at work because, without this understanding, innovation efforts are paralyzed. Not all risk is created equal. That recognition comes from Frank Knight, an economist at the University of Chicago who in 1921 showed that “risk” actually refers to two very different types of risk: risk proper and uncertainty. Risk proper is real, it’s constant (the same for anyone playing the game), it can be accounted for with reasonable accuracy, and while it can’t be eliminated, it can be profitably managed and hedged against. Uncertainty, on the other hand, describes when the risk proper, or probability, of an outcome is unknown. And not just the probability but also the investment costs, the ultimate payout, and even the very rules of the game may be unknown and, worse, may change over time depending on the actions of others. Uncertainty must be taken in a sense radically distinct from the familiar notion of Risk, from which it has never been properly separated. . . . [A] measurable uncertainty, or “risk” proper, as we shall use the term, is so far different from an unmeasurable one that it is not in effect an uncertainty at all.17

We live with risk and uncertainty, and they have very different effects on our decisions. Anyone undertaking a new venture, consciously or unconsciously calculates the likely benefits of success and costs of failure: whether to chase after a bus or not, put four or five quarters in the meter, or get in this line or that one at the grocery store. (I should have gone with five quarters; that gamble cost me forty dollars.) In each of these decisions, we weigh the costs and likely outcome. Indeed, nothing has more influence over the outcome of a new venture than this ­calculation— because it determines our commitment to its undertaking.18 We can deal with risk proper: we can calculate the odds, make sure we can afford the losses (or offset them by hedging), and proceed accordingly. But we can’t deal with uncertainty. In the face of uncertainty, we freeze up. This was Knight’s contribution: the reason more people don’t innovate is an aversion not to risk but rather to uncertainty. On the other

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hand, those who do undertake a new venture are not necessarily more comfortable with risk—they may just know something that others don’t. And that knowledge makes them less uncertain about, and thus more willing to commit to, the path forward. Companies can offset the risks associated with investing in new manufacturing facilities or processing plants by attracting outside investors, taking out insurance policies, or capturing subsidies or loan guarantees to hedge against the (known) negative outcomes. But they can’t hedge against uncertainty because the odds, and the costs and benefits, are unknown. Uncertainty rather than risk proper is the dominant characteristic of innovation, and in the pursuit of sustainable innovations, it comes in several significant forms. Policy uncertainty relates to which public policies will be enacted (or redacted) and for how long, for how much, and how they will be implemented. The technical and manufacturing uncertainties often pale in comparison to those surrounding public policy. United Technologies is an American conglomerate overseeing the development and manufacture of a wide range of building-, energy-, and transportation-related products including aircraft engines, HVAC, fuel cells, elevators and escalators, fire and security, building systems, and industrial products. As one executive explains, “The potential and perceived value of new energy technologies can change quickly, and is significantly impacted by domestic and global public policy.” In a survey of corporate executives, 65 percent rated government policy as the most significant uncertainty associated with, in this case, low-carbon innovation (followed by 25 percent for market uncertainty).19 Such policies can take many forms, from emissions curbs to tax credits or subsidies. For example, the Department of Energy’s loan guarantees to electric automaker Tesla ($465 million) and thin-film solar venture Solyndra ($535 million) were meant to reduce the risks of lending to these firms but created even greater uncertainty for competitors and investors in the same markets.20 Some incentives may be predictable and provide greater certainty; others may be unpredictable and increase uncertainty. Policy also acts more indirectly by affecting the availability of raw materials for manufacture and use, by changing the regulatory environment of customers or suppliers, or by supporting (or tolerating) nationally subsidized industries.

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Market uncertainty is the second major source of uncertainty. Customer preferences regarding sustainability shift across market segments and across time as competing alternatives emerge from within or outside an industry. A customer’s own uncertainties strongly influence purchase decisions. For suppliers to the automobile market, for example, the customers are the automakers, whose decisions hinge on upcoming emissions standards and other policies (and particularly how they will be measured). The same holds for energy generating equipment and the policy uncertainties that utilities, answering to their local utility commissions, will face over the life of a plant. Similarly, building owners considering adopting energy efficiency innovations face uncertainties regarding the technical and financial outcomes of such investments. Technology uncertainty also contributes to the reluctance of companies to move beyond the research and development stage of innovations. Two sources of technical uncertainty seem the most salient. First is the uncertainty about whether new processes or new materials will work at commercial scale in the same ways they worked in the laboratory, or “Can we build a million units in a plant in Asia as reliably as we built a thousand of them in our lab?” and “Will these components perform as expected over the entire forty-year life of the plant?” This uncertainty is particularly strong in the latter stages of technology development, when the stakes grow exponentially and missteps can take down not only projects but entire companies. Sure, early-stage R&D and market research can be costly, but it represents only a small fraction of the cost of the commercial-scale prototyping and demonstration of new products, pilot plants, and processes necessary to bring innovations to market. Take the cost to develop carbon capture and sequestration technology. Developing the technology and testing it in the laboratory may run in the tens of millions of dollars; building a demonstration plant costs around $700 million. The same holds for the development of manufacturing capacity and the proof of scalability (and reliability) of new products (examples are Solyndra and Tesla). The larger the capital investments required to scale reliably and profitably, the more paralyzing the uncertainties.

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The second source of technology uncertainty involves technical standards and the concern that everyone from suppliers to regulators to even competitors agree to move in the same direction or not at all. Many innovations in energy, agriculture, and other large industries require large capital outlays by customers that are recouped only after many years of use. That means customers want to commit to only those innovations that are supported by a wide range of competing providers and accepted by the broad network of parts suppliers, maintenance providers, and regulators who make up the field. Business uncertainty, particularly profitability, is also a large source of uncertainty. Energy, food, and commodity markets are large, mature markets that offer little margin for error when deciding whether to enter them with an innovation. A miscalculated cost or a performance shortcoming can spell the difference between large profits and large losses. Even a changed policy enforcement can turn what looked like a good business into a bad one. As one survey respondent stated, “Profitability is [the] main metric for all projects, yet sustainability issues are constantly changing the rules for [that] calculation.”21 Environmental uncertainty, finally, also affects us—even if we choose to do nothing. The Association of British Insurers predicted property insurance premiums would double over the next decade for those living in areas that will feel the most dramatic effects of climate change. The major reason for these premium increases is the increasing uncertainty about the effects of climate change. Tim Wagner, cochairman of the climate change and global warming task force for the National Association of Insurance Commissioners, says, “Insurance is priced based on statistics and probability. What climate change has done is create ambiguity and uncertainty in the pricing scenario.”22 The pursuit of innovation hinges on your ability to identify and manage these uncertainties. Your responses will determine not just how and when but whether your company will pursue such innovations at all. With the ability to identify and resolve policy and market uncertainties, companies can act on growing opportunities sooner and with more commitment; without that ability, companies often adopt a

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wait-and-see posture that follows, rather than leads, changes in their industries. As Knight argued, it is critical to understand when decisions are based on risk and when they are driven by uncertainty, as “there are farreaching and crucial differences in the bearings of the phenomena depending on which of the two is really present and operating.”23

The Breakthrough Bias The final challenge results from misconceptions about where innovations come from and thus how we identify and invest in them. Say the word “innovation” and most people think of dramatic new technologies or market breakthroughs, the kind that revolutionize industries overnight. This tendency is so strong that, despite continuing evidence to the contrary, managers, policy makers, and the public show a breakthrough bias when pursuing, funding, or anticipating innovation. This bias favors the pursuit of bold technological or market leaps that separate us from our unsustainable past and ignore or resist efforts to advance through incremental changes in known solutions. Yet as history shows time and again, it’s often these incremental steps that lead to the most significant breakthroughs. This bias becomes even more salient in the pursuit of sustainability, when a consistent parade of new technologies in the laboratory promise to rescue us but, in the end, undermine commitment to working with the solutions we already have. The origins of this bias came in 1945, when Harry Truman’s science advisor Vannevar Bush published Science: The Endless Frontier and set the course for the public understanding and pursuit of innovation. Bush emphasized the generation of innovation from within basic research because, in his view, basic research creates the inputs that feed applied research, development, demonstration, and wide-scale deployment: Basic research leads to new knowledge. It provides scientific capital. It creates the fund from which the practical applications of knowledge must be drawn. New products and new processes do not appear fullgrown. They are founded on new principles and new conceptions, which in turn are painstakingly developed by research in the purest realms of science.24

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This view sees innovation as a linear flow in which ideas first emerge in basic research and move downstream through development, demonstration, and deployment, each subsequent stage characterized by an increasing priority on implementation rather than invention. In other words, the innate potential for breakthrough is in an idea from the original basic research—the rest is just execution. This bias has shaped not only public support for R&D but also, increasingly, the management of corporate R&D. As Martin Kenney and Richard Florida describe in their book The Breakthrough Illusion, R&D laboratories emerged toward the end of the nineteenth century to focus innovation efforts on improving manufacturing processes (and on engineering products for mass production) as organizations grew in scale.25 Over time, however, these laboratories were increasingly populated by scientists connected more to their disciplines than to the manufacturing floor. The schism only increased as manufacturing was outsourced, resulting in R&D organizations focused on developing breakthroughs rather than incremental improvements to a company’s current offerings. The breakthrough bias can undermine innovation for two reasons. First, it’s foolish to ignore the bird in hand while you’re waiting for the bird in the bush; the bird in hand might be your only option and for longer than you thought. For example, in 2013 coal provided 39 percent of US electric energy, while solar provided 0.3 percent.26 A 1 percent improvement in the efficiency of the average coal plant could, in the short run, lead to improvements in coal exceeding the total contributions of solar. This is not an argument to abandon solar or to invest in coal but rather to illustrate that improvements in existing systems may bring about similar or larger benefits in the short run as pursuing new technologies does. China’s expected to more than double its coal-fired electricity generating capacity (from 2007 levels) by 2035. China, India, and other economies are rapidly raising their standard of living by adopting the energy, transportation, and other systems currently working at scale in developed countries and as a result creating an infrastructure that will last for the next forty to fifty years. Not taking incremental improvements seriously is as foolish as not investing in longer-term opportunities.

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Second, what if the biggest breakthroughs actually do come from incremental improvements to existing technologies already in use? The bias toward breakthroughs suggests (1) such solutions must not be breakthroughs since they’re already in use (and haven’t changed the world yet), and (2) therefore, our investments are better spent on the next promising breakthrough to come from university and national laboratories. Yet the bias persists despite considerable evidence contradicting those two points. Remember, the electric light was forty years old before Edison revolutionized the world with his design, the Internet was thirty years old and incrementally improving beyond its original use before it dramatically changed our lives overnight, and the transistor’s impact occurred long after and far outside its original development as a replacement for copper switches in phone lines. In fact, an innovation’s impact is often inversely related to its novelty—if the surrounding infrastructure isn’t there to support it, novel technologies can take decades, even centuries, to develop. The breakthrough bias is stronger in the pursuit of sustainability when public and political calls for outrageously ambitious breakthroughs impede those trying to manage the innovation process. Electric vehicles, hydrogen fuel cell vehicles, solar photovoltaics (PV), and wind power are all promising new technologies but lack supporting infrastructure. As Vaclav Smil notes, The historical verdict is unassailable. Because of the requisite technical and infrastructural imperatives because of numerous (and often entirely unforeseen) socio-economic adjustments, energy transitions in large economies on a global scale are inherently protracted affairs.27

In business-as-usual circumstances, all-electric vehicles are expected to reach only 3 percent of the US market by 2020 (with best-case aggressive policies, 10 percent).28 Solar PV is growing dramatically (from a small initial base) but still represents less than half a percent of the energy supply and has a similar low expected marginal contribution over the next several decades.29 Meanwhile, pursuing breakthroughs diverts attention away from the more critical challenges of build-

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ing on those solutions we already know. Auden Schendler argues in his story of trying to make sustainable changes within the Aspen Ski Company, “A focus on technology development is actually one of the most prominent emerging ways to delay action on climate change, and it is being used widely on the national stage.”30 And there are plenty of known, incremental changes that can be made. For example, a 2009 National Academy of Sciences report found that the energy savings from accelerated deployment of existing energy efficiency technologies (in buildings, industry, and transportation sectors) could offset all expected growth in electricity demand through 2030 (approximately 35 percent of the 2030 total demand). Further, a McKinsey Global Institute report found that existing energy efficiency opportunities had negative costs—investments in these technologies had a positive net present value.31 Yet this evidence has had little effect on the collective breakthrough bias. If existing and more sustainable alternatives do indeed have untapped value, the limiting factor may not be ability to generate novel technologies but rather ability to execute on what we already know how to do. This puts entrepreneurs and corporate leaders in a difficult position. When federal policies and public sentiment favor the pursuit of breakthroughs, despite the evidence that true gains come from the pursuit of incremental improvements, only the most visionary will be able to resist the pull of breakthrough bias.

u  Mind the Gap As described in Chapter 2, your innovation strategy tells you where you’re trying to go. The challenges noted in this chapter describe some of the major obstacles in getting there. Recognizing which of them your company will face in the pursuit of sustainable innovation helps determine which capabilities you will need in order to overcome them. The following questions are offered to help you in considering which of these challenges are relevant to your sustainable innovation strategy.

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Declining Resources • What physical and social resources are your company or industry depending on now that are vulnerable to changing environmental or social conditions—whether from climate change, food and ­water scarcity, or nutrition and health concerns? • To what extent does the challenge of declining resources affect your business? Further, to what extent does it influence your priorities for innovation over the next three to five years? • Who in your organization has the perspective and responsibility to consider these resource dependencies, recognize which may be at risk, and recommend proactive responses? • Does your company have the right capabilities to mitigate or adapt to these resource constraints, particularly through the development of new products and services? • At what point would such a scarcity generate the necessary commitment across your organization to pursuing the necessary changes? Brownfield and Greenfield • Does your company’s strategy for growth involve brownfield markets? To what extent does your innovation strategy directly address the need to launch new products and services into brownfield markets? • Given your strategy, which elements of existing technical, economic, and political infrastructure will you have to contend with? • Does your organization already have the capabilities to understand and address these elements? • How does going against entrenched competitors, customers, regulators, and infrastructure shape the development of your offerings? • Do the groups tasked with innovation have people with the experience to understand which brownfield elements you can and should

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attempt to overturn and which you should attempt to fit within, which you can ignore, and which you can exploit? Faster, Better, Cheaper • To what extent does your innovation strategy depend on getting to scale rapidly, with quality and profitability? • If your strategy depends on fast scale-up, how does this inform your corporate and innovation strategies? • Does your company have prior experience launching new products at scale—with new product and process technologies as well as new customers and value propositions? • Do you have the strategic patience to recognize and maintain the proper balance between faster, better, and cheaper in the launch of new products and services? • When trade-offs are required, who is involved in the decisionmaking process? • Do you have the capabilities—the right people, communication, processes, and resources—to manage this trade-off? Risk and Uncertainty • Rate your company’s overall ability to deal with uncertainty: is it able to move forward in the face of considerable uncertainty, able to move forward against moderate uncertainty, or is it paralyzed by uncertainty? • What are the prevailing sources of uncertainty surrounding your company’s overall strategy and innovation strategy today? • Does the pursuit of sustainable innovation create uncertainties— whether regulatory, market, technology, or environmental—that your company has not dealt with before? • Who in the organization is tasked with monitoring these different uncertainties? Are they involved in the process of formulating innovation strategy?

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• Is your company able to commit despite these uncertainties? Further, does it have experience in reducing this uncertainty by developing the relevant capabilities? Breakthrough Bias • Is your innovation strategy subject to the breakthrough bias? In other words, does your company err in searching for a breakthrough or waiting for others rather than committing to current opportunities? • Who in your organization is guiding your company’s technology road map, and how is that road map influencing, or being influenced by, your overall strategy? • Do the promises of breakthroughs in university or national laboratory science cause your innovation efforts to change dramatically, slow down, or be shelved? • Is your company investing heavily in novel technologies and cutting-edge science while being unwilling to commit to advancing the potential of existing ideas? • Is your company pursuing more R&D projects than it could, or would, commit to bringing to market? Other Challenges • Finally, what are the other challenges that will stand in the way of your pursuit of sustainable innovation? • Which of these are unique to your situation and which might others in your market or in other markets also be facing? • How are these challenges shaping your innovation strategy? The challenges described in this chapter combine to make the pursuit of sustainable innovation a very different undertaking than other types of innovation. Not every one is present, let alone prominent, in all markets or relevant for all companies. But recognizing their presence

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enables us to consider what capabilities different organizations will need in pursuing their chosen innovation strategy. The next chapters describe the five remaining capabilities that, in addition to commitment, played significant roles in successful sustainable innovations and likely will play an equally significant role in pursuing your strategy.

Chapter 4  Nexus Work

Think of innovation, and what comes to mind are iconic inventions

and their revolutionary impacts on the organizations and markets of their time. The steam engine powered the Industrial Revolution; the electric light, the electric age; the automobile, mass production. Today, the integrated circuit, personal computer, Internet, and smartphone symbolize various stages of the information revolution. And yet as I talked about earlier, most of these technologies had been around for decades before suddenly disrupting everything. That leaves us with a central question: If their inception—the aha or eureka moment—didn’t spark the revolution, what did? What, if not a new idea, makes some innovations so powerful and some organizations capable of leading the revolutions that follow? To understand what gives innovations their impact you have to look past the iconic invention—Watt’s steam engine, Edison’s light bulb, Apple’s iPhone, or Google’s search page—and let your eyes focus on the network that surrounds and enables these technologies to work the way they do. Forget the idea—the network is the innovation. Throughout history, the core ideas for every “invention” were already known. What turned those ideas into revolutions was someone seeing and building the right network at the right time and then helping it grow over time. This is nexus work.1

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Einstein is often credited with having said, “Problems cannot be solved by the same level of thinking that created them.” The problems of sustainability, more specifically, cannot be solved by the same level of thinking that created them. Their solutions lie in not continuing to optimize the existing elements and relationships—the networks—that make up the current system but rather rethinking the elements and organizing principles of the system itself. Simply dropping electric vehicles into the existing transportation system makes them a poor substitute for gasoline-powered cars. Moving from internal combustion to electric vehicles requires thinking not at the level of the vehicle but one level up (at least): at the level of the system in which the vehicle interacts with refueling stations, city and suburban infrastructures, regulatory policies, carmakers, commercial interests, and consumers. Solar panels will make a poor substitute for gas and coal energy plants without changes to the larger energy system in which they are embedded. The same goes for sustainable techniques and technologies in agriculture and food processing. Sustainable innovation requires creating solutions that change networks, making nexus work a critical capability.

(Re)Building the Networks of Power To understand nexus work, let’s take another look at Edison’s development of the electric light. When Edison began working on his system of electric lighting, gas lighting was not only an established industry but one of the largest of the nineteenth century. The original idea and early efforts date back almost two centuries (in fact, the first efforts to commercialize it involved the Boulton and Watt Company in the 1790s), but it was between 1810 and 1820 that gas lighting established itself as a commercially viable industry and rapidly expanded. Like the railroad networks and electric grids that followed it, gas lighting was one of the first tightly coupled complex networks to emerge, connecting a range of companies, customers, consumers, and regulators, as well as a host of technologies, regulatory policies, and financial instruments involved in its generation, distribution, and use. Sixty years later, gas lighting was

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a brownfield energy industry, with its well-developed technologies, entrenched infrastructure, political influence, and mandated monopolies. To gain a foothold and, eventually, overturn this incumbent system, Edison would have to build a network of his own that could compete with it in scale and scope. When Edison entered the electricity business, the question was no longer whether electric lighting could be successful but how. Isolated lighting systems were already on the market, but they could not affordably compete with gas lighting in scale. The gas industry’s embedded infrastructure and greater economies of scale made any new electric systems seem costly and unreliable, especially when each installation required dedicated generators, wiring, lamps, engineers, and electricians to operate them. So while electric lighting had great potential, until someone could demonstrate an economically viable way of matching the scale and scope of gas lighting, the next wave of inventors, entrepreneurs, investors, politicians, and consumers waited on the sidelines. Edison realized he would need to build an entirely new network involving producers, operators, installers, investors, regulators, customers, and new technologies. So forget the lightbulb—Edison’s true accomplishment, in fact, was organizing the already existing elements of electric lighting into a coherent and commercially viable system that could take on the monopoly powers of the gas industry. As Thomas Hughes argues, this was his genius: “Edison invented systems, including an electric light system that took form as the Pearl Street generating station and distribution network of the Edison Electric Illuminating Company of New York.”2 Upon seeing Edison’s display at the 1881 Paris Electrical Exhibition, Emil Rathenau, founder of Allgemeine Elektricitäts Gesellschaft and father of Germany’s electric industry, remarked, The Edison system of lighting was as beautifully conceived down to the very details, and as thoroughly worked out as if it had been tested for decades in various towns. Neither sockets, switches, fuses, lampholders, nor any of the other accessories necessary to complete the installation were wanting; and the generating of the current, the regulation, the wiring with distribution boxes, house connections, meters, etc., all showed signs of astonishing skill and incomparable genius.3

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In creating this system, Edison faced two major challenges. First, he needed to produce technical components that would work together effectively and economically in his new system. The lightbulb was just one component, and as Hughes points out, it was no more critical to the system’s operation than was the “Edison Jump generator, the Edison main and feeder, or the parallel distribution system.”4 The larger network consisted of power generation sources, controls, transmission and distribution pathways, lighting systems, and motors. Moreover, the demands of a utility grid were so far different from those of isolated systems that its components needed to be redesigned or entirely new ones developed to ensure the system worked reliably and profitably. Second, to grow the system, Edison needed new companies dedicated to manufacturing, installing, and operating these components (and for overseeing the entire system). Edison argued that each company should be independently managed to ensure their individual roles received the necessary attention and effort and their teams were well rewarded. He needed to create these organizations, define how they could work together, find investors to finance them and the individual installations, and craft regulatory policies to accommodate them. When he was done, Edison had created twelve companies, eleven to each focus on developing, installing, and maintaining an element of the system and one to preside over the entire network. The list of companies Edison founded and the work he did finding investors, installing management teams, and coordinating each company’s efforts is impressive:5 • The Edison Electric Light Company (incorporated 1878) was the original investment vehicle created to fund the development of Edison’s system of electric lighting and to control the growth of subsidiary companies by stock, contracts, or licensing agreements. • The Edison Electric Illuminating Company of New York (incorporated 1880) was the central station operating company, later to become Consolidated Edison. • The Edison Electric Illuminating Company of Brooklyn (incorporated 1887) was a licensee of the Edison Electric Illuminating

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Company of New York and provided service in Brooklyn. Other Edison Electric Illuminating Companies formed across the country as licensees purchased Edison equipment and operated central stations. • Edison Company for Isolated Lighting (incorporated 1881) designed, developed, and installed isolated electric systems for factories, hotels, and ships. It merged with the Edison Electric Light Company in 1886. • The Thomas A. Edison Central Station Construction Department (established 1883) constructed isolated systems and then directcurrent electric power stations throughout the United States. The Edison Company for Isolated Lighting absorbed it in 1884 and assumed responsibility for the construction of all central stations in the United States. • The Edison Machine Works (incorporated 1881) manufactured the Edison Jumbo dynamo and other generation and system equipment. It later became one of the companies forming General Electric. • The Edison Electric Tube Company (established 1881) built the underground conductors needed to build the Pearl Street station and grid. It merged with the Edison Machine Works in 1886. • The Edison Lamp Works (established 1880) was the world’s first electric lightbulb factory, producing the electric lamps necessary for the Pearl Street station. It later became one of the companies forming General Electric. • Bergmann and Company (established 1881) manufactured equipment and accessories for the Pearl Street generating station and later became one of the companies forming General Electric. • The Edison Shafting Manufacturing Company (incorporated 1884) manufactured belts, pulleys, and rotating bars used in shafting gear assemblies and was integrated into the Edison Machine Works in 1885. • The Edison United Manufacturing Company (established 1886) was a sales agent for the Edison Company for Isolated Lighting,

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the Edison Machine Works, and Bergmann and Company. It liquidated in 1889 shortly after the formation of a new company called the United Edison Manufacturing Company. • The Edison Wiring Company (established 1887) was the contractor for installing Edison electric light systems. It was absorbed in 1888 by the Edison United Manufacturing Company. Edison’s network of companies formed the foundation for his system of electric lighting. Once proved, his system unleashed waves of investment, innovation, construction, and diffusion that rapidly spread Edison’s system and changed it beyond even his own imagination. Few innovations require the parallel development of as many component pieces as did Edison’s and yet all must create a network of technical, business, political, and social elements that are tuned to support one another.6 Networks lie at the core of existing markets, reflecting those sustained relationships between organizations whose offerings enhance and enable each other. Marco Iansiti and Ron Levien define them as “communities of entities with differing interests bound together in a collective whole.”7 Think of how the corporations, lobbyists, policy makers, policies, technologies, and people of the oil industry are connected to one another. Or the modern electric sector. Or the modern industrial agricultural economy. These networks are the defining feature of brownfields—the organizing principles are well established and the roles of the individual elements clearly defined. A company’s or technology’s success or failure will depend as much on the competitive advantage of its network as on its strategic positioning or productivity, and once established, these networks reduce production costs (through network-wide economies of scale), increase performance (through network effects), and shape policies and standards to the advantage of their collective interests.8 “The crucial battle,” as Iansiti and Levien note in The Keystone Advantage, “is not between individual firms but between networks of firms.”9 As new opportunities for sustainable innovation emerge across a broad range of markets, the companies able to build new networks will shape those markets for decades to come. Even the most dominant of

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actors faces enormous challenges in attempting to tweak an existing system, let alone overturn it. Yet a new system is often what’s needed to introduce truly sustainable change. The networks introducing and comprising sustainable innovations include, for example, the emerging residential- and utility-scale solar sectors, new distributed energy generation, new electric and fuel cell vehicles, new organic and local food production systems, new building monitoring and efficiency networks, new school nutrition programs, new organic cotton production in the apparel industry, and the new biopesticides sector. These networks range in size from niche markets to global industries and represent everything from relatively isolated changes in components or end products to changes affecting entire sectors and reshaping everything from raw materials suppliers to end-consumer behaviors. Some network players will be dedicated wholly to the new network while others participate—as suppliers, manufacturers, distributors, regulators, and so on—in other types of networks. Johnson Controls, for example, is the leading supplier of lead-acid car batteries and a developer of new electric vehicle battery systems. Toyota sells internal combustion cars, hybrid and electric vehicles, and now fuel cell vehicles. Additionally, some emerging technologies may provide the kernel around which a new network emerges, and others may simply insert themselves into existing networks. For example, the new electric vehicle may spring from a new network of suppliers, manufacturers, and distributors or, as history suggests, could as easily emerge as a new component with a network of suppliers feeding into the established networks of the existing automobile market. The jet engine, for example, integrated itself into rather than disrupted the existing networks of airline manufacturing and operations. Moreover, the boundaries of these networks depend on the strategic intent of those behind their construction, the nature of the technologies involved, and the interdependence of elements.

Nexus Work Defined If innovation does not come from a new idea but instead from the network that is built around it, then nexus work is constructing these new

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networks by reorganizing the old relationships and building new ones. It is not networking, collaborating, or pursuing joint ventures. Networking is to nexus work as playing chess is to redesigning the board, redefining the rules, and changing the pieces; collaborating is to nexus work as attending meetings is to calling them and setting the agenda; and legal agreements like joint research agreements, joint development agreements, and joint ventures are to nexus work as crafting prenuptial agreements are to building lasting relationships. In other words, nexus work involves acting on, rather than in, the existing networks by shaping both the individual elements and the organizing principles that structure their relationships.10 Constructing these new networks intelligently represents a critical capability for the pursuit of sustainable innovation. Indeed, nexus work can be seen as a metacapability—one that enables seeing and bringing together the capabilities that might be needed for success. Ford’s ability to bring together the right people significantly reduced the uncertainties surrounding his efforts to achieve mass production; Edison’s ability to build a new network enabled him to scale quickly and cheaply enough to overturn the brownfield system of gas lighting. As Edison’s system shows us, nexus work involves more than building partnerships across established firms. It requires seeing how technologies, markets, regulatory policies, and other elements—spanning the technical, economic, political, and social realms—can be brought together and rearranged in new ways. It involves building those new connections and adapting them as the system emerges and grows.11 Further, nexus work involves moving between the organizing principles of the overarching network and the particular design of individual elements—from the forest to the trees and back again. As Thomas Hughes says, “Edison’s concepts grew out of his need to find organizing principles that were powerful enough to integrate and give purposeful direction to diverse factors and components.”12 Which companies would work together and how; how much money was to be made (if any) by selling generators, wiring, bulbs, or electricity; how to balance the significant initial capital costs with long-term operating profits; and how to respond to and shape the regulatory policies that affected the growth of

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the system were all obstacles standing in Edison’s way. In turn, his organizing principles influenced the designs of the individual elements: some of his best work involved redesigning the dynamos to work in a grid, and Edison’s lightbulb was not a marvel in its invention but in its adaptation to a new utility system with distinctly different requirements. Put another way, the challenge lies in ensuring that the organizing principles of the network make the most of the individual elements while ensuring that each element makes the most of the network on an ongoing basis.13

The Network Behind Clean Diesel You can see the role of nexus work in Daimler AG’s development of clean diesel. In the mid-1990s, auto and truck maker Daimler’s top executives recognized that, although the internal combustion engine was likely to remain predominant for personal and commercial vehicles, its regulatory regime made innovations increasingly difficult. The incremental lowering of allowable vehicle emissions amounts by US and European regulators was creating an accumulation of equally incremental innovations to meet those requirements. Eventually, Daimler’s leadership believed, these small fixes would turn the internal combustion engine into an expensive and inefficient platform. In response, Daimler committed to creating a new engine platform, BlueTEC, that would enable them to innovate in diesel over the next three decades. Designing a new vehicle represents a major undertaking involving hundreds of engineers and supporting workers, taking five years or more, and costing hundreds of millions of dollars. Integrating a new technology (new to the vehicle, the company, and the market) adds significant risk and uncertainty to the effort. While carmakers make minor technical or cosmetic changes to their car models every year, they do major new designs, which entail retooling their manufacturing lines, roughly every seven years. The company will support those cars for an additional seven to eight years. For trucks, the time between major changes (and continued support) can be twice as long. That makes each vehicle redesign a big bet. That also means a new technology like clean diesel would require thorough testing in the laboratory before being in-

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troduced. If the technology proves unreliable in the field, the costs (in dollars and reputation) of recalling cars and replacing parts can mount quickly. The BlueTEC project began inside Daimler’s research and development laboratories as an exhaust system bolted onto a diesel engine mounted on a movable steel rack. There, the scientists and engineers could work on the engine and continually monitor and modify it. Sitting in the laboratory, the prototype engine was decoupled from the rest of the vehicle’s design, as well as from the actions of competitors, suppliers, and other industry players. But the underlying technology intersected all aspects of vehicle design, not to mention Daimler’s relationships with suppliers, competitors, regulators, and many others. To succeed, Daimler would need to integrate the new technology into each new vehicle design project—no easy task. A vehicle development team consists of roughly a dozen smaller teams, each responsible for specific aspects or functions of the car (e.g., the engine, exhaust system, transmission, safety, cabin interior, and body). Each team works to ensure the parts they are responsible for work as well and as reliably as possible while costing as little as possible, but no team operates in isolation. Each functional piece has to fit and work with everything else, and decisions made by one team often affect the others—sometimes to their benefit and sometimes not. Moreover, Daimler had to piece together a new network integrating and aligning diverse factors and components across all levels of the industry. What made BlueTEC particularly challenging was that it required both a new engine standard and a novel additive: diesel exhaust fluid. Traditionally, drivers need only two additives: fuel and motor oil (coolant, windshield washer fluid, and brake fluid are rarely needed). A new engine design that requires an entirely new additive is not simple. Nexus work began at the earliest stages of the project and quickly involved many of the elements that would make up the final solution: not only the vehicle development teams but also the relevant suppliers, competitors, and regulatory agencies. Initially, the first new connections needed to happen between advanced R&D at Daimler and the new-vehicle design team responsible

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for the first use of the BlueTEC engine systems. To ensure the new technology could integrate both technically and economically into the new vehicle design, three R&D engineers followed BlueTEC’s selective catalytic reduction (SCR) technology out of the laboratory, joining fulltime the ninety-seven-member project team designing the vehicle. The new engine required not only redesigning the exhaust treatment system but also making interdependent changes across a dozen or more design teams within the larger project team; BlueTEC passenger vehicle engines require an additional, large tank to hold the additive. Adding such a tank, snaking new hoses around the body and through the engine of the car, and adding new sensors to the controls meant almost all the other design groups would have to change their designs—some a little and some a lot—to accommodate the innovation. Next, for the new engine design to be successful, both suppliers and competing carmakers had to adopt it. Suppliers wanted to be sure their investments in developing new materials, new designs, and expensive tooling would work with more than just Daimler. Competitors did not want to rely on components supplied by Daimler. And regulators did not want to develop different regulations for every carmaker and engine. Issues included designing common components that fit within each manufacturer’s engine designs, a common means of certifying engine performance, a shared base of suppliers, and even a common marketing language. Additionally, the company would have to ensure that regulators overseeing vehicle emissions—like the US Environmental Protection Agency (EPA) and the California Air Resources Board (CARB)—would accept the new technology. This would pose as great a challenge as the technical one. For policy makers, it was critical that the SCR technology be a platform widely used across carmakers, which in turn required a dedicated SCR working group of regulators, suppliers, and competitors to coordinate design specifications and ensure a shared infrastructure for all car models. Representatives of the cooperating auto companies met with regulatory agencies every six weeks for eighteen months. Finally, the new additive that clean diesel engines used required a new infrastructure to produce, distribute, and sell it at

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retail locations across the country. Those steps ensured that the costs and benefits of this new additive were borne by as many car companies and drivers as possible. Building a consensus among regulators, a new supply chain among suppliers, and a new standard among competitors could not happen independently. Changes in each relationship reverberated across the network. Regulators demanded, for example, that drivers would have minimal responsibility for maintaining the additive. To avoid frequent refilling of the additive tank, Daimler made it large enough (fifteen to twenty-five liters) to last ten thousand miles—longer than the typical service interval—so that drivers need not worry about filling up the tank themselves. The larger tank took up space that otherwise would have housed the spare tire, requiring the wheels team to ditch the spare tire and shift to run-flat tires, which reduced performance and added significant cost. This tire decision, including exploring all its ramifications, took a year to make. To build the distribution and sales channels for the diesel exhaust fluid, Daimler had to work with competitors to find a neutral channel and branding. Thus, as a novel idea, the clean diesel project could comfortably remain on its rack in R&D. But as an innovation redirecting the evolution of the automobile market, it would need the full commitment of Daimler’s leadership—from the board down to the project manager overseeing each new vehicle design—as well as a novel network connecting suppliers, competitors, regulators, distributors, and many others in the European and US markets. And that’s what happened. When Daimler introduced BlueTEC into the market seven years later, the company had created an engine technology and a supporting network. The 2007 BlueTEC-equipped Mercedes-Benz E320 was the first diesel vehicle in the world to meet California’s strict exhaust emissions standards. Clean diesel engines now emit about 30 percent less in greenhouse gases than gasoline engines and get up to 40 percent better mileage. How Daimler developed and successfully launched this innovation offers valuable insights for others into the central role nexus work plays in turning new ideas and new technologies into broad and successful change.

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Nexus Work in Action As a process, nexus work cycles between seeing new ways of organizing a network, building the roles and relationships that make up the new network, and continually adapting roles and relationships as the network evolves over time.14 To successfully develop and launch their clean diesel innovation, Daimler had to engage in nexus work to build the new internal networks that integrated the engine and its additive tank into new vehicle designs, partly accomplished by integrating the R&D engineers with the vehicle design teams; build the new industry networks of competing auto manufacturers and suppliers to manage a collaborative design effort, partly by effectively partnering with common suppliers and industry associations;15 and build the new networks of public agencies, partly accomplished by SCR working group members from product development teams working directly with policy makers to ensure that the design supported, and was supported by, regulators now and in the coming decades. Remember the uncertainty of the long fuse, in which most of the elements of a big bang have already emerged but not yet formed into a clearly defined system? That uncertainty ends when entrepreneurs and innovators define the roles of old and new elements and their relationships and demonstrate the viability of the resulting network. Nexus work has its most powerful effect in these moments when uncertainty is greatest. How important is nexus work to achieving innovation goals? Try this exercise: assemble a team of people inside your organization who have an understanding of where your market, technologies, and regulatory policies are going and assign them to do a premortem. Ask half the team to look back ten years from now and explain why your organization’s innovation was successful and describe the network that enabled that success—its partners, technologies, policies, and market preferences. Ask the other half to take the opposite view and explain why a competitor was able to build a better network and what it looked like. Do their answers suggest you need to engage in nexus work? If so, then do you have the right capabilities to do it well? Ask each team to generate a list of the key suppliers, distribution partners, policy mak-

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ers or regulatory agencies, and complementary technologies that you would need to successfully develop and launch your innovation initiatives. How confident are you that your company could recognize and bring these elements together? What makes a company good at nexus work? Nexus work requires a wide range of skills—strategic, technical, financial, legal, regulatory, creativity, collaboration, and sales—that fall generally into three sets of activities: seeing a new network before others do, building the roles and relationships necessary to a network, and adapting the network’s roles and relationships as it grows. With this in mind, let’s consider each independently.16 See Emerging Networks To see a new network means recognizing, in the thicket of an established system, ways of pursuing your strategic goals by reorganizing existing elements and adding new ones to advance your innovation. Those elements include consumers, customers, competitors, distribution partners, and suppliers—what typically describes the value chain in an industry—as well as regulators, investors, inventors, entrepreneurs, industrial and academic scientists, consultants, media, and political groups. They also include technical artifacts, regulatory policies, debt and equity instruments, purchasing contracts, organizational forms, business models, market preferences, and cultural values. Before Edison began work on the Pearl Street station, most of the elements of electric power and light had already emerged and had been organized into small-scale systems, strings of a few dozen arc or incandescent lights run by an onsite generator, overseen by a local company or sold as isolated systems for customers to run themselves. These early systems already included artifacts like bulbs, generators, motors, steam engines, and wiring as well as engineers and scientists, entrepreneurs, component manufacturers, and early customers. Many other elements already existed in gas lighting—including the customers, investors, utility business models (and franchise mechanisms for growth), established regulatory rules and regimes, and even physical infrastructure (Edison’s early attempts ran electric wiring through installed gas pipes). Edison’s goal,

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as he wrote in his notebook at the start, was “to replace lighting by gas with lighting by electricity.”17 And when Edison set out to build his own system of electric lighting, he could see in competing networks most of the elements he would need to build his network. The same can be said of Daimler’s clean diesel strategy, “to create a diesel engine cleaner than gas,”18 and of the technology, the elements of which, while new to automobiles and trucks, had been developed and used in stationary diesel generators for decades. Further, the automotive suppliers, competitors, regulators, distributors, and customers were already in place. Daimler’s challenge was not to invent anything so much as to reorganize the industry around the new engine technology and its design, manufacture, distribution, regulation, service, and support. In today’s solar sector, many elements of Edison’s time still exist (e.g., the utilities, consumers, regulators, policy makers, investors, entrepreneurs, and scientists) alongside new players (e.g., semiconductor, solar cell, and solar panel makers; installers; remote monitoring equipment; power purchase agreements; and third-party financing instruments), and right now a new network is rapidly taking shape, the dominant organizing principles for aligning everyone’s activities being tantalizingly close to closure. With an awareness of the existing elements and their roles within the existing system, seeing also means recognizing how to reorganize the network. There is no one best way of organizing. How individual elements fit in and support a new network—its organizing principles— differ depending on the strategy and context of the industry and moment. For example, Edison’s system of privately owned power stations fit the economic and political context of the United States. By contrast, the British system had many, smaller power plants (London itself had over fifty plants), reflecting an entrenched regulatory structure that favored municipal authority, and the German system had fewer, larger power plants (about six in Berlin), reflecting a regulatory regime that favored centralization.19 These different network structures, in turn, determined what role each element of the system played. Even the design of individual technical artifacts had to reflect the role each played

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in the larger system. For Edison, this meant determining the energy needs of his initial market (Manhattan); the costs of the raw materials for building his network (e.g., generators, main lines, building wiring, bulbs, and meters); extensive revenue, cost, and profit projections for an ongoing business; and the potential of technologies, customers, investors, and others to fill these needs. For Daimler, this meant determining the needs of regulators—in this case the EPA and the CARB—and suppliers, competing carmakers, car dealers, and customers before each would consider adopting the technology. People in established organizations have a hard time seeing beyond their existing roles (what they do) and their existing relationships (who they work with) both inside and outside the company. Those who are able to see novel roles and relationships between existing elements in a larger network are the people with a perspective that encompasses your company’s strategy, the existing industry, and emerging technologies, market preferences, and regulatory policies from outside. Who in your organization has that perspective? If not any one person, what small group could bring together those complementary perspectives and collaborative personalities that could fill in such a picture? Sometimes it just takes focused effort. For each innovation initiative, task the project management with identifying the critical partners within your organization whose support and commitment will be needed for a project’s success. Then identify the critical components of the external network (including technologies, business partners, and policies and policy makers) crucial to its success. Or think beyond the current initiatives. Form a strategic planning team responsible for identifying the larger trends affecting your environment and for exploring new networks for creating value and preserving competitive advantage related to the trends, or draft a leadership development plan that identifies and further develops employees who have demonstrated the ability to identify, build, and maintain broad-ranging internal and external partnerships. Explore the needs and resources of each of these elements through conversations—talking with partners, experimenting with technologies, understanding trends in policy and science, and so on.

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Having the people and the internal support to engage in those conversations is critical. In particular, do you have the support to engage in those conversations long before they have clear value or well-defined terms of engagement? It takes a clear company strategy and objectives to see how changes in the larger structure of the network might advance your strategy, and it takes confidence in your leadership’s commitment to those objectives to begin those conversations. Finally, and perhaps most importantly, the support and involvement of critical groups and units across your company—legal, sales, finance, marketing, supply chain management, new product development, and even accounting— are as central to success as any new external partners. How willing is each of these groups to reconsider existing relationships and engage in exploratory conversations: for example, how long would it take to get approval from your legal department and other departments to have a conversation with a potential new supplier, customer, or competitor? How hard is it to bring in outside experts to gain outside perspectives on the field or on the potential of other elements to play new roles? Build New Network Connections Building your envisioned network involves defining and establishing new relationships between different partners and includes both building new relationships and disentangling old ones between elements that range from individuals to organizations, to technical artifacts, to regulatory rules, to business models. For example, Edison built a strong relationship with the investor J. P. Morgan, who provided the new system not only financial capital but also critical political capital—gaining regulatory approval for Edison’s Pearl Street station and utility model despite entrenched economic and political resistance of the incumbent gas companies.20 As often, the elements are technical or financial, but establishing how they relate to one another is equally critical. Edison’s utility model depended on vast amounts of copper wiring to power thousands of lights rather than the dozen or so strung together in existing systems. In fact, copper conductors initially accounted for roughly a third of the entire capital costs of building a new utility grid. To make the system work economically, Edison redesigned the incandescent light, using a

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high-resistance filament to reduce the current carried by the distribution lines, hence reducing the wire’s diameter and, thus, its cost. He also had to develop new elements, like wire insulation and electricity meters, that had no role before. Daimler’s leadership similarly understood what the network needed to be approved by the EPA and the CARB, to be adopted as a standard by competing carmakers, to have the components produced and shared by its suppliers, to have service stations carry the new additive and the distributor keep it stocked, to attract car buyers to the diesel engines and away from existing gasoline engines and the new hybrids, and to have this system work profitably and reliably for everyone involved. This entailed working closely with each element—at the level of the individuals and teams responsible for vehicle engineering, supply chain management, regulatory compliance, and marketing—to coordinate their commitment to the new system and to define the roles and relationships they would have to the new technology and to each other.21 The biggest challenge in building new networks lies in managing the inevitable trade-offs between optimizing the performance of individual elements (organizations, technologies, regulations, etc.) and the performance of the system as a whole.22 Edison chose to start new companies rather than contract with existing makers of lightbulbs and generators because he recognized the design of the system was far from complete, and changes in one element would require changes in others. After trying, and failing, to convince existing manufacturers to change their designs, he took on these elements. He noted that he did so “more with an object to make the Edison Electric Light a success than to make money by manufacturing,” and as historian Paul Israel notes, this was likely a critical decision for his ultimate success.23 The optimal structures of these networks vary depending on your strategy and the conditions of the market and technologies, ranging from the loosely coupled commitments of independent firms to the tight coupling of a vertically integrated organization. Edison chose to pursue a network of commitments across independent organizations with the explicit reasoning that further improvements in performance and reductions in costs would result if each organization retained

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individual ownership. Ford chose to acquire and integrate (or replicate internally) previously external suppliers to tightly control all aspects of his system of mass production, in effect trading initiative by individual parts makers for control over the coordination of everything from iron ore to casting to machining and final assembly. Daimler, on the other hand, chose to disintegrate some of its clean diesel R&D capability to ensure competitors had equal access to it. These new partnerships often require substantial commitments from everyone involved, both directly, in terms of investments in new product and process designs or new manufacturing plants, and indirectly, in terms of strategic choices and the paths (and partnerships) not taken.24 These commitments are not made lightly. Indeed, they are made mutually and often only when considerable trust has been established. For Daimler, the clear commitment of their top management (including the board of directors) to the diesel engine and clean diesel technology provided the critical assurances for suppliers, regulators, competitors, and others who needed to make their own commitments to this network. In building these commitments, long-term strategies were shared and opportunities for mutual benefit discovered. Working closely with potential partners in this way becomes a critical source for understanding their capabilities and needs. Daimler’s close working relationship with the EPA and the CARB led to better understanding the needs and priorities of the regulatory agencies and seeing which opportunities or alternatives provided shared value. For example, this was the first vehicle emissions innovation that the US agencies had dealt with that required an entirely new additive and so faced several significant challenges. The proposed system could not add extensive new maintenance requirements for consumers, and so the additive needed to be available, it was agreed, within twenty miles of 80 percent of the diesel car owners in the country. This, in turn, required partnering with Exxon, whose distribution network and gas stations would stock the additives. Further, the EPA insisted that if the additive tank went dry, the vehicle could not continue operating (because it would no longer be within emissions limits), yet the vehicle could not strand a driver. They

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ultimately resolved this with a countdown beginning when the tank is close to empty. The vehicle has twenty starts that involve increasingly intrusive warnings before the vehicle is prevented from starting at all. This gives policy makers the ability and precedent to technically prohibit noncompliant cars, regardless of technology, from running. The effective pursuit of sustainable innovation requires the ability to work directly with a wide range of internal and external individuals, groups, organizations, and even communities as well as with diverse technologies, policies, funding mechanisms, and business models. And it means measuring and managing the trade-offs made by individual elements that bring benefits to the entire system. How well do the people at the core of your sustainable innovation efforts understand the larger network required for success? Who in your organization has a deep understanding of the needs and resources of critical partners, and would they be aware of opportunities that arise to strengthen the network and, conversely, when their actions can undermine it? How clearly can you see the patterns of dependence and interdependence between the different elements: What resources can each provide, what does each need, and what are their individual objectives? How well would they work with each other? And, as importantly, how well would they fit into your plans? How much trust—and support—do you place in your people to see opportunities, make contact and work with outsiders, and make commitments on behalf of the organization?25 Adapt the Network The early success of a new network during commercialization and diffusion creates new technologies, new market preferences, and new political forces that sometimes reinforce the initial elements and their relationships but as often can unleash yet further changes. Remember the big bang. Once a new set of elements and their organizing principles prove themselves commercially and technically viable, new entrepreneurs, investors, and competitors come rushing into the space.26 Once Edison demonstrated his utility model of electricity, scientists, engineers, entrepreneurs, and entire established companies entered the

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field, George Westinghouse and Nicolai Tesla among them. It soon became clear that alternating current was a better fit for the new electric grids that separated electricity generation from its consumption—it further reduced the size of copper mains (reducing cost) and enabled the generating plants to be located even farther away (adding economies of scale by increasing the number of customers each plant served). Westinghouse seized on this opportunity, while Edison fought it; as the economic historian Harold Passer notes, “In 1879, Edison was a brave and courageous inventor, in 1889, he was a cautious and conservative defender of the status quo.”27 The ensuing battle of the systems, as it became known, was played out mainly in the press roughly from 1887 to 1892. In the end, Edison lost more than just the technical standard; he also lost his reputation as an inventive genius and his control over the network of organizations he had built. Similarly, the Ford Motor Company enjoyed almost fifteen years of dominance before General Motors began unraveling the Ford system by preying on its rigidity. General Motors disrupted the tight coupling that gave Ford its economies of scale by introducing annual models and a series of incremental improvements in features. Ultimately, Ford had to completely shutter its factory for nine months to retool to accommodate these new technologies and the ability to make more frequent changes. This is the ongoing work of adapting a network as it grows. The durability of a network depends on how well it retains its flexibility and adaptability. In any successful network, the risks of further change that displaces the original innovators come sooner than anyone expects. One such risk lies in technologies that were uneconomical before the new network and now turn out to be better suited in the new network structure (like alternating current’s advantages in a network organized around centralized production and broad distribution). Or consider the rapid changes under way today in the market for residential and commercial solar power. The central players in this emerging market are still negotiating the elements and boundaries of the network. For example, bundling battery storage with solar panels represents a new revenue source, a new means to reduce the problems of intermittency (that solar works only when the sun shines), and a chance to ex-

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ploit peak demand pricing (when utilities must pay sometimes ten or even a hundred times the normal cost of electricity to meet demand). For electric utilities, already wary of losing their control of (and return on) energy assets, the bundling of battery storage units in solar systems is a threat to their role in and control of the network because the new combination of technologies enables commercial and residential customers (or the solar installers who aggregate their generation and storage capacity) greater means to store power when it is cheap and sell it back to the utilities when it is most expensive. These negotiations are taking place in both the chambers of the public utility commissions and early experiments in the market. Another risk is that once the new network proves itself viable, existing corporations enter and aggressively compete. For example, as discussed in more detail in the next chapter, organic food producers fought and arguably lost control over the evolution of the structure and elements of their network when large-scale food producers and processers succeeded in changing federal organic standards to include many nonorganic ingredients. These new elements can threaten the committed investments and central positions of key new participants and core technologies in the network. Managing the continuing evolution of a network is a problem we would all love to have, but it is a problem nonetheless. If you are not prepared to evolve with the network or, better yet, lead its continued evolution, it will soon grow beyond your control and benefit. Are people in your organization formally tasked with managing and continually exploring the next generation of the new network? Are these people working closely with your network partners to monitor evolving needs and see new emerging opportunities? As importantly, any changes in the network require changes in the roles and relationships within your organization, meaning that anyone tasked with supporting the evolving network must also be adept at driving complementary changes inside your company. Finally, these are not often financially justifiable decisions—pressures for short-term gains can cause additional resistance to the long-term changes that guide a new network. How willing is senior leadership to sacrifice short-term efficiencies or profits or control to allow the network to change over what will likely be years if not a decade?

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In other words, is there a clear strategy and credible commitment guiding your continued support of your company’s nexus work?

u  Mind the Gap The steam engine, lightbulb, automobile, clean diesel engine, solar panel, hybrid vehicles, LED lighting, biopesticides, nutritional school lunches, and so many other promising and (for their time) sustainable opportunities existed long before they were “invented.” Their turning point came with the networks necessary to transform them from ideas into true revolutions: the emergence of critical complementary elements and the leadership of entrepreneurs who recognized and built networks connecting these previously independent pieces. This is nexus work, one of the central capabilities of sustainable innovation, and it involves shaping people, artifacts, and ideas—suppliers, competitors, distribution partners, customers, consumers, regulators, inventors, entrepreneurs, investors, scientists, consultants, regulations, organizational forms, business models, investment instruments, market preferences, and cultural values—into a system guided by a single set of organizing principles. Here are some questions to help you reflect on whether your company needs the capacity for nexus work in your pursuit of sustainable innovation: • Given your company’s innovation strategy and the challenges you see in its path, to what extent does achieving your goal require reshaping your existing roles and relationships, both within your company and with outside partners? Or looked at another way, could a competitor build a better network and succeed in spite of your best efforts? • Do you have a clear view of the disparate elements that are shaping your market over the coming decade and how they might fit together? • How would you rank the ability of your employees to engage in nexus work?

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• Who in your organization has the perspective to see the interconnections of your existing industry? Do you have people, whether as individuals or a team, whose perspectives capture the industry’s entirety, and how easily could you bring them together? • If you can envision the ideal network, do you have the ability to build it? Rate your organization’s capacity to shape the core technologies of an emerging network, the key business partnerships, and even its critical policy elements. • How much will your different functional groups resist working together across the supply chain, manufacturing process, and distribution channels and, ultimately, making available access to different partners? Would they willingly compromise their performance in favor of the network’s? • Is your organization capable of managing and adapting with an evolving network? Do the people managing your innovation initiatives have the authority and expectation to respond quickly to changes? Is the decision-making process in your organization fast and effective enough, or decentralized enough, to keep up with moves by partners and competitors? In addition to developing the skills, activities, resources, and organizations to support nexus work, your organization can unwittingly undermine it: • Does your corporate structure reward groups and individuals for their performance in ways that discourage working across a network? • Do your human resources and promotion policies foster competition across functional or business unit leaders? • Does your culture value consistency and conformity over resilience and change? Optimization of individual units over the performance of the whole company? • How strongly do your employees identify with their current roles and relationships within the company?

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• Does your strategy clearly depend on the success of external network partners? • Is your company’s commitment to its strategy credible to both internal and external audiences? • Are your organizational processes and routines—everything from vendor relations to contracts to intellectual property issues— designed to prevent unauthorized new relationships?

Chapter 5  Managing Science and Policy

For most of us, the opportunities and threats of sustainability will not

come directly from rising sea levels, drought, severe storms, water scarcity, or the other dire and predicted effects of climate change. And not from the mass migrations, environmental degradation, or famine and disease caused by social inequity. They will come instead from the shifting market preferences and competitive practices that are themselves driven by the evolving science and policies of sustainability. Navigating and shaping this science and policy landscape represents a critical capability in the pursuit of sustainable innovation. “Science” here broadly refers to beliefs regarding causality—how things work—and ranges from lay theories to experimentally reproduced and validated near certainties. In other words, don’t limit this definition to the activities of lab-coated men and women. Scientific beliefs are socially constructed and usually the result of contests between partisan interests pushing alternative theories. Scientists are the first to take part in this process, as among scientists it’s the best path toward advancing knowledge. Moreover, science is not simply an explanation of what happens but also an implicit position on what should happen. In this way science and policy are linked because this morality in turn shapes public policy, albeit slowly. The science of sustainability, that is, ­ appening creates not just a different technical understanding of what is h

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but also a different moral understanding of what is and what is not sustainable practice; it is a consensual and often extremely political process of arriving at a new understanding of what constitutes safe, legal, proper, accepted, and even efficient practices. Four hundred years ago, the common belief was that the earth sat at the center of the universe and that the sun, moon, and stars rotated around it. Copernicus developed an alternative theory, heliocentrism, that argued that the sun sat at the center of our universe but also that there was no fixed center for all celestial bodies. Tycho Brahe, Johannes Kepler, and others further developed these ideas over another half century, and then Galileo, using an improved telescope of his own design, made astronomical observations that empirically validated heliocentrism. The Catholic Church took issue with these emerging views, for they challenged not only the scriptures but also the moral (and hence political) power of the church and its doctrine.1 Only when cholera was recognized as a microbial infection spread through the contamination of water supplies by sewage—and not the prevailing theory that it was spread by bad air—did cities and states make massive public investments in clean water and sewage treatment systems (the same can be said for policies at the state and local levels to prevent outbreaks of bubonic plague, dysentery, and Ebola).2 And today, climate change is a century-old scientific theory that still influences policy only at the margins; the science of, and hence policy on, food and nutrition has not kept up with technological changes in production, processing, or consumption. Even where broad consensus and direct causality exists— for example, about the effects of environmental toxins on humans and other species—the science struggles to shape policy against entrenched economic and political interests. This larger landscape of the science and policy of sustainability— and not the direct environmental and social effects—will create many of the opportunities and threats companies will face in their markets. Thus, cigarette companies are less worried about killing their customers than about losing the regulatory policies that allow them to operate. Car companies are less worried about their role in causing climate change than about the changing policies that will determine their costs and

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competitiveness over the coming decade. Food and beverage companies are less worried about diabetes, poor nutrition, or pesticide use than about the changing policies in their markets. Into this mix add the innovations of competitors, suppliers, and others whose evolving business practices change both consumer preferences and regulatory policies. In this way, shifts in market preferences, competitive practices, and regulatory policies shape sustaining innovations, which in turn shape those same preferences, practices, and policies. To build the capacity for sustainable innovation, companies must be able to quickly recognize and respond to emerging opportunities and threats from changing science and policy. The more successful companies have developed the further ability to influence those elements in their field. Established companies in established industries often have these capabilities at their core and in their leadership. The oil companies, gas and electric utilities, automakers, and mining and chemical processing companies long ago built the expertise and established the formal resources to deal with the uncertainties created by science and policy. There’s a reason the oil industry receives ten times the subsidies of clean energy—they’re good at lobbying. So good that lobbying— influencing both science and policy—has become synonymous with entrenched interests of the old industrial model. And while it’s easy to condemn lobbying because it defends the status quo, it is also necessary to change the status quo. A decade ago, most companies and industries didn’t need to deal directly with the science and policy of sustainability. Now they scramble to find chief sustainability officers, launch green initiatives internally, and join industry-wide certification standards— well-intentioned and sometimes useful exercises but more often reactive than proactive. Take organic food. In principle, it’s good for humans, for communities, and for the earth; in practice, it’s a $30 billion market battling existing food companies for shelf space and profits. But a central question emerged early on: What defines organic? Is it the ingredients, farming practices, or sustainable labor practices? Who will measure these, and how? To settle this question, the Organic Foods Production Act of 1990 created the National Organic Standards Board to recommend

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policies regulating the production and distribution of organic food and products. Its task was to define organic farming practices, to establish a national list of acceptable inputs in farming and ingredients in food processing, and in the end, to determine who could legally use the word “organic” in labeling their product. Stephanie Strom of the New York Times describes the rise of big-company influence in organics: Over the last decade, since federal organic standards have come to the fore, giant agri-food corporations like . . . Coca-Cola, Cargill, ConAgra, General Mills, Kraft and M&M Mars . . . have gobbled up most of the nation’s organic food industry. Pure, locally produced ingredients from small family farms? Not so much anymore.3

These corporations and others have come to dominate the fifteenmember National Organic Standards Board in determining what organic means. As corporate membership on the board has increased, so too has the number of nonorganic materials approved for the National List of organic foods. At first, the nonorganics were largely things like baking soda, which is nonorganic but essential to making things like organic bread. Today, more than 250 nonorganic substances are on the list, up from 77 in 2002.

Science, Policy, and Sustainable Innovation We can complain about undue corporate influences at work, citing more evidence that existing interests are using their power to resist change or shape it to their advantage, and have one more reason to disdain politics. Or we can acknowledge that politics and commerce are inextricably twined, that politics plays an essential role in setting industry standards, and that to succeed we must learn to play this game. Until true organic farmers learn how to participate in the politics of their industry, they risk losing out to the incumbent food companies, whose entrenched interests and abilities will continue to affect the science, policies, and practices of the field.4 Recognizing, responding to, and even changing policy can mean the difference between failure and success. Revolution Foods launched

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in Oakland, California, in 2006 to provide fresh and nutritious school lunches (we revisit the company in more detail in Chapter 8). The school districts that are the customers of Revolution Foods rely on science and policy in deciding whether to use the company’s lunches, including (1) the new US Department of Agriculture (USDA) regulations mandating higher portions of whole grains, fruits, and vegetables in school lunches; (2) the relative quality of incumbent providers’ frozen meals; and (3) the increased budgets allocated to lunch programs for the added value of fresh and nutritious foods. Initially, this was a decision and set of standards that needed to be fought one district at a time, but in 2010, Congress passed the Healthy Hunger-Free Kids Act, giving the USDA power to make changes to the National School Lunch Program. Now Revolution Foods and its allies are seeing the benefits of actively engaging with the science and policies of nutrition at the national level. As cofounder Kristin Groos Richmond says, “I see Revolution Foods playing a very important thought leadership role for years to come in this field, setting a really high standard to point to. We’re seeing the results and we’re seeing the demand.”5 In brownfield markets, engaging with policy makers is essential to shaping how innovations are evaluated and regulated. When Edison attempted to build his first electric grid, the entrenched interests in gas lighting, extending from the coal manufacturers to the city-employed lamplighters and including suppliers, customers, politicians, and investors, used their political influence to resist. When Edison first applied for an operating license the mayor flatly denied one, but Edison’s backing by J. P. Morgan won him a license. Then the board of aldermen proposed that Edison pay $1,000 per mile of wiring and 3 percent of the gross receipts; ultimately, that was reduced to $52.80 per mile (note that the gas companies were permitted to lay mains for free and paid only property tax).6 Recall Daimler’s close work with regulatory agencies, the US Environmental Protection Agency (EPA) and the California Air Resources Board, to gain approval for its clean diesel technology and the new additive, which required the company to codevelop the distribution system for the additive and the mechanism ensuring the engine would not run without it. Without this ability to negotiate and shape

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science and policy, innovators are at a distinct disadvantage. As the old adage goes, “You’re either at the table or on the menu.” Understanding and engaging with the scientific and political dimensions of innovation is a critical capability. With respect to declining resources, for example, engaging with the scientists and policy makers in the field enables you to see—and potentially affect—emerging opportunities and threats. With respect to brownfield markets, this capability enables more effective competition with incumbents, whom the relevant science and policy favor. With respect to scale, reliability, and profit, it enables you to influence the definition of quality, which scale and profit continually erode. Insight into and influence over evolving science and policy also mitigate the policy uncertainties associated with sustainability. Finally, that same influence addresses the breakthrough bias by shaping the public policies that reward—through tax breaks, subsidies, penalties, pricing decisions, and other means—one set of alternatives over another. Existing markets are being disrupted today by changes in the science and policy of industrial practices that were, until just a few years ago, accepted, tolerated, or at least ignored. These disruptions increase the uncertainty over investments in innovation—whether to invest in developing new product and process technologies and pursuing new markets or in extending old practices and defending old markets. Most consumers are in the dark when it comes to how their food is grown, harvested, processed, and served, and for roughly a hundred years this has allowed industrial food companies considerable liberties in pursuing profits while meeting regulatory requirements they have codeveloped. Technology and consumer values continue to evolve, however, and now can spread quickly and generate both broad public pressure and individual consumer actions. Remember pink slime? The meat byproduct, approved by the USDA, lost 80 percent of its business within a few short months after its production practices were broadly publicized. Market preferences and regulatory policies changed overnight. “Pink slime” is the informal term for a food additive companies routinely used to increase the lean content of their meat products. Its trade name is “lean finely textured beef ” (LFTB). LFTB was approved by the USDA

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in 1994 as an additive made by removing bone, fat, and other bits from trimmings and treating the remaining beef with ammonia. From the time LFTB was first developed and approved, there were complaints against it, yet not enough to derail its use. A USDA scientist coined the term “pink slime” in an internal e-mail arguing against its use. The New York Times discussed it in a 2009 Pulitzer Prize–winning article on safety problems in the beef industry, with still no change. The end really began only in the winter of 2011, almost twenty years after it was approved for use, when celebrity chef Jamie Oliver ran a segment on LFTB that went viral on YouTube. This triggered a blogger, Bettina Siegel, to post an online petition demanding pink slime be banned from school lunches. In March 2012, ABC News did a series of reports on pink slime, discovering pink slime in supermarket beef and identifying the offending supermarkets by name. Statements from the Consumer Federation of America, a coalition of nonprofit groups, and the National Consumers League (a nonprofit group that advocates for safe food) defended the additive, but companies and regulators alike began a public rush for the exits. Supermarkets and restaurant chains immediately announced they would no longer sell pink-slime-tainted beef, the USDA announced it would allow schools the choice to purchase beef without pink slime (even while assuring everyone that it was a safe and affordable product), and within a year, all but three states had rejected the additive. Twenty years of business were erased in three months. Cargill, the nation’s largest producer of ground beef, lost 80 percent of its customers for pink slime. Beef Products, the primary manufacturer of the additive, closed three of its four plants and laid off 650 workers.7 There are sound arguments for and against LFTB (it is banned in Canada, the United Kingdom, and the European Union), but my point is not whether it is bad or good but rather how quickly science and policy can shift, causing even business as usual to collapse. Other industries and markets are on equally uncertain ground. New York City’s attempted ban on sugary drinks over sixteen ounces, though voted down by the New York Supreme Court, joined similar shifts in opinion and policy concerning the public health risks of soda (like Boston’s 2004 ban of sodas on school campuses).8 The inhumane treatment of pigs

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and cows, fair trade in food commodities, the sale of genetically modified foods, and fair labor practices among apparel and now electronics companies: these traditional (or at least hidden) practices can become liabilities overnight, and new practices that replace old ones or find sudden subsidies become opportunities. Engaging in the science and policy of sustainability as a means to drive innovation involves understanding your company’s impacts—its assets and liabilities—and using that understanding to craft your company’s strategy and the field’s larger preferences, practices, and policies. This knowledge and action play out on four levels that span the company and the larger field: 1. Knowing your company’s environmental and social impacts by recognizing your assets and liabilities and the best path forward to deal with emerging opportunities and threats 2. Knowing the field’s preferences, standards, and policies by understanding how your competitors, suppliers, customers, and regulators measure their and your environmental and social impacts 3. Acting on that knowledge in crafting your company’s innovation strategy, making commitments based on recognized opportunities and threats 4. Acting on the larger field to shape industry-wide preferences, practices, and policies to ensure they support the best solutions possible Note that there is always room in this framework for self-centered knowledge and self-serving actions, but there is also room for truly sustainable innovation.

Know Thyself How will environmental and social pressures—from climate change, water scarcity, social equity, or other issues—affect your company over the coming decade? How are your practices at risk from those changes or well positioned to exploit them? Science and policy are dominant

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features in the landscape of sustainable innovations, and successful companies anticipate shifts in both. They do so by building the capacity to understand the company’s current impacts and how current and emerging policies will affect your operations, including your upstream suppliers and downstream distributors and customers. Most organizations have a hard time seeing these opportunities and threats let alone acting on them. Indeed, many companies don’t want to know. Inventorying their environmental and social liabilities has both moral and legal ramifications—once you acknowledge your shortcomings, how far must you go to repair them? Yet even the most willfully ignorant company can’t keep its industry from changing, and that ignorance can quickly become a liability. A first wave of companies has already confronted the need to understand their environmental and social impacts, often having learned the hard way that it was critical to their survival. In the 1990s, Nike suffered significantly from the discovery that its suppliers in Southeast Asia were employing underage workers, demanding long hours, and paying little. Nike has since taken a leadership role in tracking the working conditions of its suppliers. It is finding how difficult it really is to govern its approximately six hundred contract factories, spread across forty-six countries and employing more than eight hundred thousand workers. At the same time, Nike knows from experience what can go wrong if it doesn’t. A range of companies are now pursuing similar efforts. Walmart faced public resistance as the company’s increasing presence began to affect local economies, and in 2005 CEO Lee Scott embarked on a massive effort to inventory and then reduce the environmental and social impacts of its then six-thousand-plus stores and sixty-thousand-plus suppliers. In 2007 the outdoor apparel company Patagonia developed the Footprint Chronicles to capture the individual social and environmental impacts of its apparel products with the simple directive, “Be completely honest about where our products come from and the resources required to create them.”9 In 2010, Unilever, maker of Dove soap, Axe deodorant, and Hellman’s mayonnaise, among other consumer products, launched its Sustainable Living Plan, inventorying its impacts from its suppliers to its products in use by consumers. Indeed, Ernst and Young reported

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a rise in sustainability reporting over the past decade, with 95 percent of the Global 250 reporting such measures (and stock exchanges in at least twenty countries requiring or encouraging such reports.10 What did these and other companies find? For many, environmental impacts aren’t coming from their office energy use, or the Styrofoam cups in their snack rooms, or even their factories. Instead, the greater impacts lie upstream, in the carbon emissions, water consumption, and working conditions of supplier factories and fields, or downstream, in the use and disposal of its products by consumers. This is what Unilever found when it decided to account for its impacts. Only 5 percent of its greenhouse gas emissions came from its own activities; a quarter came from its supply chain, and the rest, two-thirds, came from the use of its products. Similarly, less than 0.1 percent of its water usage came from its internal processes; half came from growing the raw materials it uses, half from consumers using its products.11 Unilever’s greatest opportunities for innovating lie, for example, in how palm oil growers irrigate their fields and how consumers use water. This holds for most companies: the greatest opportunities and the greatest risks often lie outside their direct operational footprint. Where the environmental impacts are—whether upstream, inhouse, or downstream—varies by company and industry. For retailers, grocers, and apparel companies, the upstream impacts, and hence opportunities and threats, tend to dominate. Roughly 95 percent of Walmart’s carbon footprint comes from upstream: the suppliers who make the blue jeans, grow the produce, and manufacture the toys that Walmart sells. The same for apparel companies like Nike, Levi’s, and Patagonia, for whom a 5–10 percent reduction in the impact of their supply chain equals the entirety of their own direct footprint. For others, the impacts come through their product’s use and disposal. Think auto manufacturers, consumer goods companies, and energy companies. How should we value Ford’s installation of a grass roof on its River Rouge factory relative to the footprints of the Ford Explorers and Expeditions that keep rolling off the line? For these companies, the real footprint is in the efficiency of the planes, trains, and automobiles they make and sell. Finally, some companies’ own activities outweigh those

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upstream or downstream. These include the most energy intensive of all manufacturing sectors—cement, bulk chemicals, iron and steel, aluminum, paper, mining, and glass—but also some of the least energy intensive, like banks, Internet companies, law firms, and other whitecollar service firms. When the least energy-intensive companies set out to reduce their carbon footprint, such efforts are well intentioned but relatively minor in the larger calculus. Knowing your impact enables you to know both your liabilities and your opportunities. Understanding the science and policy of your field’s sustainability issues also gives you insight into your customer’s needs. Often, the direct impacts of environmental and social impacts are felt by customers, who change their buying behavior as a result. Johnson Controls’ Power Solutions business, for example, sells batteries to automakers. The shifting science and policy on automobiles and hybrid and electric cars directly affects the automakers by changing their purchasing decisions and long-term innovation strategies via new regulations on carbon dioxide emissions and air pollutants and mechanisms such as fuel economy standards and consumer tax credits for fuel-efficient vehicles. Johnson Controls’ head of Government Relations, Mark Wagner, describes the company’s innovation strategy as hinging on the “ongoing co-evolution of policy and technology.”12 Understanding science and policy means understanding how they will affect your offerings and their value to customers. How well do you know your company’s environmental impact and exposure? Remember the risks of declining resources, both environmental (e.g., water, oil, metals and minerals, plant- and animal-based resources) and social (e.g., the social contracts). Do you track these risk factors and their potential effects on your business? Campbell’s Soup tasked four teams with promoting sustainability in areas such as community and the environment. “These formal chartered teams are where you can drive accountability,” says Dave Stangis, Campbell’s vice president of Corporate Social Responsibility, Sustainability, and Community Affairs. “You get content expertise, you get decision-making ability and you drive accountability. It’s really the only way I know to make it work.”13 Hewlett-Packard realized that its biggest success, its printer

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business, could also become its largest liability in terms of energy use, paper waste, and other environmental concerns. As it explored options for innovating around these liabilities, one of its first steps was to calculate the energy efficiency of all its computers and printers, putting a carbon footprint calculator online and sharing it with its customers. The calculator even provided comparisons with competing companies’ printers (both favorable and unfavorable). Is someone in your company formally tasked with accounting for these potential opportunities and liabilities?

Know the Field Understanding the field means understanding how your operations, including both your upstream suppliers and downstream distributors and customers, measure against the field’s prevailing science, policy, and practice and against emerging trends in all three. This isn’t easy. More than four hundred indexes offer to benchmark and improve social and environmental practices in the apparel, automobile, electronics, chemical, and other industries. These indexes may seem harmless, especially when there are so many and their noise is so discordant, but which to listen to and what to learn from them is part of understanding the state of the field and which direction it’s moving. It also means integrating the emerging trends in science and public opinion, competitive practices, and regulatory policies that will affect the field and doing so with enough confidence to support your own commitment to pursuing the opportunities for innovation that result. Usually, companies track the science in their research and development groups, public opinion in marketing, competitive practices through engineering, and regulatory policies, if at all, in government relations or compliance offices. To drive sustainable innovations, however, these three forces should be monitored together.14 Johnson Controls is one of the leading energy service companies in the United States, providing energy retrofit engineering for buildings, project management, installation and commissioning, performance measurement and verification, ongoing maintenance and support,

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and financing via performance contracting. The company recently expanded from serving institutional, public-sector customers and projects to serving commercial, private-sector markets, in which there are considerably greater opportunities for business growth and environmental impact but also considerably more challenging and complex customer requirements. Buildings represent a still largely untapped opportunity for emissions reductions: globally, the sector accounts for roughly 40 percent of energy consumption. In the United States, commercial and residential buildings accounted for nearly 40 percent of total energy consumption in 2008 and 38 percent of carbon dioxide emissions and are expected to remain at that level through 2030.15 The development and success of the company’s innovations in building energy use depend on policies that include industry and market subsidies, tax breaks and loan programs, state-level renewable energy standards and environmental policies, and local financing options. In 2010, Johnson Controls established the Institute for Building Efficiency in Washington, DC, dedicating significant resources and talent to providing key decision makers in government, nongovernmental organizations, and business with research and educational resources. Its key objectives include tracking policy developments that affect the company’s markets and clients, providing research to and educating policy makers on upcoming decisions, and providing information on emerging technologies and innovative financial models. Meeting these objectives means engaging with scientists and others in the field to reach a level of understanding regarding the relevant variables, or what should be measured, and the prevailing metrics, or how they should be measured. And it requires a level of engagement and competence that recognizes emerging trends, whether that’s new insights from recent research or practice or shifting metrics in response to changes in available technologies. How well do you and your company know the leading edge of science, practice, and policy in the markets where you compete? Is someone specifically tasked with understanding this, and as importantly, is there a formal role and budget associated with this capability? Where

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is the science heading, and who in the organization knows this? What leading practices in your company and in competitors are best aligned with that science? And what policies at the local, state, and national levels are going to create opportunities or liabilities for your business?

Shaping Innovation Without a means to measure their environmental and social impacts or measure themselves against their competitors, companies are blind to the opportunities and threats of sustainability. At the same time, however, that knowledge does little unless it informs their pursuit of sustainable innovations. Harvard Business School’s Robert Eccles says, “Many, if not most, sustainability reports are more window dressing than substance and so aren’t very effective at influencing the company’s resource allocation decisions.”16 Many of the corporate giants and, recently, tech stars like Microsoft, Google, Facebook, and Apple have announced plans to be carbon neutral, meaning their energy either comes from renewables like solar and wind or is offset by planting trees or other similar activities. But we are interested in innovation, not procurement, and this is no more innovative than buying organic produce. Knowledge is a critical capability, but its value depends on how well it’s wielded to define and pursue your innovation strategy. Done right, the process of gathering data, developing metrics, and setting performance benchmarks becomes a critical tool in setting a sustainable innovation strategy. As Nike’s CEO, Mark Parker, says, “We learned to view transparency as an asset, not a risk.”17 These strategies can be global or local and at the corporate, business unit, or team level. For example, at the global level this understanding guides innovation by setting long-term goals for the management of supply chains, marketing initiatives, and new product and process innovations across the many business units and brands within the company’s portfolio. Daimler’s understanding of the current and future state of market preferences, engine science and technology, and regulatory policies enabled it to define

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and commit to its global strategy for investing in clean diesel. Toyota’s understanding enabled it commit to the Prius and larger hybrid platform, General Electric’s understanding led to its global ecomagination initiative, and Unilever’s to its Sustainable Living Plan. In each case, the ability to understand how science, practice, and policy were shaping the competitive landscape guided the company’s resource allocation decisions and whether to support the innovation efforts of one initiative and not others. The same understanding is behind local strategies at the businessunit and even team levels. Indeed, it sometimes has to in order to support more global initiatives. When Nike recognized that its largest environmental and social impacts, and thus liabilities, depended on its materials suppliers and contract factories, it also recognized that these impacts were dictated by its designers every time they chose fabrics, manufacturing methods, and even vendors. So Nike spent seven years and $6 million developing a design tool, Considered Design, that connects the relevant science and policy understanding to individual choices made by designers at the earliest stages. “This tool is about making it simple for designers to make the most sustainable choices right at the start of the product creation process,” says Hannah Jones, Nike’s vice president of sustainable innovation.18 As designers select fabric types, recycled content, and finishing treatments (like garment dyes or chemical washes), the product is given a score, and alternatives for each of the design choices are provided. Similarly, when McDonald’s wanted to reduce its energy consumption and carbon footprint, it had to rely on the choices made in local restaurants. McDonald’s studied the energy consumption of its stores and then provided its individual restaurant managers with an easy-touse, paper-based audit. The audit helped identify which known savings opportunities managers could focus on first, enabling them to quickly identify and address the greatest opportunities to save energy. The results, according to the company, generated savings of between $3,000 and $6,000 per year per restaurant. Not much individually, but considering that the company has over fourteen thousand stores in the United

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States (and over thirty-one thousand worldwide), that savings in energy costs and environmental impact quickly adds up.19 Whether global strategies or local ones, the challenge lies in overcoming the age-old problem of knowledge management in organizations: “If we only knew what we knew.” Most companies have the right knowledge. It’s rare, however, to have the right knowledge in the right hands at the right time. Often, that knowledge resides in lower-level employees working on local efficiency or sustainability projects or, often, pursuing their own passion or conscience. Indeed, when catastrophes occur, it’s typical for investigations to find that individuals had recognized and attempted to warn the organization, but the layers of management and lack of resources prevented them from having any effect. An example is the 1984 Bhopal disaster, the gas leak that occurred at the Union Carbide plant in India producing the pesticide carbaryl and that is widely considered one of the world’s worst industrial catastrophes. The accidental release of toxic methyl isocyanate, used an as intermediate in the production of carbaryl, affected over 558,125 people and resulted in approximately 3,787 deaths (though estimates range up to 16,000). In the six years leading up to the disaster, company officials were repeatedly warned about the potential risks. Even more tragic was that alternative chemical reactions were available that didn’t require methyl isocyanate and were far less toxic.20 Daimler has executive and management positions dedicated to monitoring and managing energy and environmental policy and to integrating those considerations into the business. Its Office of Certification and Regulatory Affairs works to facilitate learning and engagement between product development teams and regulatory agencies. It was members of this office who traveled regularly between the EPA’s regional office in Ann Arbor, Michigan, and Mercedes-Benz’s Stuttgart, Germany, engineering offices during the development of the first US cars to use Daimler’s clean diesel technology. At these meetings, design decisions were discussed and changes made to ensure that what was feasible was sufficient and that what was sufficient was feasible. Decisions included the cost and availability of the AdBlue (diesel exhaust fluid) additive and how to manage the warnings to drivers that a car had in-

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sufficient additive. This office also educated the engineers on the design teams about current and future policy requirements that affected their work. Engine designers could not only work toward meeting current emissions standards but also prepare their designs for the tightening of those standards over the seven-year lifespan of a car model. Do the people in your organization who understand the science and policy of sustainability have a voice in the strategic direction of the firm? Clay Nesler, vice president of Johnson Controls’ Global Energy and Sustainability, oversees the Institute for Building Efficiency. He also leads a global Center of Excellence responsible for energy and sustainability strategy, policy, innovation, and nongovernmental organization relationships. This management structure focuses on the integration of energy and sustainability strategy, policy, and innovation and as a result has been key to identifying and incubating low-carbon innovation opportunities for the company. In your company, are the individuals and offices tasked with understanding the science and policies of sustainability involved in the strategic planning process? Are they even present at the table? Consider, for example, how often emerging strategic opportunities in your company have been defined by changes in policy or advances in science. Moreover, consider how often your company’s liabilities, which can range from discoveries of unfair working conditions to inhumane treatment of animals, to scientific findings of the health hazards of your products, to toxic chemicals and waste, have influenced resource allocation decisions. Or do they remain strictly local and thus nominally deniable issues decided by equally local decisions?

Shaping the Field Let’s go back to the long fuse and big bang. That long fuse looks like a chaos of activity as innovators, suppliers, customers, investors, and regulators pursue different strategies with no overarching direction. Then, seemingly overnight, a single trajectory crystallizes out of that chaos. Those companies guiding the outcome of this process—particularly how and when a field comes together in terms of its science, policies, and practices—have created the best conditions for their own innovation

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strategies. Reaching consensus on the science and policy of sustainability doesn’t mean reaching the one right way; it means the field converges on a single and accepted way to account for each organization’s environmental and social impacts and invests accordingly. A single accepted way to measure performance and make decisions reduces uncertainty and frees everyone to make commitments they would otherwise delay or avoid altogether. Reaching consensus is not easy. In existing industries, innovation changes the balance of power. Shaping the science, practice, and policy of your market or industry is as much an exercise in power as it is an exercise in reason. As Jeffrey Pfeffer, management professor at Stanford University, writes in Managing with Power, Unless and until we are willing to come to terms with organizational power and influence, and admit that the skills of getting things done are as important as the skills of figuring out what to do, our organizations will fall further and further behind.21

He’s talking about the need to engage in the politics of organizations, but in pursuing sustaining innovations, it is equally important to engage in the politics of fields and shape the standards by which new innovations are measured, certified, legislated, and even mandated. Become adept at the politics of the science and policy landscape or risk being washed out. This is what happened with the organic food industry, and other industries facing similar challenges. Consider the efforts of that unlikely hookup of Patagonia and Walmart, which joined forces in the Sustainable Apparel Coalition (SAC) with the goal of creating an industry-wide tool to measure the environmental and social dimensions of their apparel and extensive supply chains. The coalition’s mission is to lead the industry toward a shared vision of sustainability built upon a common approach for measuring and evaluating apparel and footwear product sustainability performance that will spotlight priorities for action and opportunities for technological innovation.22

If anyone can mainstream sustainable practices, it’s this coalition. Launched in spring of 2010, the SAC now comprises over fifty members

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(adding two to three new members every month), many of them the biggest retailers, apparel companies, and distributors. Members include Adidas, Arvind Mills, ASICS, C&A, Columbia Sportswear, Duke Center for Sustainability and Commerce, DuPont, DyStar, Environmental Defense Fund, Esprit, Esquel, the Gap, H&M, HanesBrands, Huntsman, INDITEX, Intradeco, JC Penney, Kohl’s Department Stores, Lenzing, Levi Strauss, LF USA (a division of Li and Fung), L. L. Bean, Makalot Industrial Company, Marks and Spencer, MAS Active, Mountain Equipment Co-op, New Balance, Nike, Nordstrom, Otto Group, Outdoor Industry Association, Patagonia, Pentland Brands, Pratibha Syntex, PUMA, REI, TAL Apparel, Target, Teijin Fibers, Textile Exchange, Timberland, Tiong Liong Corporation, the University of Delaware, the US Environmental Protection Agency, Verité, VF Corporation, Walmart, WL Gore and Associates, and WRI.23 Collectively, these companies account for roughly 30 percent of the apparel sold worldwide. The SAC isn’t the first attempt to build a sustainability index; the market is flooded with indexes, certifications, ecolabels, and so on. And it’s not the perfect tool to capture all aspects of the sustainable life cycle—none will be. The challenge isn’t being the first or the best; it’s to become the standard that shapes science, policy, and practice.24 When Johnson Controls introduced its start-stop battery in the European automobile market, the battery was welcomed as an affordable and straightforward way to quickly increase the gas mileage of most vehicles by 7–10 percent. Cars using the battery shut off their engine at stoplights or while idling and immediately start again when the driver released the brake and stepped on the gas pedal. A thirty-miles-pergallon car became a thirty-three-miles-per-gallon car with the swap of a battery and minor adjustments to the wiring. However, when Johnson Controls attempted to introduce the new battery into the US market, it met resistance. While the battery technically improved gas mileage, the driving profile used by the EPA to determine car mileage included less idling than the similar European measure. As a result, the improved mileage would not be recognized under the emissions standards and hence was not of value to carmakers unless they worked with regulators to change the way improvements are measured. So while estimates put

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penetration of the start-stop battery at 80 percent of the European and roughly 40 percent of the China markets by 2018, until carmakers can get credit for the added efficiency, it’s expected to only reach 35 percent of the US market by then. Johnson Controls’ ability to work closely with the EPA remains critical to deploying the start-stop battery as a valuable solution for US customers.25 Without the capacity to recognize emerging issues, build the necessary coalitions and consensus, and shape the science and policies of the field in ways that create opportunities, sustainable innovations will not see the light of day. How much influence do you and your company have over how consumers, competitors, and policy makers view the science and policy landscape in your industry? As the field converges on new market preferences, new competitive practices, and new regulatory policies, do you have a seat at the table? If not, how exposed are you? Could you identify individuals in your organization who are influential at the field level? What industry coalitions, standards committees, or policy debates are you aware of and involved in?

u Mind the Gap The ability to engage with the science and policies must be treated as central to the pursuit of sustainable innovation, on par with engineering, marketing, manufacturing, supply chain management, finance, or accounting. The four levels of engagement—knowing your own impact, knowing the field’s impact, shaping your own strategies, and shaping the field’s advancement—should reflect the relative influence science and policy have over your competitive landscape. Take Daimler’s Office of Certification and Regulatory Affairs and Johnson Controls’ Institute for Building Efficiency.26 Both offices are well established and well staffed. Many companies have established prominent positions like chief sustainability officer. But for many, this position is primarily focused on overseeing operational improvements and issuing sustainability reports. Rarely does it extend beyond the first or second levels. Indeed, Nike even changed the title of its chief sustainability officer, Hannah Jones, to

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vice president of Sustainable Business and Innovation to emphasize the greater expectations of this role. The different activities described in this chapter require a wide range of skills, including expertise in product and process engineering, marketing, supply chain management, government relations, regulatory policy, compliance, and strategic planning. All these skills seldom reside in a single person. It’s equally hard to integrate them into an office previously focused on just one, so repurposing existing offices such as Government Relations or Compliance is not sufficient. Obviously, much depends on the particulars of each company’s size and situation—small companies can’t afford to build a large group dedicated to understanding their impact and engaging with the larger field; large companies can’t afford not to. Consider the following questions: • Does your company have an adequate understanding of the opportunities and threats that will come from changes in science and policy in the coming decade? • How much of your firm’s strategy is informed by knowledge of your own environmental and social measures and by the direction of the larger field? Rate your confidence in making commitments based on this knowledge. • What role does the understanding of science and policy currently play in identifying, prioritizing, and managing new innovation projects (not just those labeled sustainable)? How many of the innovation projects in your pipeline clearly depend on getting the science and policy right? • Are there individuals or offices dedicated to understanding your organization’s environmental and social impacts? If so, are those people marginal to the business unit or integrated into its top management team? How much insight into and influence on the organization’s long-term strategic objectives do they have? • If there are not such individuals or offices, is there need for a separate and central function for tracking the science and policy of sustainability in your markets? And what resources and influence

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would this group need to be successful—internally and externally and in both operations and strategy? • Are there well-developed tools or processes to ensure the decision making at all levels of the organization account for the environmental and social impacts of the company’s operations? Again, if the current state of your abilities to engage with the science and policy landscape falls short, what actions can you take to build your desired capabilities?

Chapter 6  Recombinant Innovation

Read the websites, press releases, and articles on clean technology

these days, and they are filled with the latest university or national laboratory research that promises to change the world. Innovation has long been associated with new and disruptive technologies—the newer, the better. The lightbulb disrupted the gas lamp; the automobile disrupted the horse and buggy; the steamship disrupted sail. And today it’s the promise of advances in solar, wind, biofuels, electric and hydrogen fuel cell vehicles, genetically modified foods, and countless smaller but no less disruptive technologies. Reading all these announcements, it seems as though a breakthrough solution is always just around the corner. But in fact, the truly breakthrough technologies come by combining, integrating, and improving on the best of what’s already out there. Regarding this recombinant nature of innovation, Abbott Payson Usher, a historian of technology, noted in 1929, “Invention finds its distinctive feature in the constructive assimilation of pre-existing elements into new syntheses, new patterns, or new configurations of behavior.” In 1934, the economist Joseph Schumpeter wrote of innovation that “to produce other things, or the same things by a different method, means to combine these materials and forces differently.”1 It’s an old idea that innovation comes from the novel combination of existing elements, but it’s an idea as often overlooked in the histories of

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innovation as it is in the gushing praise of some new laboratory invention. Watt’s steam engine was built from pieces of a Newcomen engine, the first steamships combined steam engines with existing schooners, Edison’s system drew its technical pieces from competing electric lighting companies, and Ford’s Model T followed several decades of earlier vehicles. Today’s sustainable innovations have similar origins. The original Tesla Roadster combined a Lotus Elite body with an all-electric power train using off-the-shelf lithium ion laptop batteries. Indeed, from 2007 until 2012, Group Lotus produced completed Roadster vehicles, minus the electric power train, which shipped from their factory in Hethel, England, to Tesla’s Menlo Park, California, facility where Tesla installed the power train.2 Radical transparency in today’s food supply chain builds on information technology and tracking systems adopted in retail and logistics by Walmart, UPS, and others. This doesn’t mean innovation is easy. Smart meters are relatively dumb computers, yet their development and deployment has been anything but simple. Hydrogen fuel cells made their first appearance in the late 1830s, were used in the 1940s for stationary power systems, and were further developed in the 1960s for the NASA space program. The first hydrogen fuel cell vehicle was developed in the early 1990s, yet the technology still awaits its breakthrough moment. The first solar cells were developed in the 1880s, and while much of the solar industry’s advances rode on the shoulders of developments in semiconductor manufacturing beginning with the 1960s, the technology has yet to have its full impact. Biofuels were used to power Ford’s and Daimler’s early cars; more recent advances came from equipment and processes for converting corn into high-fructose corn syrup and now from the biotech industry, but the future of biofuels still remains uncertain. In other words, innovation is hard enough without having to invent anything. Rather than a focus on creativity—thinking out of the box, encouraging wild ideas, brainstorming, and installing foosball tables—the pursuit of sustainable innovation requires the ability to recombine the best of what’s already out there. Indeed, this is the basis not only for the generation of new solutions but also for their impact in the market.

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Henry Ford’s Old Ideas Recall the story of the Ford Motor Company. Ford’s innovation wasn’t the car, it was the mass production of such an affordable, rugged, and profitable car. On October 1, 1908, Ford introduced the Model T, a lightweight yet durable car with a twenty-horsepower, four-cylinder engine, a top speed of about forty-five miles per hour, and gas mileage of from thirteen to twenty-one miles per gallon. At $850, it was an instant success in a market waiting for an affordable car. This began the seven-year development effort that would quickly disrupt the automobile industry. In the final three months of 1908, the Ford Motor Company built close to 1,600 Model T’s. By 1914 the number had grown to 265,000, and during that time the price steadily dropped to $490 (ultimately reaching $260). A closer look at the origins of mass production reveals the advantages of recombining the best of what’s already out there, or recombinant innovation. While many small innovations came from the auto industry just before the Model T’s introduction (e.g., electronic ignition, carburetors, pneumatic tires, and engine, transmission, and steering elements) and an equal number came from elsewhere (e.g., vanadium steel from France, stamped metal equipment from bicycle production, and casting innovations from the railcar industry), four core technologies drove the development of mass production at Ford. The first was interchangeable parts. When the Ford Motor Company began producing the Model T, it announced, “We are making 40,000 cylinders, 10,000 engines, 40,000 wheels, 20,000 axles, 10,000 bodies, 10,000 of every part that goes into the car . . . all exactly alike.”3 While this was a first for the automobile industry, the idea of interchangeable parts had been around for over a century. It began in 1801 when Eli Whitney proposed building thousands of identical horse pistols using the new system of interchangeable parts. Over the next century, the machine-tool industry emerged to produce identical parts with such accuracy and speed that, by the time Ford began tooling up for the Model T, machines, lathes, punch presses, and drill presses were already

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producing consistent parts for bicycles, sewing machines, firearms, and agricultural equipment. As importantly, skilled engineers grew up using and designing these tools. To many within Ford and the automobile industry, this technology was revolutionary, but Max Wollering, one of the engineers Ford hired to design the car, tools, and factory incorporating interchangeable parts, said, There was nothing new [about interchangeability] to me, but it might have been new to the Ford Motor Company because they were not in a position to have much experience along that line.4

The second core technology was continuous flow production. Before the Model T, Ford Motor Company like all the other car manufacturers at the time followed the artisanal production process. Suppliers would make and ship batches of parts and subassemblies to the final assembly plant on Piquette Avenue, where small teams would assemble individual cars on a stationary assembly stand. When Ford built a factory dedicated to producing only the Model T, the company abandoned these old notions, reorganizing production around the flow of work. Ford invested in machine tools that were dedicated to one operation, like cylinders bored in six engine blocks at a time, and he built conveyor belts and gravity slides to move the work from one machine to the next, so that materials continuously flowed from inputs to outputs. To do this, he borrowed from the techniques and equipment already being used in the production of cereals and flour, particularly the automatic all-roller, gradual-reduction mill, which was described as “the first in the world to maintain under one roof operations to grade, clean, hull, cut, package, and ship oatmeal to interstate markets in a continuous process.”5 Oscar Bornholdt, who had the job of tooling up the Highland Park factory for the Model T, had studied the layout and machine tools of canning operations and other similar continuous flow factories and readily admitted, “At the Ford Plant, the machines are arranged [sequentially] very much like the tin-can machines.”6 The third technology of Ford’s mass production was the assembly line. With interchangeable parts and a continuous flow process, Ford’s engineers began to rethink the role of the worker. Traditionally, roving

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teams of skilled workers would move down a line of assembly stations, performing a specific set of tasks. The assembly line arranged the workers in a line, giving each a simple task to do before moving the work to the next man, who would perform his simple task, and so on. The assembly line was revolutionary in its impact at Ford, but again, it was not new. Henry Ford credited the “disassembly” lines of Chicago meatpackers for the original idea, in which whole pigs and cows came in at one end and cuts and parts went out the other, and the workers stayed in one place while the carcasses moved past them on a chain. William Klann, head of the engine department at Ford, recalled touring Swift’s Chicago plant, thinking, “If they can kill pigs and cows that way, we can build cars that way.”7 The fourth major element of mass production technology was the electric motor. In the nineteenth-century, factories were built around a central steam engine, which powered machinery throughout the plant using a complex system of central shafts powering local ones that powered individual machines. Belts would break, shutting down whole lines or even the entire plant and costing as much as 25 percent of the plant’s productivity. As late as 1919, some 50 percent of automobiles were manufactured using central steam engines—the only exception being the Ford half.8 While electric motors were being used in textile production, printing, streetcars, and the first automobiles, bringing them to mass production was revolutionary. Ford’s engineers could now design a factory that used continuous flow production, easily experiment with new layouts of the factory floor, move machines without concern for the overhead shafts that once powered them, and easily experiment with running the machines at different speeds. Ford’s mass production had an irreversible effect on the automobile industry, manufacturing, and society—not because the technology was novel but just the opposite. Ford drew from existing technologies and from the people and ideas associated with them. Ford was well aware of this, once testifying, I invented nothing new. I simply assembled into a car the discoveries of other men behind whom were centuries of work. . . . Had I worked fifty

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or ten or even five years before, I would have failed. So it is with every new thing. Progress happens when all the factors that make for it are ready, and then it is inevitable. To teach that a comparatively few men are responsible for the greatest forward steps of mankind is the worst sort of nonsense.9

Despite inventing very little—if anything—Ford’s innovations were remarkable. In 1914, when most of the elements of mass production were in place, Henry Ford with his 13,000 employees produced almost 300,000 cars, while 299 competing car makers relied on 66,350 employees to produce only 280,000 vehicles.10 The same story holds for other equally dramatically technological revolutions. The first practical internal combustion engines were steam engines that injected turpentine, rather than steam, into the pistons. The first commercial steam railroads merely replaced the horse-drawn wagons carrying ore along the wood and iron rail lines built to guide the heavy wagons. In the green revolution of the twentieth century highyielding wheat strains (whose stalks often fell over before harvest) were combined with dwarf wheat cultivars (which had short, strong stalks) to create novel wheat cultivars. Fracking (hydraulic fracturing)—either the best or the worst development for climate change—has had a rapid and widespread impact in part because it combines two existing practices, horizontal drilling (developed in 1929 and commercialized in the 1980s) and hydraulic fracturing (first commercialized in 1947). The combination was first experimented with in the 1980s before taking the world by storm in the last decade. Today, Daimler’s clean diesel technology is built on a known technology, selective catalytic reduction (SCR), that was first patented in 1957 and has been used as an exhaust treatment system in stationary diesel engines since the 1980s. By the time Daimler committed to using it in vehicles, the challenge was not inventing anything but rather integrating and improving its performance in long-haul freight trucks and passenger cars, in which space and weight are at a premium. Johnson Controls’ start-stop battery uses an absorbent glass mat technology developed and produced for marine applications, motorcycles, and remote power applications in which du-

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rability and deep discharge are valued. The technology’s existence made development of start-stop batteries involve significantly less uncertainty and investment on the part of both Johnson Controls and its automotive customers. What does this mean for your pursuit of innovation? Rather than chasing wholly new ideas, focus on recombining old ideas in new ways. Rather than insulating your innovation efforts from other operating divisions, customers, or suppliers, draw extensively from these partners. Rather than nurturing individual geniuses, develop strong networks that foster collective efforts both within and outside their boundaries. The more you can build innovations on existing elements—alreadydeveloped technologies, proven business models, experienced executives, established supply chains, and savvy customers—the better your chances for gaining widespread adoption and having significant impact.

Why Old Ideas Are Better than New Ones Recognizing and recombining existing technologies is a core capability of sustaining innovation. Untested technologies generate many of the uncertainties inherent in pursuing sustaining innovations—not only whether they will work but whether they will work at scale, profitably, and predictably. This uncertainty affects everyone from customers hesitant to adopt a novel technology to companies hesitant to invest in its development to suppliers and regulators hesitant to accept and adapt to it. Combining existing technologies that have demonstrated use in other industries reduces much of this uncertainty. Henry Ford was able to tour the Swift meatpacking plant in Detroit and see for himself what the assembly line looked like in action long before he bet on its implementation in his own factory. Johnson Controls could point to its existing marine deep-cycle batteries and the production facilities already in place before committing to developing and selling the new start-stop battery. Recombinant innovation also overcomes the brownfield resistance to emerging technologies that often threatens to disrupt the existing industrial order. One of the benefits, and potential dangers, of recombinant

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innovation lies in its ability to tap the established economies of scale, experience, and even political influence of technologies and companies in other sectors. Why do you think we have corn ethanol as a fuel additive? The mandating of corn ethanol as an additive in gasoline testifies to the relative political power of agricultural titan Archer Daniels Midland (ADM) and the oil companies as well as the benefits of building a new fuel supply based on the established methods, supply chain, and distribution processes used by ADM in producing high-fructose corn syrup. Indeed, in the beginning, ADM lobbied for federal mandates for ethanol because it used the same equipment that produced high-fructose corn syrup. Since the sweetener was used primarily in soft drinks for which (at the time) demand dropped during the winter, there was a need to make use of the idle equipment in the off months.11 ADM’s existing technology, supply chain, and experience wielding political influence were critical elements of the innovation of corn ethanol. Similarly, with recombinant innovation you can overcome the faster-better-cheaper conundrum. As was clear with Ford’s development of mass production, the only means by which he could build a better product at the scale of the market opportunity he saw with the economies of scale he needed was through the widespread adoption of existing technologies. When Ford’s engineers introduced the assembly line to the factory, the results were immediate and obvious. The first experiments were done in the magneto assembly room, where workers had traditionally assembled magnetos individually and had, on average, produced roughly one every twenty minutes. The first day of the experiment, workers averaged one every thirteen man-minutes—immediately reducing labor costs by a third. Within a year they would produce one magneto assembly in five man-minutes. Few experiments with innovation prove themselves on the first day, but the assembly line at Ford did. Within a year, most of the other departments at Ford had changed over to an assembly line process.12 Finally, the pursuit of recombinant innovation reduces the effects of breakthrough bias—the bias toward bold technological or market leaps that encourages managers, regulators, and others to prefer funding breakthrough technologies despite their inherent risks. Rather than

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searching for new and revolutionary technologies, focusing on building novel applications for existing technologies and novel combinations of existing technologies is often more effective for reaching the market sooner, with more reliability.

Building the Capabilities for Recombinant Innovation When the goal shifts from invention to inventive recombination, the organized pursuit of innovation changes dramatically, not simply in terms of which people you hire and how they search for solutions but also how your organization’s culture and structure supports and rewards that process. Thomas Edison, Henry Ford, and their modern counterparts were capable of one breakthrough after another because they focused on recombining existing technologies rather than inventing new ones. The challenge for modern companies is the same as it was for companies a century ago: learning about what’s already out there, identifying how it can solve old problems in new ways or new problems in old ways, and putting together the new combination of old ideas, people, and technologies.13 There are two relatively distinct strategies for the organized pursuit of recombinant innovation. The first is to be a dedicated broker. Rather than focus on offering a small portfolio of products for a single market, develop a broad range of solutions for an equally broad range of markets. Professional service firms most often use this strategy: design firms, marketing agencies, law firms, accountancies, and management consulting firms. This strategy was at the core of Edison’s initial success. Before he committed to building out his system of electric lighting, his Menlo Park, New Jersey, research laboratory consulted for a wide range of firms in an equally wide range of industries. From 1876 to 1881, Edison’s laboratory produced innovations in high-speed, automatic, and repeating telegraphs; telephones; phonographs; generators; voltmeters; mimeographs; lightbulbs and filaments; and vacuum pumps. Edison said he built the laboratory for the “rapid and cheap development of an invention” and promised “a minor invention every ten days and a big thing every six months or so.”14 And he delivered. In six years of

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operation, Edison’s most prolific period as an inventor, the laboratory generated over four hundred patents and was known worldwide as an invention factory. In the Menlo Park laboratory, Edison fostered ideal conditions for pursuing innovation through technology brokering. Working for a range of clients and in a range of industries, Edison moved easily through these different industries, enabling him to be the first to see how ideas developed in one industry might be useful in another. Getting his start in the 1860s, for example, Edison’s earliest products brought the ideas and objects of the emerging telegraph ­industry—in which electromechanics was first commercially introduced—to other markets. His electric fire and police alarms consisted of a dedicated telegraph line from house to police station. His electric mimeograph pen borrowed from a perforating device in automatic telegraphy that punched holes in paper to record the dots and dashes of incoming signals.15 What made Edison’s laboratory so successful? Not the ability to shut itself off from the rest of the world, invent new technologies, and birth new markets. Exactly the opposite. It was the ability to connect that made the laboratory so innovative. Edison borrowed often from the ideas of other industries. The laboratory’s range of clients from many different industries meant that any one development project offered “valuable spillovers of information” that they would apply in other projects.16 The historian Andre Millard notes, “If [insight from a project] provided the key to another problem in a totally different project, [Edison] was prepared to quickly exploit it. The new laboratory was built with this kind of flexible innovation in mind.”17 Modern companies like IDEO and Design Continuum, known for their ability to generate innovative solutions seemingly on demand, pursue very similar brokering strategies, bridging the many different markets and industries in which their clients compete.18 Morrison and Foerster’s clean technology law practice was developed to offer corporate and litigation services and technical expertise in intellectual property, energy, and environmental law. The more they deal with a variety of legal issues associated with sustainability for different clients, the more they are able to recognize and advise their other

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clients on these same issues. So too, management consulting firms like Accenture, Booz-Allen, and McKinsey are building out their sustainability practices and, in the process, creating the conditions for bringing the lessons learned with one client to bear on the problems of others. Does your firm work with clients across a range of industries? If so, how well does it bring the lessons learned from each client engagement to the next—particularly when those engagements span different industries or regions? Could you build a practice around identifying and recombining the best elements of sustainable innovations? When a team works with a client in one industry, how likely are insights to reach other teams working elsewhere? These insights, learned from the practices of one industry, can become sustainable innovations when they are brought to bear on the problems faced by clients in other industries. It’s equally important, however, that when Edison began to put together his system of electric lighting, investors were reluctant to back someone who moved so easily among different industries. This brings us to the second strategy a company can use to pursue recombinant innovation: the ability to recognize opportunities for recombinant innovation while staying focused on its markets and committed to its innovation strategy. Instead of brokering, this strategy pursues a single product for a single market. Edison’s investors wanted someone who would stick around long enough to build a successful new venture. So in 1881, Edison announced, “I’m going to be a business man, I’m a regular contractor for electric lighting plants and I’m going to take a long vacation in the matter of invention.”19 Edison had made his reputation on his ability to innovate by recombining existing ideas, but at that point, he committed the full resources of his laboratory to building a commercially successful system of electric lighting. Henry Ford focused his company on mass producing the automobile. To do this well, he formally charged his engineers with searching broadly for what had already been done. He gave Walter Flanders and Max Wollering carte blanche to build a new system of manufacturing automobiles on the basis of what they had seen and done in other industries, and he intensively studied and then replicated the disassembly lines of the meatpacking industry.

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For the utilities and IT companies that successfully develop and deliver smart meters and the products and services that will build on that platform, the same challenge awaits. Companies must learn how to search broadly to find the right elements and move quickly to combine them to innovate in their markets. And rather than giving R&D staff rewards and recognition for patents produced, papers published, or technologies developed in-house, this means rewarding the relationships R&D groups build across the organization and outside it: What percentage of new innovations come from outside in terms of overall projects and revenue from those projects? Such measures and reward systems force R&D centers to build stronger ties to the operating divisions and to outside communities. The process of bringing outside ideas into the organization to develop new products and processes has existed as long as organizations have. It played a central role in the rise of corporate R&D in the first half of the twentieth century. A study looked at the origins of DuPont’s most influential innovations, as measured by the organization’s growth, that emerged between 1920 and 1950, such as rayon, Duco lacquers, cellophane, synthetic ammonia, neoprene, Lucite, nylon, Teflon, the refining of titanium, and Dacron. Twenty-five innovations constituted 45 percent of the total sales in 1948. Of these, DuPont developed ten and acquired fifteen from outside; eighteen were product innovations, of which DuPont developed five and acquired thirteen. The remaining seven were process innovations, of which DuPont developed five and acquired two. In other words, innovation at DuPont from 1920 to 1950 came mostly from ideas developed elsewhere. However, the president of DuPont, Crawford Greenewalt, said, “[Of] the DuPont Company[,] and I believe this is true for the chemical industry, I can say categorically that our present size and success have come about through the new products and new processes that have been developed in our laboratories.”20 Open innovation was and is a relatively standard practice, even in large companies with well-established R&D laboratories. What isn’t standard is publicizing that practice. The image companies project may be of generating breakthrough inventions, but the prevailing practice is one of recombination.

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There are many opportunities, for example, to bridge the otherwise disconnected communities in a firm’s external network. For some, this means bringing the firm’s technical expertise to new markets and industries. Hewlett-Packard did this initially in moving from engineering diagnostics to medical imaging, communications, computing, and printing, and advances in one field often led to breakthroughs in others. Others may find dramatic gains simply by solving the problems of one division with the technologies already developed in another, as 3M has done by applying its microreplication technology across the range of 3M’s markets. Yet other firms may benefit by bridging with customers or suppliers—as Toyota did in sharing best practices with suppliers when developing its lean production methods. Within large corporations, the practices and experiences of the many different divisions create the potential for brokering technologies between them. Consider the case of PureCycle, introduced by heavy-equipment manufacturer United Technologies Corporation (UTC). UTC has five dominant and distinct business units—Pratt & Whitney, Sikorsky Aircraft, Hamilton Sundstrand, Otis Elevator, and Carrier. The first three are in aerospace; the last two compete in commercial markets. Each has a long history of innovation, first as an individual company and then as a business unit within UTC. But because of the history of their acquisitions and the management structure and culture of UTC, each operates relatively independent of the others. The independent business units at UTC had the potential for innovations if and when the ideas and experiences of the different business units could be combined. In 2002, the company brought together the best technical talents from across the different units, asking them to participate in a series of two-day brainstorming sessions. The objective was to identify opportunities in one market that could be solved with new products and services built from the existing elements of the other units. The team quickly recognized the potential in combining their existing expertise and technologies in heating, cooling, and power generation to create a revolutionary clean energy product. PureCycle enabled industrial customers to convert waste heat to electricity at below-market prices and, as importantly, consisted entirely of existing components drawn from

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Carrier, Pratt & Whitney, and UTC’s central research center. The market opportunity looked promising as well since, in the United States alone, industrial plants emit enough waste heat to generate fifty gigawatts of electricity. The technology behind PureCycle comes from well-established chiller technology, something Carrier had developed, manufactured, and sold for decades. Running a Carrier chiller in reverse and combining it with two heat exchangers used in big commercial air-conditioning units, the brainstorming team realized, would affordably convert hot water (as low as 165°F) into electricity. And because of the simple design structure, the PureCycle units could be manufactured quickly, profitably, and at scale.21 A Carrier engineer, Thierry Jomard, transferred to UTC Power to lead the PureCycle development effort. As he explains, Carrier people are trained to think in terms of using heat exchange to produce cold air—that’s the output that counts; the compressor is just there to move the fluid. Pratt & Whitney engineers, on the other hand, are power people. The outcome they care about is power, and they use turbines to get it.22

The challenge wasn’t getting UTC to do something it had never done before but rather getting the right people together, at the right time, to see how their existing ideas and technologies could be combined in new ways to create a breakthrough product. Many large companies have these same opportunities to bring technologies, and the ideas and people behind them, from one application and market into others. Technology companies like IBM and Cisco, for instance, are competing for market opportunities in energy, water, and agriculture, in which their existing technologies and knowledge of big data and network connectivity—as well as strengths in policy and government sales—give them a competitive advantage. For example, significant opportunities exist in increasing the efficiency of municipal electricity and water consumption and management of data centers and other widespread assets. Indeed, these same markets are attracting a swarm of Silicon Valley start-ups hoping to bring their programming

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skills and entrepreneurial habits to bear on the problems of energy efficiency, agricultural practices, water usage, and other markets.

Recombinant Innovation in Action The process of recombinant innovation is not as simple as buying and using an idea like you would a can of beans; at best, finding the right external ideas represents the beginning rather than the end of the innovation process. Bob Sutton and I once spent eighteen months studying the wildly creative product development firm IDEO. We were interested in how the innovation process took place inside a company that had designed thousands of products for hundreds of clients in dozens of industries. What we found were four supporting advantages— combinations of behaviors, activities, values, structures, and resources— that enabled IDEO’s designers to routinely generate innovations. They had access to a variety of solutions and problems in the wide range of industries of IDEO’s clients, learned about these solutions enough to use them later, recognized new opportunities to combine pieces of these existing solutions and apply them to other problems, and ultimately, constructed novel solutions from those combinations. These capabilities aligned with and enabled IDEO’s very intentional strategy of continuous innovation. Let’s look at each of these advantages individually before considering how they would best align with and support your company’s innovation strategy.23 Designers at IDEO have access to a variety of solutions that comes from the nature of their work for clients in many different industries. Moreover, the nature of staffing client projects ensures that people move often between industries—one project may involve designing a hospital emergency department experience, the next designing office furniture, and another designing the cabin and cockpit instrument panel of a light jet. In terms of sustainable innovation, IDEO has developed solutions for tackling childhood obesity for the Centers for Disease Control and Prevention, worked on providing clean water in the developing world for the Acumen Fund; found ways to encourage blood donations for the

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Red Cross; explored solutions in energy efficiency for the Department of Energy; and designed the interface of Ford Motor’s Fusion hybrid electric vehicle. “As social issues increasingly become business issues,” says IDEO CEO Tim Brown, “this will be a critical new direction for design.”24 The company hires designers who enjoy moving between industries and projects (rather than building up expertise in just one). Relative to companies that organize themselves by formal business units that focus on a single market, discourage people from moving often between markets, and hire people for their specific and local expertise, IDEO’s designers have a wide range of experiences to learn from and draw on when they encounter new problems. Ironically, the modern corporation is often the best positioned yet least qualified to exploit access to a variety of experiences. How many different domains—markets, industries, geographies—does your organization engage with? How many different technical or scientific disciplines do you have among your scientists, engineers, and designers? A simple proxy might be the number of business units and the number of technology platforms. Like UTC or 3M, large companies often have access to a wide variety of markets, customers, suppliers, and competitors. Yet their strategies, work practices, and reward systems rarely support, and more often undermine, tapping these networks in the pursuit of innovation. IDEO designers learn about these solutions enough to use them later—meaning the individuals and groups working on projects across a range of industries not just see but actually work with the solutions of these different domains. For the Ford Fusion hybrid electric vehicle project, IDEO designers worked closely with Ford’s design team, interviewed current and potential hybrid electric vehicle drivers, explored prototypes and competing systems, and drew from the wide range of user interface designs they have done for other clients in other industries (like the jet instrument panel they had done three years earlier). The research identified hundreds of ideas, 109 specific concepts, and finally 21 unique features to prototype and refine with the Ford team. The result of the project was the SmartGauge with EcoGuide, which provides two high-resolution, full-color LCD screens, one on either side of

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an analog speedometer, that display standard information like fuel and battery-power levels, average and instant miles-per-gallon numbers but also driver efficiency and power management settings and controls. It includes tutorials on how drivers can get the most efficiency from their driving habits and a shutdown display that summarizes information from the latest trip, like fuel economy performance, and compares it to previous trips. Designing the hybrid electric vehicle user interface for Ford meant understanding what current and aspiring drivers of hybrid electric vehicles want in their driving experiences, prototyping promising features, and gauging drivers’ reactions. It also meant learning about the nature of the technologies involved and their relative economic and social value to both the car company and the customers. In our study of IDEO an engineer referred to this type of learning as throwing a bunch of tools into his toolbox. He “remembered the tools, but not where they came from.”25 Moving between projects and domains encourages IDEO’s designers to soak up what they find in any one domain because it’s likely to be useful in another project down the road. For example, IDEO has worked with the Department of ­Energy on how to market the benefits of energy efficiency and on a home ­energy-management display system for Tendril, a firm marketing energy management, demand management, and customer engagement for electric utilities. Do the people working on innovation in your organization have the chance to learn by working with solutions across a range of projects and domains, or do they spend their time incrementally improving the same solutions for the same domains? More simply, how often do they get to spend time taking apart, studying, and playing with existing solutions from across different domains? In addition to accessing and learning about the range of solutions that work in other domains, a third advantage is the ability to recognize new opportunities to combine pieces of those existing solutions and apply them to other problems. The designers of the jet aircraft instrument panel were not assigned to the Ford hybrid electric vehicle project team but likely participated in productive ways through a range of activities and structures. For example, IDEO relies heavily on brainstorming, which plays a central role in its creative process by bringing together

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six to eight IDEO designers from across the company to consider a particular challenge in one team’s project. This enables designers working on different projects to connect past experiences with an existing solution or insight that the new project team could build on. Similarly, the reward structure at IDEO directly evaluates the contributions that designers make to other people’s projects, encouraging them to take the time to find ways their experiences can help. Regularly working across different domains also increases the ability to see connections. As the Princeton sociology professor Paul DiMaggio points out, “When persons or groups switch from one domain to another, their perspectives, attitudes, preferences, and dispositions may change radically.”26 By moving between domains—whether in projects, brainstorming sessions, or hallway conversations—people open themselves to connections that others might miss. How often and how easily do you and those you work with move between different projects and domains? How broad ranging are the different solutions or definitions of problems that you consider when faced with a challenge? Of course, this broadness also relies on the willingness of project leaders to ask others for help with their problems. How easy is it for you or others in your organization to share problems you’re working on? How easy is it to ask for help across the boundaries between teams, functions, and even business units? Finally, supporting recombinant innovation is the set of activities and supporting organizational features related to constructing new solutions from existing ones, or the challenge of turning the novel ­conceptions— the new combinations of old ideas—into realities. Loose notions of what might work are tested by the realities of physics, costs, human behavior, complexity, and the many other ways that even the best ideas can fail. Building dashboard interfaces and testing them with hybrid electric vehicle drivers provides valuable lessons that not only improve the current solution but also become the raw materials for solving the problems of future projects. In addition, constructing these solutions often involves working with additional suppliers, developers, and customers in the project’s domain, which exposes the design team to yet greater varieties of experiences. The capability to construct new solutions from pieces of old ones is also often where the greatest risk and uncertainty

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lie in any innovation effort. After all, it’s where the most significant investment decisions happen. Relative to more traditional and incremental innovations, pursued within existing markets by existing business units with existing teams and partners, building wholly new solutions dramatically increases uncertainty. It entails dealing with new markets, new potential partners, and new skills and experiences that you cannot control (and maybe are not controllable) and that bring great financial and, to those inside the organization, political uncertainty (who takes the fall if it doesn’t work?). At the same time, however, these efforts also are often the most effective ways of creating the commitment necessary to drive the project forward. Are people rewarded for building these new combinations of old ideas? Do they fear the risk of a failed prototype more than they value the benefits of the learning that results? Does the breakthrough bias mean that these innovations will be downplayed or even dismissed?

u Mind the Gap The ability to innovate by combining existing elements must be treated as a core capability equal to or more important than the ability to invent or discover novel products and processes. This capability can be seen in Henry Ford’s development of mass production, Daimler’s development of its clean diesel platform, Edison’s development of his electric lighting system, and UTC’s development of PureCycle. Recombinant innovation takes different forms, from the more focused brokering strategies of IDEO to the pursuit of particular opportunities and recombinations of ideas within your company. Which innovation strategy to pursue depends on your company’s long-term strategic goals. Consider the following questions: • How well is your company positioned to recognize when technologies in one market can be adapted to create innovative and sustainable solutions elsewhere? • How embedded are you within particular markets—with connections to the upstream suppliers, distribution channels, customers,

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regulators, and others—and how valuable are those existing connections to your sustainable innovation strategy? • Similarly, how might your existing technologies and the expertise surrounding them be adapted to address the problems of other industries? How might you search for new applications in other markets? • Does your company have multiple business units, each competing in different markets? Are there formal processes, structures, and incentives to connect these resources across the organization? If not, how might you develop them? • If you’re a start-up, are you well positioned to adapt your core technologies to meet the sustainability needs of other customers in other markets or, conversely, to find other, more sustainable technologies to meet the needs of your current target market? • If you’re in a professional service business, how well do you take advantage of your company’s broad experiences across clients and industries to bring sustainable innovations from where they’re known to where they’re novel?

Chapter 7  Designing Revolutions

In 2001, after a decade working at the intersection of digital technol-

ogy, software, and mobile devices, Tony Fadell approached Steve Jobs with the idea of a digital music player that, combined with a Napsterlike file-sharing system, would enable an entirely new, seamless platform for selling and storing music. The iPod hid its technical and commercial complexity from users, allowing them to enjoy an easy introduction to what has since become the fastest-growing segment of our digital lives. But the iPod is not the interesting story here. In 2008 Fadell stepped down as senior vice president of Apple’s iPod division. Not one to sit around, he set out to build a green home in Lake Tahoe, complete with the latest intelligence, solar power, and other leading technologies. And then he stumbled on the lowly thermostat, whose design and function had gone unchanged for the last fifty years.1 In his frustration with this barely intelligent plastic box, Fadell saw an opportunity. He recruited Matt Rogers, who had begun as an intern working on the iPod and had risen to be one of the engineers on the original iPhone team. In 2010, this was the beginning of Nest. In 2011, Nest introduced its first product, the Learning Thermostat. A sleek and simple device with a round and palm-sized design, it looks entirely familiar to anyone who remembers the early mercury thermostats. And yet, from its aluminum cylinder to its legible digits to

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its screen, which is large enough to be seen from across the room and turns red or blue to indicate whether the HVAC is heating or cooling the house, there is no mistaking its innovative function. Its algorithms learn from your habits and predict the most efficient heating and cooling, and Wi-Fi connectivity allows you check on and control your thermostat from a smartphone or web browser. In 2013, Nest launched its second product, Protect, a smoke and carbon monoxide detector. In January 2014, Google acquired the company for $3.2 billion, roughly ten times the company’s $250 million estimated annual revenue. Compare that to competitors with larger visions and more extensive product offerings like ADT Security Systems, at the time worth twice its annual revenue of $3.3 billion, or Control4, maker of home automation systems, worth three times its annual revenue of $128 million. How did Nest, in a little over three years, become worth $3.2 billion, despite not having developed a technological breakthrough, gone first to market, or even by the most favorable estimates, taken 1 percent of the overall thermostat market? The answer is simple: better design.

The Power of Design “Design” is the particular arrangement of concrete details that make up a product or service. It includes the form and function of physical ­features—size, weight, shape, color, and other technical choices that determine cost and performance. Whether consciously or not, everything made is designed. Good designs represent a set of choices that create value for both those who consume the offering and those who have a hand in producing and delivering it. Take the smartphone: every detail of its physical appearance and performance has been painstakingly specified and represents the best compromise capable—in the judgment of its designers—of delivering the best user experience to the most users for the most profit. Variations in different models’ designs follow from the variations in judgments of different designers as much as the variations in the desires of intended users: screen size (and energy drain), battery size (and weight), materials (plastic and metal), and processor and memory (and cost). But the same design decisions are made—

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consciously or unconsciously—in the design of industrial goods and even services. Those decisions are made by many different people—only a few of whom might be formally tasked with designing the offering. So technically, all of us engaged in the innovation process are designers. Whether it’s a new product or service, an ad campaign or a mission statement, a business plan or a supplier contract, the principles of design apply. Design is most often used to differentiate products already on the market. Its strategic value is to make a new product or service stand out from the competition and not be a commodity. This is true during most of an offering’s lifetime—think of disposable razors or cars or laptops. But when new technologies threaten to disrupt existing markets, design plays another and far more important role: enabling the products and services based on these new technologies to gain a foothold when they would otherwise be rejected. The goal is not to stand out so much as to fit in. Design helps integrate revolutionary innovations easily into not just your consumer’s existing beliefs and patterns of behavior but also your supplier’s, distributor’s, regulator’s, and partner’s. Built into most stories of technological revolutions is the assumption that the new technology wins—over older technologies and competing new ones—because of an inherent set of economic or performance advantages. In these stories, good design simply means a cool new look and feel—think of the iPod or iPhone. But the story of who wins and why, from the QWERTY keyboard to Microsoft’s Windows to solar power to energy efficient thermostats, is always more complicated. The fate of many revolutionary and, in particular, sustainable innovations hinges on their design—that arrangement of concrete details. We think of electric vehicles, solar power, drought-tolerant wheat, and even affordable health care in the abstract, but in daily life they have real and concrete forms, not as the electric car but as the Tesla model S or the Toyota Prius, not as solar power but as panels on our neighbor’s garage, not as nutrition but as pink slime or fresh fruits and vegetables in every school lunch. For almost any organization pursuing innovation, design represents a critical capability—the right combination of people, practices, resources, and tools to design innovations that facilitate, if not

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compel, adoption and use. Note that the combination of these elements, not any one, is what matters. Hiring a designer isn’t enough, taking several weeks to observe users isn’t enough, and spending extra money on chrome or aluminum or celebrity endorsements isn’t enough if those people or practices are not guided by the strategic vision, reinforced by the right culture, and supported by the right resources and tools.

Who’s Designing Your Revolution? Picture the home of the future. It’s a beautiful and seamlessly connected system filled with energy- and labor-saving devices that talk to one another, see to our comfort, cook and clean for us, order our groceries, serve up the news, and lock our doors at night. In a recent commercial for AT&T’s Digital Life, a young couple visits their parents’ country cabin, casually mentioning that they stopped by the parents’ house before coming up. The father pulls out his iPhone and, just to be sure, hits the Close House button, which proceeds to turn off the outside lights, the inside lights, the television, and the kitchen faucet in their suburban home—leaving the family carefree and ready to enjoy the weekend away.2 These visions aren’t the sole province of the digital age. In 1935, General Electric produced “Three Women,” an hour-long romantic comedy starring famous actors and extolling, not so subtly, the virtues of an all-electric kitchen. This is the promise of all new technologies: to take care of everything from the mundane to the major in our lives, freeing us to live easily. Yet despite the best efforts and intentions, this is the kind of innovative vision that never quite becomes a reality. That doesn’t stop companies from promoting, investing in, and pursuing innovative visions—whether for connected homes, smart cities, self-driving cars, clean and convenient public transportation, or sustainable food systems. In fairness, the connected home does represent a serious market opportunity. Homes, because of how many there are and how much we spend on the stuff that goes into them, are one of the most attractive markets for sustainable innovations like solar panels, LED lightbulbs, efficient refrigerators, air conditioners, water heaters, car charging systems, and dynamic window shading. New ventures

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and established companies alike have launched products promoting their visions of the home of the future and, of course, the home energy management system that promises to connect them all. For instance, in 2009, Google and Microsoft each offered digital platforms that enabled homeowners to download their energy data, hoping consumers, household hardware makers, and utilities would all jump on board with connected devices or data. Both folded less than two years later, citing poor adoption rates by consumers. Companies like AT&T, ADT (which traditionally offered home security services), and General Electric also began offering new options for energy and lifestyle management that included temperature control, carbon monoxide detection, and fire and smoke monitoring. But none have led the revolution. Despite their wonderful visions, in reality most home energy management and automation systems are more Rube Goldberg than Steve Jobs. So why is the home of the future, like the car of the future, the mass transit system, or a sustainable local food system always just out of reach? Two reasons. First, because these solutions (and the problems they address) represent entirely new systems, and changing a system is exponentially harder than changing one piece of it. Every time a new technology emerges, visionaries come forward with utopian plans for how it will revolutionize lives by replacing the old system. They are utopian in the classic sense: it will work wonderfully, as long as we change everything— our technologies, our values, and our behavior—immediately, completely, and in perfect coordination.3 Swapping a new refrigerator or a new TV for an old one is easy, but ditching an entire system for a new one requires a tremendous leap of faith—how much would you pay for a kitchen faucet (and the plumbing and wiring) that could talk to your AT&T plan? Which brings us to the second reason these visions never come true: natura non facit saltum. Nature does not make leaps. While technologies (and sometimes our imaginations) might make leaps, we prefer our mind-sets and behavior not to. As a result, neither do the complex systems we shape and inhabit. But every once in a while, someone manages to envision and create a revolution that the market embraces. The difference between a new revolution and yet another utopian vision is, often, just a matter of design. When innovation depends on

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changing entire systems, design becomes a matter of fitting in, of appearing as a relatively incremental improvement in what we already own and use rather than a leap into an uncertain future of electrified faucets or worse. Historically, this role lasts only an instant, five years at most, just long enough to engender familiarity, trust, and widespread acceptance, after which consumers, suppliers, distributors, retailers, and regulators come to understand the new technology and begin to explore and appreciate its potential for change. The design choices that, at the point of acceptance, made it fit in now begin to hinder its evolution. Navigating these rapidly changing landscapes through design is a capability companies need to successfully introduce sustainable innovations: initially to insert their new offerings into established markets and consumer habits and then to enable consumer understanding and behavior to evolve, in small steps, without making leaps.

The Trojan Horse Solution This takes us back to Nest, a company that moved us one step closer toward the connected home by hiding a revolutionary technology inside a humble and entirely familiar object, the thermostat. As Stephen Lacey, who covers clean technology innovation for Greentech Media, says, The “connected home” is one of those terms which, much like “smart grid,” describes a vague, far-off goal with a lot of different interpretations. The term itself is helpful for framing a vision for the future, but it doesn’t precisely describe the way technology is being integrated into the home itself. . . . Nest has been particularly effective at milking this trend, choosing to focus on making individual products attractive to consumers, rather than just taking a broad-based approach.4

Nest’s founders certainly shared the vision of a connected home. As Tony Fadell says of selling his company, “Google will help us fully realize our vision of the conscious home and allow us to change the world faster than we ever could if we continued to go it alone.”5 But having the vision is rarely enough, even when the technology exists. Nest’s founders came out of Silicon Valley, which has been building new and

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complex information technology systems amid the rubble of old and overturned industries for some time. Within the Silicon Valley culture, the persistent underlying question is always, what are you disrupting? Engineers and entrepreneurs aim to topple industries and, as often, try to do so overnight (in time to make their first hundred million before turning thirty and return their investors’ money within five years). But Tony Fadell knew that making a revolutionary home energy management system would be too much for the mass market of US homeowners to accept, especially when their old system wasn’t really broken. In 2011, Fadell pointed this out: “The problem with Silicon Valley is that you all want to impress your friends—you want to make the next thing and revolutionize it. But you have to make a strong business. . . . We want to make multiple products that all relate together, so that the business is there to continually drive innovation.”6 So instead of introducing a dramatic new system, Fadell and colleagues introduced a simple, elegant, digital thermostat that, out of the box, looked and acted in all ways like your old one. No need to abandon your old system, just your old plastic box of a thermostat. Maxime Veron, head of Nest’s product marketing, explains, “Turns out, a simple thermostat has been a much better way to connect with consumers, thus opening up new opportunities throughout the home.” She called their thermostat a Trojan horse for bringing home energy management systems into vogue.7 By minimizing the differences between what customers (and the market) are used to and what the future can bring, they hit the right note, and customers welcomed the Nest thermostat. Nest didn’t offer a new energy management system, just a new thermostat. But designed into that thermostat, like a Trojan horse, was the ability to expand—to bring connectivity, demand-response services, security services, and finally, Google’s omniscience and omnipresence. Edison made similar choices in designing his system of electric lighting. Remember, electric lighting had been around for several decades, in its long-fuse phase, before Edison’s system triggered the rapid adoption and institutionalization of electric lighting and the utility model. It was market acceptance, not invention, that made Edison famous. He envisioned a new world powered by electricity, proclaiming that “the

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same wire that brings the light to you will also bring power and heat— with the power you can run an elevator, a sewing machine, or any other mechanical contrivance, and by means of the heat you may cook your food”—all for far less than the cost of gas and coal.8 Yet he purposely designed his innovation to fit cleanly within the established uses, business models, and regulatory constraints of the well-established gas lighting industry he was trying to overthrow. According to his notebooks, the goal was “to effect exact imitation of all done by gas so as to replace lighting by gas with lighting by electricity . . . not to make a large light or a blinding light but a small light having the mildness of gas.”9 He did exactly that by introducing a thirteen-watt bulb, identical in brightness to the gas lamps of the time, despite having a forty-watt bulb burning in his laboratory; by inventing the means to turn a single lamp on and off as consumers did with gas; and by charging them for electricity—following the practice of gas companies—despite having yet to devise a way to effectively meter electricity usage (his zinc sulfate meters froze when temperatures dipped below forty degrees Fahrenheit). He was so successful that, as the New York Times reported, looking in from the street scarcely anyone would realize rooms were lit by electricity. And that was a positive review. History is filled with similar accounts. The early hybrids like the Honda Insight and Toyota Prius offered a small step between the real world of traditional automobiles with internal combustion engines and the utopian vision of electric cars. The early smartphones like the Palm Treo (2002) and the more successful Blackberry (2003) offered users a small step up from the first personal digital assistants of the previous decade. It would be four years before Apple introduced the step up from the iPod to the iPhone and by then the public was ready to embrace a radically powerful option. Sustainable innovation depends on established markets and entrenched technologies transitioning to new ones, but history suggests it’s not done by making big leaps so much as by designing a path that enables the market to take small steps in the right direction. But note that even in these examples not every company that successfully introduces the first products of a new platform manages to maintain its leadership

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position as the market transitions. Much like the evolution of the network that follows a successful innovation, the challenge in design lies in striking the right balance between building a product and business that offers customers an evolutionary path to a new platform and maintaining the flexibility to evolve as quickly as the market once adoption takes place.

When Punch Cards Ruled the Earth Designing for revolutions isn’t limited to sustainable innovation. This skill is necessary for anyone attempting to introduce a novel technology into existing, well-established industries and markets. Just-add-water cake mixes of the 1950s struggled for adoption until a clever marketing executive, Ernest Dichter, recognized that by using this innovative product women felt they were not truly baking. The solution: require that they add a fresh egg to the mix (taking the dried egg out of the formula). In the short term, this helped adoption by providing a smaller step beyond baking from scratch, and consumers eventually got used to the idea of baking from a mix.10 But one of the best examples comes from the earliest days of the modern computer, one of the most revolutionary of technologies to emerge in the twentieth century. To IBM, the company able to first gain a foothold in this market, a capability for robust design meant the difference between becoming a leader and becoming a footnote. In 1951, the UNIVAC became the first commercially available general-purpose computer. Built by J. Presper Eckert and John Mauchly, the same engineers behind the ENIAC, the UNIVAC was widely seen as the wave of the future, threatening to replace the punch-card systems that businesses used to perform complex calculations and the people who operated them. At the time, IBM dominated the market for punchcard systems. To counter the disruptive threat these new, generalpurpose computers posed to its existing business, IBM developed a design strategy to retake the lead in the emerging technology of computers. Soon after the introduction of the UNIVAC, IBM announced the IBM 702, a business computer in the same class as the UNIVAC.

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However, while IBM was working on the 702, it was also developing and marketing a more humble machine, the IBM 650, that would rapidly overtake the early general-purpose computers and maintain IBM’s leadership position in the marketplace. The IBM 650 was not nearly as powerful as its predecessors, and IBM engineers and managers chose to present it—right down to the housings—as a mere extension of existing punch-card equipment. As one UNIVAC sales manager stated, the IBM 650 “slipped right in to the existing punched card processing scheme. It was punched cards in, it was punched cards out, and it was just like a bigger calculator for them.”11 Joanne Yates, an MIT professor and historian of technology who has studied the early adopters of computers, found that IBM succeeded by focusing not on the performance of the new machines but rather their ability to fit within the existing systems, behaviors, and mind-sets of its customers. The design of the IBM 650 fueled its rapid acceptance not by revolutionizing anything but rather by ensuring the new machine would fit easily within the punch-card system that included the existing machines, processes, staff, and organizational structure: what it was, where it went, who owned it, and who ran it. Moreover, the IBM 650 served as a stepping-stone for insurance firms moving from their existing punch-card systems to new computers, and by the time those customers were ready, so was IBM, with its 702 and 705: By developing and marketing the card-operated 650, making the more powerful tape-based 702 and 705 compatible via conversion equipment, and offering its familiar and fast punched-card peripherals, IBM provided an easy migration path from the tabulator era into the computer era. Insurance executives could draw on their existing models for technology and its use in insurance operations, as well as for business relations with the vendor.12

Customers who adopted the IBM 650 computer saw gains in speed and also reductions in the growth of their clerical staff—all without having to dramatically change internal processes. As Yates suggests, IBM succeeded by taking a revolutionary technological innovation and, through

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its design, presenting it to customers as an incremental change in their understanding and behavior. Presenting the revolutionary as evolutionary meant that IBM avoided the requirement for customers to make discontinuous leaps from what they knew to what they did not. But it wasn’t just the company that gained from this Trojan horse strategy. An academic study conducted in the 1960s found that insurance companies that adopted more advanced computers took on average 40 percent longer to install new machines than those replacing IBM 650s, the perfect half step. The differences were attributable to “a high level of confidence and a willingness to move ahead fast . . . among those companies whose previous technical experience had brought them close to the level of the modern computer.”13 As an incumbent, IBM knew its users, and the company was better positioned to understand how to design a new technology for rapid acceptance. But on top of this, IBM made a big shift so that its consumers could too but without it feeling like one. Let’s explore how you can do the same as you create sustainable innovations.

Baking Robust Design into the Innovation Process As we’ve seen, design is a critical capability of sustainable innovation. The challenge is designing products and services that not only are more sustainable than what they replace but also gain acceptance, bring together disparate partners, and ultimately, transform the industrial practices they’re targeting. Moreover, the design capability must be built into your organization in ways that enable you to do this time and again. Remember, if all goes well, your market may shift quickly, and if design has been relegated to a low-status department, a high-profile consulting firm, or boot camp for executives, you may not be able to shift with it. Good design requires an effective and mutually supportive combination of people, practices, rules, and tools inside the organization. It means having people with the right vision and skills to see where the industry is now and where the needs and technology are opening new

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­ pportunities—opportunities that design can create or shape. It means o having the leadership and the means to commit to a strategy, invest in the right resources, and support such a design-informed pathway. All this rests on an organizational culture capable of following great design with consistent product quality, service, support, and branding. This design capability exists in many businesses but can be perhaps most easily seen in consumer electronics companies, which have faced four decades of rapidly changing technologies and use patterns. With the iPod and the iPhone, Apple in particular became famous for how its design is so closely linked to its corporate strategy. Computing technologies grow in power and connectivity and shrink in size and cost, driving both opportunities and uncertainties in the ways that consumers can and will interact with new products and services. Seeing those opportunities and designing products and services to enable them in ways that align with the company’s larger strategic vision will determine whether the company continues to guide the evolution of this sector. That’s why Jonathan Ive, the head of Apple’s design group, serves as a senior vice president and is closely involved in the strategic decisions of the company; indeed, he was widely seen as in contention to replace Steve Jobs.14 Design capability can also be seen in consumer product companies like Procter & Gamble, whose core capabilities for innovation often mean designing products to stand out on a shelf full of— for the most part—functionally identical products. To companies like Procter & Gamble, this means coordinating decisions about everything from the formulation of each new product to its packaging and branding, to the marketing and retail strategies (in which stores and at what price), to the larger strategic direction of the business unit and the firm. But the nature of the design varies by sector and thus demands a set of skills that depend on the challenges you’ll face trying to introduce new products and services. In consumer products, the design must stand out from a variety of similar offerings while reducing costs. In consumer electronics, the design must stand out while keeping ahead of rapidly changing technologies and standards. For sports apparel companies like Nike, Adidas, and Under Armour, their designs must stand out while keeping ahead of and parallel to larger fashion trends.

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In sustainable innovation, design has to gain adoption in established sectors without sacrificing long-term evolution. This is where robust design becomes an invaluable capability. Nest’s Maxime Veron describes how the company followed Apple’s example: “One thing that Apple does really well is [to devote] an extremely high [level of] attention to detail, high-quality materials and the focus on customer experience” of a simple product.15 That’s what Google bought. “[Nest] now brings their Apple-influenced design philosophy to Google, which tried unsuccessfully in 2009 to break into the residential energy monitoring sector with its PowerMeter.”16 Larry Page, Google’s CEO, says of the acquisition, Nest’s founders, Tony Fadell and Matt Rogers, have built a tremendous team that we are excited to welcome into the Google family. They’re already delivering amazing products you can buy right now—thermostats that save energy and smoke/CO alarms that can help keep your family safe. We are excited to bring great experiences to more homes in more countries and fulfill their dreams!17

Rather than buying customers (which Nest has relatively few of), buying intellectual property (again, little to speak of), or adding revenue (insignificant to its balance sheet), Google bought a team and organization capable of using design to transform the moribund home energy management market. For pursuing sustainable innovation and, particularly, those offerings that will take on and overturn established technologies and behavior in existing markets, design is a critical capability. And not just design as a general skill (if there is such a thing) but robust design—the ability to gain market acceptance for those new products and services whose revolutionary potential is so often elusive. The legendary industrial designer Raymond Loewy coined the term “MAYA (most advanced yet acceptable) principle” to describe the challenges of keeping within the customer’s comfort zone. But in addition to short-term success, designers need to retain flexibility over the long term to adapt and evolve with changes in the technology and market. Look again at Nest’s Learning Thermostat, Edison’s electric light, and IBM’s 650 computer—none of these offerings took full advantage of the new technologies on which

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they were built. Instead, these companies pursued robust design strategies, which involve balancing three interdependent dimensions: domesticating the future, designing for the network, and designing for the long view.

Domesticate the Future With its round shape and twisting action, Nest’s digital thermostat was deliberately designed to evoke the iconic product it was displacing. The IBM 650 was designed to look identical to the punch-card machines it was expecting to replace. And Edison’s lightbulbs were designed to look as similar as they could to the gas jets they were trying to displace. In each case, the intent was to minimize the leap required in moving from the old technology to the new one, and the answer lay in determining the details that shaped people’s first impressions of the new product or service and how they interacted with it. In short, the right design choices domesticate the future, making the revolutionary both familiar and comfortable. This is a function of design that has been around as long as there have been technological transitions, so long that anthropologists have coined a term for it and now designers of consumer electronics, software, and user interfaces have made it central to strategic thinking. “Skeuomorphs” are design details that serve no technically functional purpose but are essential to the public’s understanding of the relationship between an innovation and the object it displaces.18 Wood grain paneling on automobiles and television sets evoked the wood of the carriages and cabinets that such products were replacing. The file folders and garbage cans on every Microsoft Windows desktop repeated the elements (and functions) that the new computer was attempting to displace. Many features on ancient pottery were vestiges of structural details once essential to their construction or function, including the remains of cords and lashing needed for carrying them or supporting them during the firing process. Sometimes these design features linger but are often quickly lost as consumers see and embrace the potential

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of the new technology. The skeuomorphs that introduced the original iPhone, for example—the note application designed to look like a torn legal pad, the address book app icon that looked like a Filofax, the bookshelf icon that looked like, well, a bookshelf—were jettisoned as users got comfortable with the new technology and Android and Apple competed to make the most use of smartphones’ limited screen space. An example of domesticating a new and sustainable technology comes from the development of telepresence, the immersive and highquality version of the fifty-year-old idea known as the videophone. Telepresence has the potential to significantly reduce corporate travel and its accompanying carbon footprint—early adopters of the recent systems by Cisco and Hewlett-Packard have seen 30−45 percent reductions in both.19 Moreover, the Carbon Disclosure Project found that “an individual business implementing four telepresence rooms can reduce its [carbon dioxide] emissions by 2,271 metric tons over five years.” And yet adoption of these systems still moves slowly.20 In Hewlett-Packard’s development of its telepresence offering, Visual Collaboration Services, the project leadership knew that users would quickly embrace or reject this new technology on the basis of their personal experience of its value. The team brought together anthropologists, designers, sociologists, and social linguists to gain a deep understanding of user needs by working closely with executives of an early and willing customer. What they found was both simple and profound: an executive had to be comfortable using the new technology to discuss an idea, present an argument, or have a conversation on which his or her career depended despite that meeting taking place between two or more people from offices often thousands of miles apart. And comfort came from the ease and frequency of meetings, which maintains familiarity and social ties; the ability to make eye contact and read facial expressions and other critical but nonverbal signals; the ability to read those same nonverbal communications passing between other participants; and even a common physical background, to suggest all were meeting in the same location. This initial user-centered work helped set a number of key technical parameters for how the system would be

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­ esigned and how its real value could be measured along the way, in not d just how many systems were sold but how users could trust and work with the system and integrate it into their daily lives. Focusing on delivering real value to users isn’t easy. Emerging technologies are usually best understood—and most heavily endorsed—by those in engineering who see its transformative potential. They are rarely interested in hobbling the new technology just because users don’t get it yet. That difficulty in empathizing with users is compounded by the separation of the people who design the final products or processes from end users by a long chain running from marketing managers and strategic planners to engineering, the legal department, finance, procurement, manufacturing, distributors, and sales, each of which has a different sense of the problem being solved and the priorities. As the entrepreneur and management professor Mark Meyer notes, business units “may be tempted to compromise the new product to fit the corporate mold: ‘Let’s change the design so we can manufacture on our existing equipment’; ‘It will be easier to distribute if we use our existing channels and sales force’; Such changes can do irreparable harm.”21 Further interfering with an offering is that many innovations are often motivated by corporate sustainability goals rather than true market opportunities, and by the internal pressures of project deadlines, cost limitations, competing products, and, yes, the need for faster, better, cheaper. It’s easy to see how development teams lose focus on designing solutions that introduce new technologies in ways that appeal to the end users. Designing for revolutions means ensuring that designers are informed and involved in setting your innovation strategy and that your strategists are informed and involved in design.

Design for the Network The second dimension of robust design is designing solutions that foster adoption not just from customers but from the network of new partners that are necessary for your ultimate success. The key word here is “new,” as in partners who are not used to working with the new technology or within the web of relationships that you’ll need to build for it to

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be successful. For them, the innovation and how they’ll interact with it represents a potentially large leap, and the more familiar it appears to them and comfortable they are with it, the more likely they’ll accept it. Robust design and nexus work are complementary capabilities and visible in how Daimler introduced its clean diesel engines, how Edison built his electric grid, and how Apple built first its iPod and then iPhone platforms. Because most innovations rely on a network of suppliers, development partners, regulators, and distribution partners, the skeuomorphic design process applies to designing for the full range of potential network partners. Some innovations depend on building a relatively linear network of partners—upstream suppliers, manufacturers, distributors, retailers, and consumers—while others entail more interdependent collaboration in the production, delivery, and operation or use of the innovation. Consider two design decisions, one for a more linear network and one in a network that required ongoing collaboration to operate. Ford’s Model T innovated in a linear network, and Ford had to find network partners that would serve as distributors and sellers of the new massmarket automobile. Most of the early automobiles were complicated machines requiring skilled mechanics to maintain—not something that would foster adoption by the broader market. So Ford focused on making the Model T simple enough that almost everything could be fixed with a pair of pliers and a screwdriver.22 Why? Because with no mass market and no national network for selling and servicing automobiles, Ford had to make design choices that would enable existing bicycle and carriage shops (and intrepid owners) to easily maintain Model T’s. These design decisions get more complicated in collaborative networks, with exponentially more complex decisions involving trade-offs in cost and value between partners. High-speed rail, for example, involves building and managing the ongoing participation of a range of providers. It is delivered by a network of rolling stock manufacturers (who make and maintain the trains), rail operators (who own and run the trains), infrastructure managers (who own and maintain the corridors and rail stock), and state and federal agencies (who oversee the service and infrastructure and often subsidize operations). Alstom is one

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of the leading rolling stock manufacturers, makers of the locomotives and passenger cars that you see in the pictures advertising high-speed rail. The managing director for Alstom Transport in North America, Guillaume Mehlman, explained to me how business depended on how well its products benefited the rest of the partners rather than the end consumers: If our trains are losing someone else money, they [the customers who buy rolling stock] are not going to buy more. That’s where we depend on our customers. . . . The Paris to Lyon service, which opened thirty years ago, was so profitable that they started buying mountains of trains, hundreds of trains just on that line. The corridor has to be there and it has to be maintained. And the operator has to operate its trains with a high level of availability. If that fleet isn’t running, it will just prove that high-speed trains cannot be profitable, that it’s got to be subsidized, and it will not fuel growth.23

Some partners will be motivated by profits and others by the desire for growth and still others by the design for changing an unsustainable system. Understanding and explicitly framing the innovation as satisfying their different needs can be critical to designing products and services and assembling viable networks. The founders at Nest certainly understood this challenge and set out to cultivate critical partners in the retail and utility sectors. While Nest is a consumer product, it is also a tool for energy management that can provide utility companies with data and demand response. One of the impediments to selling demand-response solutions has been getting the electric utility companies to commit without requiring interminable pilot testing and trials (some call this “death by pilot”). However, Nest’s founder Tony Fadell recognized early on that a smart and connected thermostat could provide utilities with demand response, which to Nest meant the chance to create a continuous revenue stream in energy management (in addition to the sale of the product to consumers). The company launched a demand-response program in which utilities paid it thirty to fifty dollars per user per year for the ability to turn down the

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heating or cooling in empty homes. Indeed, this was part of the pitch to investors. As Peter Nieh, Lightspeed Venture’s lead investor in Nest, put it, if the company could “create a device that consumers love, then you can sell demand response on your own terms,” without suffering endless utility demonstrations.24 Introducing sustainable innovations requires building new networks for the new ideas and technologies. The more transformative or disruptive the innovation, the more novel the network required. Designing innovations for novel networks means designing for adoption by more than just the end consumer; it means designing for adoption by suppliers, distributors, regulators, and any other key partners who must also easily see and embrace its value. And again, this is not a capability that can be relegated to lower-level in-house designers or high-status outside consultants. These design decisions must often be made in the earliest stages of planning and are as much a function of strategic considerations as technological opportunities.

Design for the Long View In the long-fuse-big-bang nature of technological change, once a market accepts a new technology and way of organizing around it, change happens faster than everyone expects. Being the first in the market is no guarantee you can or will maintain market leadership. Gaining initial acceptance for a new technology often means hobbling its design to match existing understandings and behaviors, but long-term success requires the ability to quickly evolve and adapt as everyone in the market begins to see and embrace its potential. Edison, like Nest and IBM, aimed to balance gaining adoption for a new technology in the short run with ensuring the company could evolve and adapt with the changes that followed in the long run. The most effective design strategy for short-run-long-view conditions comes out of research done by the sociologist Eric Leifer, who investigated how grand masters play the game of chess.25 What were their thought processes: Did they map out every possible move and

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countermove in their heads before selecting a course of action? Did they recalculate every time? Earlier theories on the decision-making processes of chess masters held that they mapped out everything from the opening gambit to the endgame and then swiped pawns or advanced knights to accomplish their strategy. Leifer discovered that chess masters instead preferred moves that simultaneously achieved strategic goals and preserved flexibility to counter their opponents’ moves. He called this a “robust strategy” because it was focused on advancing your aims while preserving your ability to adapt to your opponent’s moves. You can see how the same approach is inherent in design strategies that introduce a domesticated version of novel technology while preserving the vision and flexibility to evolve beyond it. Edison baked this robust strategy into the initial design of his solution, from the details of the business model to the structure of the organizations to the design of the lightbulbs to the circuits in buildings. Even then, the famous war of currents that pitted Edison’s direct current system against the Westinghouse alternating current system was a result of Edison’s commitment to a core technological feature (DC electricity) that required a host of complementary decisions (in the design of generators, distribution lines, lamps, and meters) that could not easily be undone. Similarly, Henry Ford’s decision to make price the main feature of the Model T created an escalating commitment that left him inflexible and unable to respond to innovations by competitors like General Motors, who took the best of Ford’s mass-production techniques and then added annual model changes and more features to win over the market Henry Ford had created. And today’s battle between Apple’s iPhone and cell phones using Google’s Android is a battle between different implementations of a product made possible only by Apple’s success in building and proving a novel network of actors and technologies around the smartphone. Five years after the iPhone’s introduction, Apple had to catch up to the rapidly evolving technical possibilities and market preferences of the customers, developers, and cellular carriers that had embraced the platform. By contrast, IBM in the 1950s had set a clear path to migrate its customers from the 650 and its easy fit with the existing punch-card calculating systems to the next generations of computers that would leave

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those cards behind. Indeed, the company had already begun work on the next generation, the IBM 702 and 705, when it was developing its original 650 series. While robust design requires understanding how your intended customers and other network partners see the world and an emerging offering, it also requires seeing the potential of the new technology and how it might extend far beyond those initial offerings. Most importantly, it requires seeing a path from the design decisions necessary to gain initial adoption to the more revolutionary possibilities that, once adoption is no longer the limiting factor, you and others in the market will soon deliver. Nest’s founders envisioned a future in which its smart thermostat evolves into the hub of a connected and coordinated home energy management system. But that future remains largely unwritten. And that’s to be expected. Robust design strategies do not have a singular view of the future, a utopian vision of exactly how a technology’s promise will be realized as long as we all act appropriately. Instead, such strategies are built on the awareness that customers, users, competitors, and other players in the market will shape the future and create the next set of opportunities. The best competitive position is adaptability to the coming changes.

u  Mind the Gap Robust design fosters adoption of new technologies in established markets while maintaining the flexibility to stay ahead of and even lead the market transition that rapidly follows the technology’s introduction. Here are some questions to help you reflect on whether your company needs the capacity for robust design to achieve its sustainable innovation strategy: • What are the most significant technologies in your company’s innovation pipeline? How much of a leap would these technologies demand from users? • In your products or services, are you trying to change people’s understanding and behavior to fit the potential of the new offering, or

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are you trying to fit the new offering to their current understanding and behavior? • What’s your road map for introducing the new technology, and does the pace of change reflect what’s possible for the technology or what’s possible for the consumer and marketplace? • How well prepared are you if the technological trajectory veers off your expected path as customers and others get used to the new offering and begin to explore its potential? • Are your company designers aware of the technological and competitive landscapes and making design choices that foster adoption in the short run while preserving strategic flexibility in the long run? Does the company’s leadership recognize the strategic value of a new technology’s design, and is it willing to accept trade-offs that might hobble the technology or add to production costs? • How well do your development teams understand their intended customers and other critical partners and, particularly, how they each relate to the current solutions in the market? Do they know which traits in the current solutions should be maintained and which can be abandoned? Are there established practices for building this understanding? • How much time does your top management team spend investigating the needs of partners and how design can address those needs? • What’s the status difference between your designers and the management of the company? Are they equal in rank and pay or are designers several pay grades down and kept out of critical and strategic conversations? • How quickly can you build and test design ideas? Can you put prototypes in front of potential customers and consumers and get reliable feedback?

Chapter 8  Business Model Innovation

Your business model describes what you do and how you organize

to do it. In short, this includes both your offerings and the set of capabilities you have to develop and deliver them: products and services, customers, suppliers, revenue model, manufacturing processes and technologies, IT systems, people, and most importantly, alignment and support of these choices. Business model innovation occurs when companies simultaneously make changes in offerings and in the capabilities of developing and delivering them. This kind of innovation encounters obstacles for two reasons. First, the teams with the task of leading and developing product innovation—new product development or research and development teams—are rarely the groups focused on organizational change. Second, a company’s leadership must commit to the fundamental organizational changes required and acquire the necessary new capabilities—inside the organization or in partnerships. The ability to generate, develop, and drive business model innovation represents the final and perhaps most integrative of the capabilities necessary for sustaining innovation because it defines what combination of other capabilities will best suit your overall strategy. Can any company pursue business model innovation? Theoretically, yes. But despite the power of business model innovation, it is one of the most difficult capabilities to develop. CEOs want business model

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i­nnovation but have a hard time committing to it. A survey by the Economist Intelligence Unit found that over 50 percent of executives surveyed believe “business model innovation will become even more important for success than product or service innovation.” Similarly, an IBM study in 2008 found that nearly all the CEOs surveyed “reported the need to adapt their business models,” with two-thirds of them saying that “extensive changes were required.” Yet another study found that only 10 percent of innovation investment by global companies was focused on developing new business models.1 As authors Mark Johnson, Clayton Christensen, and Henning Kagermann note, “Every successful company is already fulfilling a real customer need with an effective business model, whether that model is explicitly understood or not.” 2 But those business models become rigidities because they shape how problems are defined and solutions chosen when new market opportunities emerge. Remember, as Abraham Maslow remarks, “to a five-year old with hammer, everything looks like a nail.”3 Companies see the world through the lens of their existing capabilities and, as a result, can’t easily see new situations requiring all-new capabilities. This is made more difficult in large, established companies because business model innovation involves changing, adding, or dropping current activities, difficult steps that can trigger significant resistance and even outright hostility within a company. And yet it is central to sustainable innovation.

Banking on Solar Take the business model innovation behind residential adoption of solar power. When SolarCity was founded in July 2006, its initial plan was to become a trusted national brand, using the best available technologies and focusing on selling solar power to consumers and small businesses. Many small contractors were doing residential solar installations, but the process was costly and complicated. The economics changed with the Energy Policy Act of 2005, federal legislation that required all utilities to offer net metering, thereby allowing homeowners to sell their solar energy back to utilities and offset their energy bills. Part of SolarCity’s early plan was to capitalize on this new legislation

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and dramatically simplify the process of buying small-scale solar systems (a complicated process of permitting, financing, and installing). The plan was for the company to grow by acquiring some of those many local solar installers that made up the national market at the time.4 That plan worked, and SolarCity has been the leading provider of residential solar power in California since 2007. But the market for solar systems did not grow as fast as expected. Despite considerable media attention and financial support from state and federal programs, residential customers have been reluctant to adopt solar power.5 “The largest barrier to adoption,” as SolarCity’s CEO Lyndon Rive explains, “was the up-front cost.”6 A solar system for the typical residential customer cost approximately $20,000. Other barriers were the uncertainty customers had about installing a new technology on their roof, whether it would actually save them money, whether technical advances might make their system obsolete, and whether they might need that money for a new car, braces for their kids, or a new kitchen. In 2008, to overcome that uncertainty SolarCity developed a new business model, third-party ownership (TPO). Instead of selling residential customers the solar panels, they would lease them, similar to leasing an apartment or a car (a similar option lets homeowners purchase power at an agreed rate, neither owning nor leasing the panels that sit on their rooftop). The new business model not only got rid of the large upfront costs but also often guaranteed a particular financial performance. Customers don’t make as much money with TPO, but they avoid the initial costs and long-term uncertainties, and, it turns out, preferred that trade-off. Under TPO, adoption has grown dramatically.7 As John Supp, program manager for the California Solar Initiative, said recently, “SolarCity does massively more business with their lease than other companies. . . . [It] is definitely in a class by itself in getting people to go solar. Somehow, they’ve mastered the art of solar distribution.”8 Now, other industry leaders have adopted this business model. SolarCity, SunPower, and Sunrun redesigned their product as well as the capabilities to deliver it and the revenue models to do so profitably. According to a Greentech Media Research report, TPO deals have gone from roughly 10 percent of new installations to 75–90 percent.9

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And many new solar power companies, building on the TPO model, have jumped into the market. But SolarCity had already captured the dominant position, having built critical relationships with about thirty national and regional home builders, including Brookfield Homes, De Young Properties, Del Webb, Elliott Homes, McMillin Homes, Taylor Morrison, Toll Brothers, Shea Homes, and Woodside Homes.10 The company has also lined up the largest residential solar fund in the United States to finance its individual installations, now amounting to $1.57 billion from Goldman Sachs, Bank of America, Credit Suisse, and Google. The company can offer home builders zero-down financing, builders don’t have to pay for the solar systems, and home buyers get immediate savings of up to 20 percent on their utility bills. SolarCity developed a new business model for residential solar. Was it entirely new? Not at all. Third-party financing and leasing has been around since the nineteenth century, enabling consumers to buy everything from sewing machines to agricultural equipment to automobiles. But it was new to residential solar because, in part, the technology was not yet mature enough to provide certain returns and because regulatory policy did not yet provide a viable revenue model. Technical and regulatory changes created the opportunity for SolarCity to redesign its offerings, remove the upfront costs, and make new value propositions that drew in home builders and investment banks as new network partners. SolarCity’s success shaped the organizing principles of the industry and reduced uncertainty, bringing in more competitors and also more investors, customers, partners, favorable policies, and complementary technologies—growing the overall market substantially.

Leading the Way Business model innovations like SolarCity’s can reshape organizations, markets, and entire industries. When successful, they demonstrate to customers, competitors, investors, regulators, and others in the network a new way of organizing and new opportunities for each of them. I have talked about the importance of designing and building the networks necessary to advance your sustainable innovation. Business model inno-

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vation represents the complementary view—designing and building the organization that fits easily and profitably within these new networks. Edison built a new network for the electric light—new customers, investors, suppliers, regulators, franchise owners, operators, technicians, and so on—and he also built companies with business models that fit within this larger system. His utility company changed the dominant model from selling isolated systems to owning and operating these elements and selling electricity; his equipment company changed the dominant model from selling small generators to many customers to selling massive generators to a few (utility) companies. The success of these models enabled companies like Westinghouse and inventors like Nikola Tesla to introduce their own variations on the same set of offerings and organizing principles. Ford rebuilt his car company into something very different from the existing model of building expensive cars one at a time and selling them to wealthy customers. His success became the new and dominant model that the other carmakers rushed to adopt. Changing a business model may be necessary for bringing new sustainable offerings to market. Without new business models, new technologies have to fit within the organizations that made and sold the old technologies they’re displacing—competing in the company on manufacturing costs, profitability, and marketability (through existing sales channels, with the existing sales force) and competing in the market against incumbent products while answering to the same regulatory environment. This has become a common challenge for large energy companies attempting to run new offerings through their existing organizations, like Chevron’s $370 million joint biofuels venture with Weyerhaeuser, ExxonMobil’s $600 million investment in algae-based biofuels, or British Petroleum’s scuttled $200 million investment in solar and promises of moving beyond petroleum. Similarly, more sustainable food production and processing innovations will face a difficult path to market until companies—producers, processors, retailers, restaurants— find a way to incorporate, and profit from, integrating those different attributes in their final offerings. Clayton Christensen’s insight about disruptive technologies is that they often perform less effectively on traditional dimensions but better on dimensions the market doesn’t yet

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value. Business model innovation reshapes organizations in ways that maximize the value of a new offering by enabling those attributes that will be rewarded in the market.

Revolutionizing Lunch Consider Revolution Foods. In 2005, Kristin Richmond and Kirsten Tobey, friends and fellow students at the Haas School of Business at University of California at Berkeley, decided to pursue their vision of making healthy meals a daily reality for schools across the country. The idea began in a class on social ventures and developed from there.11 The cofounders had worked in education before and appreciated the challenges of not only getting a new business accepted as a vendor by schools but also building a company that could scale to serve their vision. Before they launched, they interviewed teachers, students, families, and school leaders from over forty Bay Area schools to understand the value proposition that would be required as well as the complexities of the network surrounding something so seemingly simple as a school lunch. An early break came from building a key partnership with Whole Foods, which shared their vision of getting fresh, healthy food to as many students as possible. Another came from connecting with Amy Klein, a chef who would become their first employee. On the surface, Revolution Foods was betting that customers—in this case, schools—would see better value in fresh and healthy lunches than in the frozen and preprocessed lunches that were the traditional fare. To be able to deliver that value proposition, however, Richmond and Tobey had to build a business model radically different from that of the incumbent competitors—the massive food service companies like Aramark, Sodexo, Bon Appétit (owned by the Compass Group), whose revenues run well into the billions. Providing hot and cold lunches that include fresh fruit and vegetables requires a supply and production process that’s measured in days, not the weeks or months of the established companies. Easy to do when you’re making a lunch at home, hard when you’re making five hundred lunches for a school, thousands for a school district, and millions across the nation. It requires local suppli-

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ers in every region, local distribution and warehousing, and local food preparation. That costs a lot more money than lunches mass produced in industrial kitchens. And it requires educating school boards as well as state and federal regulators on the added value of healthy lunches. Finally, it requires convincing kids that cafeteria vegetables could taste good. Thus, to deliver on its promise of healthy and fresh lunches, Revolution Foods and its founders had to develop a set of internal capabilities that were very different from those of the incumbent competitors and figure out a way to raise and make money while doing so. And they did. So far, so good. Right now, Revolution Foods is serving kids across California, Colorado, Washington, DC, Maryland, Virginia, New Jersey, New York, and Texas. And as expected, that growth attracted the attention of the incumbent competitors. In fact, Richmond and Tobey were invited to come and talk with one of them. At first they were concerned that talking about their business would wake these giants, who would take their idea and run them out of business. They got over these fears by admitting that, in the worst case, it would mean more kids getting healthier meals. They might learn something from these companies and might one day need them as partners, so they visited, talked, and toured one of their East Coast operations. What they learned that day was invaluable. The company executives who met with them were not evil, as their overprocessed food might suggest. In fact, they really admired Richmond and Tobey for what they were doing. They wished they could do it themselves but admitted they couldn’t. Like the other incumbents, that company had grown up around serving millions, and ultimately billions, of meals. It competed on price, not quality. To get those low prices, it needed lower costs, and that meant building a network of partners, warehouses, food processing techniques, and financial deals that had been fine-tuned over the years to make its business work profitably. Like all the major food service companies, it ordered huge quantities of food from vendors to get price discounts. Such large quantities needed to be frozen, transported, and stored in large warehouses; processed on equally large production lines; and distributed across large regions to many different customers.

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The business model that enabled these large companies to buy, store, produce, and distribute billions of meals for $1.25 each could never be unraveled and rebuilt to provide local, fresh fruits and vegetables. Their organizational capabilities had coevolved with the networks of suppliers, distributors, factories, food technologies, menus, customers, investors, and many others supporting these companies. Now that same business model prevented them from changing their ways. Revolution Foods was safe from these incumbent competitors.

Business Model Innovation Defined Think of a business model as the combination of two interdependent kinds of decisions that have shaped your business since its beginning: decisions about your offering (what products or services you’ll provide and to whom) and decisions about how you organize to deliver that offering (the capabilities you need). These decisions range from the design of your offerings to your ownership structure (for-profit or nonprofit, public or private), to your the choice of revenue model (e.g., unit sales, advertising, franchise fees, utility fee subscriptions, transaction fees, professional fees, and licensing royalties), to the people you hire (their skills and experiences), to the processes you put in place and the technologies you build the company around. Some decisions were large and intentional and probably took a lot of time and attention. Many more were small and seemed minor at the time, if they were noticed at all. But together, they steadily shaped your company into what it is now—your offerings both define and are defined by your capabilities. Business model innovation is a combination of both novel offerings and novel capabilities. SolarCity, for example, went from selling systems to selling energy, taking over the need to select panels and systems, find financing, deal with permitting, oversee installation, and maintain them over time. Thus, business model innovation is not a distinct type of innovation separate from product or process innovations. It’s more a measure of the nature and extent of the necessary changes to your existing offerings (products) and organization (process). When companies develop new offerings or change existing ones by, for example,

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increasing performance or reducing cost but without dramatically changing the organization—it’s called product innovation. The Toyota Prius hybrid electric vehicle was a novel offering but built mostly on the existing organization—Toyota’s engineering, manufacturing, and marketing capabilities and the company’s existing revenue and ownership model. Similarly, when the law firm Morrison and Foerster developed their clean technology practice, they created a new category of services (product innovation) but didn’t radically alter the organization’s existing capabilities or structure. On the other hand, process innovations involve acquiring new capabilities—organizational structures, technologies, individual skills, and processes—to get things done. Such innovations can occur in marketing, distribution, sales, or accounting. For instance, Johnson Controls’ move into the private-sector-building energy market required it to build new skill sets (new people, new accounting metrics, new project engineering skills) to deal with the different finance and regulatory policies of that market. Innovation is typically dominated by one dimension and often entails complementary but relatively painless changes in the other. Business model innovation on the other hand represents significant changes to both. When Hewlett-Packard developed its Managed Print Services, the company made major changes—to both its offerings and its processes by adding integrated services and support traditionally done by customers or vendors and by changing the revenue and profit expectations to a subscription-based revenue model rather than unit sales. Similarly, SolarCity had to develop the capabilities and financial structures to profit from financing solar installations rather than simply selling them—including new ways to sell to home builders rather than home buyers and ways to manage the large financial firms now investing in its funds. These concurrent changes bring much greater potential for impact but also much greater risk because so much of the overall business model is changing at once. Within traditional product innovation, it’s easy to envision and develop new products or services. Similarly, within process innovation, it is relatively easy to envision and develop new capabilities and organizational changes. However, it’s difficult to simultaneously envision and develop novel offerings and ways of organizing

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around them. Changing both the company’s offerings and its organization exponentially increases the complexity and uncertainty of any new undertaking. This is why business model innovation is both so difficult and, when successful, so hard for competitors to respond to. In essence, business model innovation entails building the right set of capabilities to develop and deliver new and sustainable innovations. That means understanding and integrating the capabilities already discussed here—committing to an innovation strategy, doing nexus work, managing science and policy, pursuing recombinant innovation, and adopting robust design strategies—in addition to the many highly specialized capabilities required of competing within the context of your particular technologies, company, customers, and market and the many generic competencies required of managing innovation. Think of what capabilities SolarCity required to change its offering from solar installations to third-party financing of solar installations: committing to the new strategy, building new networks with the financial sector and home builders, managing the regulatory policies and tax benefits, recombining existing technical artifacts and financial instruments, and finding ways to present novel products as minor changes in customer and consumer behavior. Moreover, business model innovation supports sustainable innovation by, for example, shifting the value proposition of your offerings away from dependency on declining resources. If consumers are turning away from ingredients using genetically modified organisms, then redesigning a food product (and its network of suppliers) shifts your dependence onto other, less constrained resources. It can also create a path to migrate brownfield customers and consumers to new practices with robust design that presents novel offerings as similar to existing ones while changing the underlying capabilities to develop and deliver them.

Hewlett-Packard’s Business Model Innovation HP’s printing business traditionally consisted of selling more printers and ink cartridges (razors and blades), but its leadership was seeing subtle changes happening in the marketplace. Customers were voicing

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concerns that printing was getting too large and out of control; printers and their ink were increasingly becoming commodities; and the energy and paper consumed was becoming an environmental liability. The company could have redesigned its traditional business of selling printers and ink to make them less expensive and more energy efficient—and they did. But while this reduced the energy consumption of individual printers, the market for printers continued to grow along with printing’s environmental impact. So a multidisciplinary team looked into developing a service that would manage a customer’s diverse printing assets. The result was a new business, Managed Print Services, that expanded HP’s offerings to include everything from optimizing the location of printers in an office to managing the operation and maintenance of those printers to identifying ways to reduce their energy and materials consumption. It was a radical departure from HP’s traditional business model, shifting the focus from selling individual printers to selling print services for an office or entire corporation. For HP, that might border on heresy—the company manufactures and sells more than a million new printers every week, and its printing business generated revenues of $23 billion in the fiscal year 2014 (or roughly 20 percent of its total annual revenue). Creating such a new service business required changing HP’s printing business model. Today, Managed Print Services reduces an average company’s overall printing-related operating costs by about 30 percent. It reduces the customer’s energy consumption from printing by 30 to 80 percent. And it cuts paper use by millions of pages. So while the printer business is a commodity business, HP brings a new service to its customers that steeply reduces printing costs and strengthens customer relationships. One of HP’s early customers of this service, Viacom, a company of approximately ten thousand e­ mployees, reduced printing-related energy consumption by 60 to 90 percent (an across-building average of 66 percent, totaling 539,666 kWh), reduced the number of printers by 50 percent, and reduced printing by an estimated ten million sheets of paper. Overall, Viacom achieved a 40 percent savings in printing-related carbon emissions, or an estimated total annual reduction in greenhouse gas emissions of 381 metric tons. For HP, the benefits are different but no less dramatic. Having visibility and

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control over the printing process also provides HP’s engineers with insights into the changing nature of printing in offices, which can point the way to new opportunities for further product and process innovations.12 Managed Print Services illustrates that rethinking the business model, going beyond incremental or local improvements to current products, is a potentially valuable way to develop and bring profitable low-carbon innovations to market. While such an innovation was recognized as possible at the level of the development teams creating the next generation of products, carrying it out required knowledge of the marketplace and coordination with the strategic direction of HP. And it required commitment by the very highest executives in the Imaging and Printing Group.

Business Model Innovation in Action In pursuit of sustainable innovation, new business models provide an important advantage, and the ability to recognize the opportunity for and launch new business models in your company is a critical capability. Without that ability, it becomes difficult to respond to the opportunities and threats presented by technological advances, changing market preferences, and regulatory shifts. It’s easy to imagine new business models but much more difficult to accomplish them. Counterintuitively, perhaps, the best way to arrive at business model innovation is not to pursue it directly. A new business model is not the goal but the by-product of a process that focuses on maximizing the long-term value you provide to your customers. It is unconstrained by the current boundaries of your organization’s capabilities and able to ­respond to the changes in your environment. Developing a new business model involves aligning three choices: what your customers want, what you can deliver, and how you can make money delivering it. Aligning these three choices should begin with determining what your customers want that you can provide. Ignore your products for the moment and focus instead on the larger problem your customers have, only part of which your products address. As the marketing guru Theodore Levitt says, people don’t want to buy a quarter-inch drill; they

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want quarter-inch holes (but carry it through to understanding what they need the holes for, too).13 Observe and document the full set of activities associated with the problem’s complete solution—for example, customers installing solar panels on the roofs of their homes or the employees of a small company printing documents. Where do they learn about how to solve this problem (or that they have this problem in the first place)? Where do they buy printers and how do they decide? How do they manage installation and technical support? What happens next, and next again after that? Follow the process all the way to the end— how they get rid of their solar panels, or what happens when they move away; how they dispose of the ink cartridges, recycle the paper, and dispose of the printers—and track the problems they encounter, how they solve them, and how much it costs them to do so. Now consider which of these activities your company currently helps your customer do and which your offering burdens your customer with. For example, printing paper burdens customers with recycling paper and replacing ink cartridges—how might you make those activities easier or eliminate them altogether? Installing solar panels requires filing permits with local city offices and seeking financing—how might you alleviate or eliminate those? Now go back through and conduct the same analysis with an eye toward what external changes—new technologies, new market preferences, or new regulatory policies—might be emerging that would significantly change your customer’s needs or create new customers? Don’t focus on breakthrough technologies so much as those technologies that were previously too unreliable or expensive but are now becoming viable solutions. For SolarCity, the increasing reliability and dropping costs of solar power created both new customers and new sources of financing. Further, as new home buyers began valuing solar systems, the company tapped this general trend by partnering with home builders to preinstall solar. For Revolution Foods, it was the growing awareness of childhood obesity and the demand for healthy lunches at school. For your second choice, what you can deliver, consider what your customer wants, which of the related activities you might take on, and which you might take control over by bringing in external partners. If you’re HP’s Managed Print Services, do you want to be in the paper

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recycling business? How about the printer maintenance or recycling business? Or do you want to build a set of partnerships that covers and coordinates these activities? If you’re Revolution Foods, how involved do you want to be in educating kids in the nutrition choices they make? What about feeding them outside school? Similarly, of what your customers may not want to do but have to as part of the current system, what might you get rid of? How about leasing printers and taking them back? How about restocking ink and other supplies? How about tracking the performance and performing the necessary maintenance on solar panels? Which of these capabilities do you already have and which would you need to acquire or develop? This is perhaps the most political of choices to be made as it threatens those in the company who have control over or expertise in capabilities that may no longer be relevant. If your sales team was used to selling printers, and the company now wants you to sell print services, your relationship with customers has changed dramatically (along with your sales team’s incentive packages). Don’t underestimate the importance of being able to navigate the internal politics of determining which capabilities are valued and which are not, along with which new capabilities are needed. The third choice entails how you make money providing customers with the collection of goods and services you’ve decided to put within your offering. The variety of ways to make money, called revenue models, shapes the extent to which particular activities are profitable. Revenue models include unit sales, advertising fees, franchise fees, utility fees, subscription fees, transaction fees, professional fees, and licensing fees. Each has different implications for how you charge customers and how they perceive those costs. Edison moved from a unit sales model of selling isolated systems to a utility model selling energy on an asconsumed basis, in the process reducing the upfront costs to customers and revenue to the company but dramatically growing revenue received over the life of the customer. Edison’s notebooks show, in exquisite detail, the cost of building and operating the Pearl Street station and the revenue that would over time recoup and overtake those expenses. As HP developed its concept for Managed Print Services, it had to develop a revenue model based on not just traditional unit sales (of both printers

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and toner) but also equipment leases and service fees for management and maintenance. How these revenues and profit margins compared to the traditional sales they were displacing was a critical element in defining the new offering. What makes developing such a financial model challenging is whether the innovation team, in R&D or the business unit’s new product development team, has the necessary capabilities to build financial models—at first crude but then increasingly accurate—that define the new business. Design teams often build prototypes of new products and test their performance or test their appeal to users. It is much more difficult to design and test a novel financial model and more difficult still to sell that design to a company’s leadership and its investors or lenders. Some of the critical questions that need to be asked are, What contribution margin will this new business provide? What are the capital costs? When will the business recoup these costs? At what volume and profit margin will the venture break even? What are the cash flow risks? It’s hard enough to answer these questions when an innovation is limited to just changing the product or process. When it involves changing the product, process, and financials, the stakes and uncertainties can be daunting. Business model innovation may be the result of seeing more comprehensive ways to solve customer problems, develop new capabilities that capture more of the value of solving problems, or monetize solutions. Most often, they result from changes to all three. But recognizing the potential for new business models is not the same as building the new businesses they describe. Because many such innovations threaten and are threatened by existing operations, companies have developed and launched business model innovations under the protective wing of R&D or similar groups. Take Johnson Controls’ private-sector building efficiency initiative, which involved significant product and process innovations in a business model. The company simultaneously developed new energy technologies (including renewable energy generation), new financial and contracting features, and new organizational capabilities (expertise in corporate financing and power purchase agreements). To accomplish these radical changes, Johnson Controls launched the

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­ usiness within its Global Energy and Sustainability group, in which b the initiative could safely develop and prove itself before becoming a standalone business. How much of the new offering and the new financial model can you accomplish with your existing resources? Do you have the right people—the right knowledge and skills—to move from a product engineering and sales organization to one that also depends on providing premium services at a profit? Do your technical systems support the new offering? In many cases, even the accounting systems can have trouble integrating unit sales and service revenue let alone other sources of revenue that might be possible. Can a management system built around retail channels adapt to online sales and support? Do the values of the company accommodate these changes in your offerings? A final note: developing a new business model means developing an initial, provisional concept of your offering, analyzing its profit potential and the capabilities required to deliver it, and then returning to the original concept to adapt it as many times as necessary. Innovation teams should avoid overinvesting time and resources in the detailed development of any proposed offering until they have cycled through its implications for the company’s financial model and its organizational capabilities. Until the concept comes into sharper focus after several iterations, there’s little to be gained pursuing fine-grained financial analyses of capital expenses, pricing options, cash flow, net present values, or projected earnings. And yet the team should run a quick check of different elements of the business model with the goal of reducing the largest sources of uncertainties and surfacing any fatal flaws before too much time and money are spent. Each pass through these issues will generate new questions that can be answered with rapid experimentation.

u Mind the Gap There are two aspects to business model innovation: identifying and acquiring the capabilities necessary to run the new business model and identifying and acquiring the capabilities necessary to develop and

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launch the new business model. The following questions focus on developing and launching the model, because they represent the challenge of innovation and, in many ways, are a necessary precursor to identifying and acquiring the necessary capabilities. • Do you have the commitment from leadership to develop a new business model? • Do you have the right team, one with knowledge of the needs of customers, the capabilities required to solve those needs, and the financial acumen to recognize a profitable way to link customer needs and your core capabilities? • Do you have the means to develop and launch promising business model innovations where they can grow and prove themselves, safe from competing interests inside the company? • Does your leadership commit to ensuring the new business will have the resources and political support it will need as it adds the necessary capabilities? Can you staff the new business with the right management to build it from an idea into a proven venture?

Chapter 9  Beyond Capabilities

Recall the two overlapping circles you drew at the beginning of

this book, one labeled “innovation” and the other “sustainability.” The overlap between them, sustainable innovation, is this book’s focus and represents a growing concern of corporate leaders today. Sustainable innovation requires different skills and resources from those required by companies faced with the challenges of innovating in e-commerce, social media, health care, education, or any number of other sectors. There will certainly be common skills needed across different sectors, but our focus is on understanding the capabilities needed by organizations to effectively pursue sustainable innovations. Chapter 1 made clear that no company is insulated from the opportunities and threats that sustainability represents. It pointed out how quickly transformational change can happen and how critical it is for organizations to have the right capabilities to recognize and respond to, if not drive, those changes. Chapter 2 described the commitment necessary to an innovation strategy and to determining what capabilities will be required given that strategy and the market conditions. Chapter 3 described the common challenges to the pursuit of sustainable innovation, and Chapters 4–8 covered the remaining five capabilities that my research identified as, if not unique, certainly central to overcoming these challenges and supporting sustainable innovation.

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This final chapter covers some of the key takeaways from this work as well as a set of more general principles that frame these lessons for your organization and circumstances.

Long Fuse, Big Bang The confusion and uncertainty surrounding sustainability doesn’t mean you can wait and see how things will turn out. Don’t forget the advice of Rudi Dornbusch from Chapter 1: things take longer to happen than you think they will, and then they happen faster than you thought they could. For most major transitions of the last 150 years, that confusion and uncertainty was simply part of the long fuse leading up to the big bang—that moment when innovators demonstrated commercially viable new technologies and business models that set the structure of the industry and its major players for years to come. Different industries are reaching their own versions of this tipping point—when sustainable innovation no longer reflects the promises of techno-utopians but instead the realities of maturing science, shifting market preferences, competing technologies, and changing regulatory policies. As these industries tip, they create opportunities and threats that are felt upstream in their supply chain, downstream in their customers, and sideways into adjacent markets. Corporate leaders need to build the capacity see through the confusion and uncertainty to detect when and how the real changes are taking shape. It doesn’t take a crystal ball, just the right people with the right backgrounds and support. Edison didn’t invent the lightbulb. His aha moment came when he visited the workshop of William Wallace: [In Wallace’s shop] I saw for the first time everything in practical operation. It was all before me. I saw the thing had not gone so far but that I had a chance. I saw that what had been done had never been made practically useful. The intense light had not been subdivided so that it could be brought into private houses.1

Edison saw the elements of a commercial electric industry coming together in time to take a leadership position—not by inventing

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s­ omething that didn’t exist before but rather by bringing together the best pieces of existing efforts. Who in your company has the necessary perspective to see through the confusion and uncertainty, recognize which elements are taking shape and how they are coming together, and lead the change?

In It for the Long Haul Innovation is a journey, not a destination. That means preparing for innovation isn’t just about seeing an opportunity let alone coming up with something new; it’s about building an organization capable of delivering innovations at a pace that maintains its leadership. Every successful initiative changes the landscape, creating threats and opportunities for everyone involved. If you don’t build the capability for continuously launching sustainable innovations, competitors will quickly follow and build on your advances. While the big bang can happen quickly, sustainable innovation triggers a decade or more of rapid technological change. The initial innovations come in the form of new products and services, but over time, equal and often more significant changes take place behind the scenes as learning by doing and learning by using cause new process and supply chain innovations that build on and improve these offerings. When Edison built the first successful electric utility, he created the very landscape that allowed George Westinghouse (along with Nicola Tesla) to introduce their competing alternating current generators and motors. Edison’s inability to continue innovating with the changing industry meant losing the now-famous standards war. Edison’s companies, consolidated as General Electric, did all right, but Edison lost his dominant position in the industry and his personal reputation. Similarly, ten years after Henry Ford perfected his Model T and the system of mass production that built it, General Motors introduced changes to its automobile and the concept of annual model changes. In resisting these economies of scope, the Ford Motor Company lost its dominance and never regained it. And while James Watt’s separate condenser changed the architecture of the steam engine, others rapidly pushed the

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innovation further by redesigning the engine for use in factories, railroads, and ships. Perhaps not surprisingly now, Watt resisted these new uses, and his and Boulton’s company lost its early competitive advantage. Preparing for sustainable innovation means building an organization capable of launching and then maintaining the innovation required to lead the multiple generations of new products and processes that will rapidly follow. Sustainability is a journey, too. As Patagonia’s founder Yvon ­Chouinard is fond of noting, true sustainability can’t exist in our modern world.2 We can only temporarily reduce the environmental and social costs of existing practices, and those reductions may be fleeting because an innovation often allows others to now consume what was once out of their reach. Coal was a solution to England’s deforestation; kerosene and coal gas replaced whale oil in lighting; petroleum replaced wood and coal in transportation; and automobiles replaced horses (and the agricultural acreage devoted to their upkeep). The very success of these solutions made them into problems for future generations. Thus, the need for sustainable innovation will never end.

One Size Does Not Fit All Don’t be fooled by promises that humankind, or at least modern management, has discovered the secret to managing innovation or that Silicon Valley and its gurus have evolved into a higher order of innovators and entrepreneurs. The best practices for bringing Internet companies or mobile apps into the world have no more relevance to introducing more sustainable biopesticides or nutritious school lunches than the management methods for innovating in rocket science do. When it comes to managing innovation, one size does not fit all companies in all markets. This is not new. During the 1960s, fresh from the development of scientific advances from World War II and using the same rocket engineers, NASA put a man on the moon. Then those same top-down, ­science- and engineering-driven principles for managing innovation were turned toward the more endemic problems of society: poverty,

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lack of education, and mental health treatment. Needless to say, they fell short. “If we can put a man on the moon,” people asked, “why can’t we solve the problems of the ghetto?” Richard R. Nelson in a brilliant essay, titled The Moon and the Ghetto, pointed out that the scientific knowledge, technological know-how, and bureaucratic organizing needed for large-scale technological initiatives—however well suited for putting a man on the moon—were as suited for resolving complex and conflicting social problems as they were for fighting a land war in Asia.3 Anyone looking to build the capabilities for innovation must look to their own particular objectives and context to determine what capabilities they need to be successful. All the foosball tables, five-star cafeterias, and hoody-wearing CEOs in the world will not solve the problems of the ghetto or climate change or famine or floods.

Know Where You’re Going Heed the Cheshire Cat’s warning: if you don’t know where you’re going, any road will get you there. Without an innovation strategy, any set of capabilities will get you there. Building an organization capable of sustainable innovation requires having a clear firm-level strategy that guides your commitment to and focus on a specific set of initiatives. Remember these four simple questions: 1. What is your strategic response to sustainability over the next two to five years? 2. What are the three innovation initiatives that will be responsible for the bulk of that response? 3. What capabilities will make those initiatives successful? 4. Which of these capabilities are you missing and how are you building them? Remember too the chicken and the egg: without a clear strategic plan to guide investments in innovation, it is difficult to commit to a limited set of initiatives let alone the capabilities they require to succeed; yet without the right capabilities, it’s difficult to define the potential contribution and

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particular needs of each initiative. The planning process must be iterative—identify potential opportunities and threats, seek out the right capabilities (experts inside and outside the organization), define the potential and challenges of each initiative, and refine your strategy accordingly.

Know the Road You’re Traveling On As I note early on, sometimes sustainability looks like shifting market preferences, sometimes like competing technologies, sometimes like changing policies, and sometimes like a confusion of all three. Sustainable innovation distinguishes itself by not a single technology or market but an overarching objective and a common set of challenges that stand in the way of getting there. The objective is simple: developing and launching new products and processes that meet the needs of the present without compromising the ability of future generations to meet their own needs. Chapter 3 laid out five challenges standing in the way: innovating in a context of declining (rather than expanding) resources; leading change in brownfield rather than greenfield markets; reaching significant scale quickly, with the reliability of mature technologies, and while remaining profitable; navigating multiple, interdependent sources of uncertainty; and overcoming public and policy biases toward tomorrow’s breakthrough innovations over today’s possibilities. I mention these as the most prevalent obstacles, but they are certainly not the only ones in the way of sustainable innovation. Every innovation effort will face its own set of obstacles, depending on the particulars of the company, its overarching strategy, its market and technologies, and the moves and countermoves of competitors and regulators. More important than any list of common challenges is the need to determine which ones you will meet on your chosen path.

Right Tools for the Right Job Countless hours in my grandfather’s workshop burned into my mind a single piece of advice: always use the right tool for the right job. The right capabilities for pursuing sustainable innovation vary with the job,

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but six particular ones consistently emerge across all cases of sustainable innovation. • Commitment—the ability to credibly commit the organization’s resources, and fate, to a specific course of action that engenders reciprocated commitments by others inside and outside the organization • Nexus work—the ability to envision, build, and maintain new and enduring commitments among previously disconnected organizations, technologies, policies, and other resources • Managing science and policy—the ability to recognize the current landscape of relevant science and policies affecting your efforts, predict its evolution, and even drive changes necessary to enable innovation • Recombinant innovation—the ability to recognize, adapt, and combine the elements of existing solutions into novel offerings that can scale effectively, quickly, and profitably • Design for revolutions—the ability to employ design in ways that domesticate radical change, reducing resistance and enabling adoption of novel and transformative technologies by brownfield markets and industries • Business model innovation—the ability of your organization to explore novel revenue models, distribution channels, value propositions, and new relationships with suppliers, partners, distributors, consumers, and regulators in parallel with new technologies This book began by asking what enables companies to successfully develop and deliver sustainable innovation. By its end I hope it offers perspective and guidance for reducing some of our most pressing environmental and social problems. In addition to the findings presented earlier, I have several general observations to share with you now.

Some Parting Shots Pursue wisdom. In sustainable innovation, it is critical for leadership to adopt an attitude of wisdom. Socrates once defined wisdom as know-

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ing you know nothing.4 Modern management scholars have since recognized the importance of leading with an attitude of wisdom. For example, Bob Sutton and Jeff Pfeffer describe it as having both the confidence to act on your knowledge and the humility to doubt what you know.5 Wisdom is not about what you know; it’s about how you know it. This wisdom may be the only antidote to the competency trap and the trained incapacity that past success brings to organizations. Success and the capabilities that enable it act as blinders preventing people at all levels in organizations from seeing gaps in their knowledge. These gaps emerge slowly, brought to light by changes in the environment that, in turn, require new capabilities to recognize and exploit. Practicing an attitude of wisdom requires taking a hard, sober look at what you know, what has changed in the environment, and what you need to know now that you didn’t know before. This perspective combines the macroscopic with the microscopic—the ability to balance between broad views of the larger market and, ultimately, the world and more narrow issues of your particular business. It combines a sharp and single-minded focus on execution with reflection and broad-ranging curiosity. Only with an attitude of wisdom can you effectively answer the question of what it is you don’t know but should—the first step toward identifying and pursuing the necessary capabilities to be effective. Pattern recognition. Pattern recognition describes making sense of the many different events, ideas, objects, and actions in the world around us in a way that gives us a single and meaningful understanding of what’s going on. One of the lessons of the long fuse and big bang is that most of the elements that make up a revolutionary innovation have been present in the years, if not decades, before they come together in a sudden and rapid change, as were the elements of Edison’s solution for electric lighting, Ford’s mass production, SolarCity’s business model, and Daimler’s clean diesel. This makes innovation less a process of conception and more pattern recognition—of seeing how these previously disparate elements are connected and how they could come together in new ways. In other words, innovation requires the ability to take incomplete and shifting customer preferences, emerging technologies, pending regulations, and competitive signals on the periphery of existing

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markets and industries and recognize their pattern. Driving sustainable innovation requires doing so through the added noise of policy wonks, technologists, futurists, and sales reps, all arguing in their self-interest. Pattern recognition works against us when it becomes pattern matching—when we look for signals that match preexisting patterns. Psychologists who study decision making call this the “confirmation bias.”6 We tend to look for, and give more weight to, evidence that supports our existing beliefs. With ambiguous data, our interpretation tends to confirm our existing biases. When those biases draw on longstanding organizational capabilities, it takes great effort to not see what we’re expecting to see. But there are other challenges, too, like seeing the pieces but missing the larger pattern entirely. There is the famous internal memo at Western Union in 1876, in response to the recently developed telephone, that argued the new technology had “too many shortcomings to be seriously considered as a means of communication. The device is inherently of no value to us.”7 Or seeing patterns that aren’t really there, which leads to chasing opportunities or dodging threats that never come to pass. Worse, it can become a perpetual fire drill of strategic initiatives, press releases, and development efforts that drain resources, focus, and commitment across the organization. Recognizing patterns from incomplete signals surrounded by noise becomes a skill only with practice: alone, to train your observation and intuition; in organizations, to emphasize and support the same skills in others. Find analogies. Looking for emerging patterns while ignoring particular patterns (pattern matching) requires knowing what patterns you’re looking for but not being vested in which ones you find. This requires broad-ranging knowledge and the ability to make analogies between what you’re seeing now and what you and others have seen before. General George Patton once said of the training of military officers that “an officer must study history to become so thoroughly conversant with all sorts of military possibilities that whenever an occasion arises he has at hand without effort on his part a parallel.”8 So too should leaders study the history of innovation—to become better able to see how patterns of

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change in other industries and at other times might be relevant to understanding how their current situation is unfolding. In fact, a number of cognitive psychology studies have shown that failures in problem solving often come not from the lack of knowledge but from the inability to recognize which old knowledge is appropriate to a new situation. Knowledge is contextual. When we learn something, it tends to remain entangled in its original situation and meaning. Recognizing emerging patterns of change before others do requires disentangling what you know from the context in which you learned it—both to let go of obsolete beliefs and to find other, more relevant ones. This relies on a process called analogic reasoning, or recognizing how a current situation or an emerging pattern resembles past ones. Seeing the current situation in terms of one or more past situations reveals how solutions that worked in past can be adapted to fit the present. As the psychologist Donald Schon describes it, “Problem-setting is a process in which, interactively, we name the things to which we will attend and frame the context in which we will attend to them.”9 “Framing” means, essentially, recognizing patterns. The historian Thomas Hughes writes in American Genesis about the central role of analogy, or metaphor, in Edison’s innovations: Edison used metaphors extensively when he resorted to analogy, an explicit statement about the similarities juxtaposed in a metaphor. He worked out the quadruplex telegraph, perhaps the most elegant and complex of his inventions, “almost entirely on the basis of an analogy with a water system including pumps, pipes, valves, and water wheels.” . . . Later, thinking metaphorically, he conceived of the interaction between existing illuminating gas-distribution systems and the illuminating incandescent-light system he intended to invent. The analogy stimulated him to invent a system, rather than only an incandescent lamp.10

This process of pattern recognition—interpreting new situations through analogies to old ones—is both more effective and harder to accomplish in organizations: more effective because the diverse experiences of those in organizations provides more potential analogies and

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because conversations about these interpretations tend to encourage new perspectives and dislodge people from their old ones, harder because those observations, analogies, and conversations must be across people, across organizational units, and over time. And yet a disciplined approach to using analogies in recognizing and responding to opportunities and threats is central. What other industries, markets, and companies have faced challenges similar to the ones in your industry? What historic parallels can be drawn between sustainable innovations unfolding in your markets and those of past markets? Robust actions. Multiple patterns typically emerge at the same time, making it dangerous to wait until a single pattern crystallizes. Instead, it’s essential to take actions that move you forward in ways that prepare you for one outcome without risking your ability to react to others. Recall Eric Leifer’s research on how chess masters approach a chess game. Instead of playing out in their minds the myriad possible moves and countermoves—choosing moves by predicting the game’s course—they choose moves that advance their strategic gambit but give them enough flexibility to respond to unexpected moves by their opponent. They do not and could not rely on detailed planning because it made them unresponsive to evolving conditions of the game. Leifer described these moves as robust actions, and Robert G. Eccles, Nitin Nohria, and James D. Berkley generalized this concept to describe the effective actions of managers in organizations.11 Effective in the conditions of a relatively certain short run, robust actions remain adaptive in the face of uncertain and evolving conditions over the long run. Many competitors in sustainable innovations are pursuing their own strategies. Witness the many competing clean energy alternatives— solar, wind, energy efficiency, biofuels, hydrogen fuel cells, natural gas, wave power, and so on. Organic, sustainably raised or harvested foods, locally grown or fair trade, have hundreds of certifications. No one knows which will be the dominant model until, suddenly, everyone seems to know. And what tips the market toward that single model will be a combination of technical advances, market preferences, policy decisions, and who knows what else.

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As a result, companies pursuing sustainable innovation need to be chess masters—recognizing and advancing their strategic goals through robust actions that leave them the flexibility to respond to unexpected moves by their opponents and the larger market. This is easier for larger companies, with large R&D capabilities, because they can pursue multiple options at once. Johnson Controls, for example, is developing innovations in battery technologies for all-electric vehicles, plug-in hybrids, and start-stop batteries. When the big bang arrives, it will be well prepared regardless of which direction its market goes. Sure, it will not be as far along as it would be had it chosen and pursued a single technology strategy, but it will not be as far behind either. To be a chess master, you need to be clear about your strategic objectives for innovation as well as the many patterns forming among the competing alternatives. From this position, as Amazon’s Jeff Bezos once said, you need to be firm on your vision while remaining flexible on the details.12 Small steps. A Chinese proverb says, “It is better to take many small steps in the right direction than to make a great leap forward only to stumble backward.” When you first begin to see a pattern—an emerging threat or opportunity—the evidence is rarely conclusive and the alternative explanations are equally plausible. These uncertainties favor two extremes: inaction and great leaps. Both reactions are dangerous. Some choose a wait-and-see approach, gathering more information, perfecting their work, or letting the dust settle, which usually results in losing the chance to lead change. The innovation literature is filled with stories of established companies that saw opportunities and developed new technologies but failed to commit. They never made the leap. General Electric had an implantable pacemaker developed and working but hesitated long enough to allow Medtronic to develop and launch its product and rapidly own the market. Sony’s infighting and doubts created the opportunity for Apple to introduce a digital version of the Walkman and take that market. Many more internal ideas and projects are stifled and abandoned long before they even have a chance to be counted among the dead.

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Others take great leaps because the greatness of the leap overcomes their indecision and anxiety in one swift moment. But blind commitment to pursuing innovation can be equally fatal. Burn your ships is the advice Sun Tzu gives in The Art of War, telling the story of invading a neighboring province and burning his ships to create in himself and his team a clear sense of purpose: win or die trying.13 Just make sure you’re on the right beach first. Moreover, corporate leaders and entrepreneurs often use their commitment as proof to others of the worth of their ideas. Commitment is not enough to succeed—too often it hides contradictory evidence that would reveal the venture is heading in the wrong direction. It’s called “escalating commitment to a failing course of action,” and it comes about any time we find ourselves taking public and effortful actions that reflect a decision on our part. The more time we spend working on a venture and publicly demonstrating our commitment to it, the more difficult it gets for us to change our thinking. The social psychologist Karl Weick observed that, when facing largescale projects, people often define the effort in ambitious ways that overwhelm their ability to get started. Weick recommends a strategy of small wins, breaking down problems into steps that are both small enough to be comprehensible, yet large or risky enough to arouse energy and a sense of accomplishment.14 This is not a matter of good project management—the right small steps that prepare you to make the leap are not smaller pieces of the larger project. To those who have already mentally and emotionally committed to pursing a particular course of action, these next steps often feel like distractions. But they are critical to moving forward wisely—with enough confidence to act but enough humility to want to learn. Small wins are small steps in the right direction. Use them to explore your ignorance, to begin building the new capabilities you’ll need to move further. Watch for the small steps—connecting with the right people and pursuing the right experiments that enable you to learn as you move forward. Two degrees. Chances are, when new patterns are emerging that require innovative responses, the people with the right perspectives, experiences, and capabilities are not the ones already in your direct net-

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work, in your organization, or even in your industry. You’re going to need people you don’t know and likely are two degrees away—you know people who know the right people. The paradox inherent in the innovation process is that innovators need strong ties to develop and launch new products and services and, if they are successful, strongly tied communities that build around the emerging innovations. But they also need wide-ranging weak ties to generate the innovative ideas in the first place. The more successful you are, the more you will be surrounded by people who work in the same organization, with the same technologies, or in the same market. In many ways, they think and act the same way you do. They have the same experiences, their power and value rests on the same system, and they will see the same patterns you do. Remember Henry Ford’s pursuit of mass production: he began with small steps and reached two degrees out, hiring Max Wollering and Walter Flanders to access their experiences with installing massproduction equipment and processes in a range of industries. Steve Jobs’s pursuit of retail began with not a bold leap into new stores but rather the small steps of bringing in Mickey Drexler, former CEO of the Gap, who connected him with Ron Johnson, architect of the Target retail strategy. These were people who could read the emerging patterns from a different perspective and respond effectively and with confidence. In preparing for sustainable innovation, the ability to bring together people from two degrees away becomes a fundamental leadership skill. Seeing new patterns emerge only begins the process. Quickly afterward, you need to find people who are better versed in reading those particular patterns—people with the right backgrounds, training, and experience. You need to bring them into your organization, trust their perspectives, and help them pull together the resources they’ll need to be successful. How effective are you and your organization at identifying the right people, recruiting them, and giving them the support they’ll need to lead your innovation effort? Finally, be bold. The sustainable innovations described in this book—both historic and current—reshaped entire organizations and markets. Those of the last decade, in particular, represent the ­beginning

200  Chapter 9

of a broader wave of new technologies, new policies, new products and services, and new customer demands for sustainable innovations. They represent what will, in every industry they pass through, be rapid changes in the dominant organizations, business models, and underlying technologies. And then, within a decade or so, those changes will become the new and dominant structure, the way of doing business, and core technologies. To drive, let alone survive, these innovations requires bold moves. Bold in the sense that they will challenge the status quo not just of markets and industries but, perhaps even more so, of the individuals and companies who generate, develop, and deliver them. As Machiavelli warns us, There is nothing more difficult to plan, more doubtful of success, nor more dangerous to handle than to initiate a new order of things. . . . Thus it arises that on every opportunity for attacking the reformer, his opponents do so with the zeal of partisans, the others only defend him half-heartedly, so that between them he runs great danger.15

These bold moves should be neither reckless nor disingenuous. They must be real, in that they are concrete deeds rather than words. They must be focused, in that they are directed at accomplishing a clear objective. They must be productive, in that they move you closer to your objective, whether confirming or contradicting your beliefs. And finally, they must be sustainable. The two central topics of this book, sustainability and innovation, are journeys without end. As we innovate and as sustainable as we become, we will continually change the world around us and press up against new limitations. Today’s innovations become tomorrow’s unsustainable institutions. Our best means to avoid the next generation of social and environmental problems will be to hone our capabilities for effecting change. As we strain the limits of existing resources and existing communities, it’s necessary to continue improving, to continually push for more sustainable solutions despite knowing that we will never reach our destination.

Beyond Capabilities  201

Our greatest challenge isn’t in making change happen but in making change natural. We—as individuals, organizations, and even entire industries—will need to develop the means to recognize opportunities for and drive advances in sustainability without provoking vigorous defense from the embedded interests of the status quo, causing dramatic swings in local and federal policies, or generating fear and opposition to new ideas and approaches.

Notes

Introduction 1.  Great Britain and World Commission on Environment and Development, Our Common Future: A Perspective by the United Kingdom on the Report of the World Commission on Environment and Development (London: Department of the Environment, 1988), 41. 2.  Phil Patton, “For Ford, a Green Roof That Springs Eternal,” New York Times, ­December 29, 2010, http://wheels.blogs.nytimes.com/2010/12/29/for-ford-a-green -roof-that-springs-eternal/. 3.  Marc Roca and Ehren Goossens, “BP Solar Business Exit Counters Trend by Google, Buffett, Total.” Bloomberg, December 21, 2011, http://www.bloomberg.com/ news/2011-12-20/bp-to-shut-down-solar-power-unit-exit-business-spokesman-says .html; Kevin Bullis, “Why BP Solar Failed,” MIT Technology Review, December 21, 2011, http://www.technologyreview.com/view/426461/why-bp-solar-failed/. 4.  Donald E. Stokes, Pasteur’s Quadrant: Basic Science and Technological Innovation (Washington, DC: Brookings Institution Press, 1997), 16. 5.  See Andrew B. Hargadon and Martin Kenney, “Misguided Policy? Following Venture Capital into Clean Technology,” California Management Review 54, no. 2 (2012): 118–139; Martin Kenney and Andrew Hargadon, “Venture Capital and Clean Technology,” in Can Green Sustain Growth? From the Religion to the Reality of Sustainable Prosperity, ed. John Zysman and Mark Huberty, 59–76 (Stanford, CA: Stanford University Press, 2014).

Chapter 1 1.  Rachel Carson, Silent Spring (Boston: Houghton Mifflin, 1962). 2.  See Intergovernmental Panel on Climate Change, Climate Change 2013: The Physical Science Basis (Cambridge: Cambridge University Press, 2013). 3.  The US Department of Defense, in the Quadrennial Defense Review, its periodic assessment of strategic objectives and potential military threats, stated, “As greenhouse gas emissions increase, sea levels are rising, average global temperatures are increasing and severe weather patterns are accelerating. These changes, coupled with other global dynamics, including growing, urbanizing, more affluent populations and substantial

204   Notes to Chapter 1

economic growth in India, China, Brazil and other nations, will devastate homes, land and infrastructure. Climate change may exacerbate water scarcity and lead to sharp increases in food costs. The pressures caused by climate change will influence resource competition while placing additional burdens on economies, societies and governance institutions around the world. These effects are threat multipliers that will aggravate stressors abroad such as poverty, environmental degradation, political instability and social tensions—conditions that can enable terrorist activity and other forms of violence.” US Department of Defense, “Quadrennial Defense Review, 2014,” http://www .defense.gov/pubs/2014_Quadrennial_Defense_Review.pdf, p. 8. 4.  This is a more general version of Dornbusch’s Law, as it has become known. Dornbusch’s work was on financial crises, and he said that “[a] crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.” “Interviews: Dr. Rudi Dornbusch,” Frontline, http://www.pbs.org/wgbh/pages/ frontline/shows/mexico/interviews/dornbusch.html (accessed December 30, 2014). His important insight, whether on financial crises or change more generally, was that it is possible to be wrong twice when predicting future events. 5.  Three decades of experimentation with telegraphy led to the installation of the first commercial telegraph line in 1839 on the Great Western Railway in Britain, running thirteen miles, from Paddington station to West Drayton. It triggered rapid spread and evolution of the technology, such as Samuel Morse’s code, which was developed in 1837 and required only a single line. 6.  This element of electric technology crystallized with the independent inventions of Werner Siemens and Charles Wheatstone in 1867. It was quickly followed by improvements from others like Zénobe Gramme and Charles Brush, and it became possible to power dozens of lights. 7.  The development and application of electric technologies would then go on to revolutionize different industries at different times: the incandescent bulb begat vacuum tubes (for rectification, amplification, and switching) and cathode ray tubes and the capabilities and equipment for advancing X-ray technology. 8.  For the history of the railroad, see Christian Wolmar Blood, Iron, and Gold: How the Railroads Transformed the World (New York: PublicAffairs, 2010). The founding years of the automobile manufacturers are as follow: Cadillac, 1902 (from the remains of the Henry Ford Company, Ford’s earlier venture); Ford, 1903; Buick, 1903; Chrysler (originally the Maxwell Motor Company), 1904; General Motors, 1908 (as a holding company for car companies including Buick, Cadillac, and Oldsmobile); and Chevrolet, 1911. The founding years of the Internet leaders are as follow: Netscape (as Mosaic), 1994; Amazon, 1995; Google, 1998; and Facebook, 2004. 9.  For more on the collaboration between Dow and the Nature Conservancy, see Dow, “Dow and the Nature Conservancy Announce Collaboration to Value Nature,” press release, January 24, 2011, http://www.dow.com/news/press-releases/

Notes to Chapter 1   205

article/?id=5877. For more on KKR and EDF, see Environmental Defense Fund, “EDF’s work with KKR and Carlyle Group,” http://business.edf.org/projects/featured/private -equity-green-returns/our-work-with-kkr-and-carlyle-group/ (accessed October 9, 2014). 10.  David Kiron, Nina Kruschwitz, Holger Rubel, Martin Reeves, and SonjaKatrin Fuisz-Kehrbach, “Sustainability’s Next Frontier: Walking the Talk on Sustainability Issues That Matter Most,” December 16, 2013, http://sloanreview.mit.edu/projects/ sustainabilitys-next-frontier/. 11.  For more on SASB, see Aleksandra Dobkowski-Joy and Beth Brockland, “How Firms Are Moving the Needle on Integrated Reporting,” GreenBiz.com, March 6, 2013, http://www.greenbiz.com/blog/2013/03/06/firms-moving-needle-integrated-reporting; and Michael Bloomberg and Mary Schapiro, “Give Investors Access to All the Information They Need,” Financial Times, May 20, 2014 http://www.sasb.org/wp-content/ uploads/2014/06/FT-Branded-File.pdf. 12.  American Wind Energy Association, “The Cost of Wind Energy in the U.S.,” http://www.awea.org/Resources/Content.aspx?ItemNumber=5547 (accessed October 9, 2014). 13. David Frankel, Kenneth Ostrowski, and Dickon Pinner, “The Disruptive ­Potential of Solar Power,” McKinsey Quarterly, April 2014, http://www.mckinsey.com/ insights/energy_resources_materials/the_disruptive_potential_of_solar_power. 14. Martin LaMonica, “LED Bulb Efficiency Surges, but Light Quality Lags,” Greentech Media, December 11, 2013, http://www.greentechmedia.com/articles/read/ led-bulb-efficiency-surges-but-light-quality-lags. 15.  Quoted in Garrett Hering, “Report: Wake Up, the Clean Energy ‘Revolution’ Is Here,” GreenBiz.com, February 11, 2014, http://www.greenbiz.com/blog/2014/02/11/ report-never-mind-detours-energy-revolution-here. 16.  Kristen Hays and Matthew Robinson, “Exxon Cleans Up Arkansas Oil Spill; Keystone Plan Assailed,” Reuters, March 31, 2013, http://www.reuters.com/article/ 2013/03/31/us-exxon-pipeline-spill-idUSBRE92U00220130331; Catherine E. Shoichet, “Spill Spews Tons of Coal Ash into North Carolina River,” CNN, February 9, 2014, http:// www.cnn.com/2014/02/09/us/north-carolina-coal-ash-spill/; Louise Story, “Lead Paint Prompts Mattel to Recall 967,000 Toys,” New York Times, August 2, 2007, http://www .nytimes.com/2007/08/02/business/02toy.html; “Bangladesh Workers Protest as Building Collapse Death Toll Passes 400,” The Guardian, May 1, 2013, http://www.theguardian .com/world/2013/may/01/bangladesh-workers-protest-may-day-building-collapse; ­Tiffany Hsu, “Dairy Farm Linked to Burger King, In-N-Out Accused of Animal Abuse,” Los Angeles Times, October 11, 2012, http://articles.latimes.com/2012/oct/11/business/ la-fi-mo-dairy-burger-king-innout-animal-abuse-20121011. 17.  “Walmart Announces New Commitments to Dramatically Increase Energy Efficiency and Renewables,” April 15, 2013, http://news.walmart.com/_news_/news

206   Notes to Chapter 1

-archive/2013/04/15/walmart-announces-new-commitments-to-dramatically-increase -energy-efficiency-renewables. 18.  Joel Makower, “Can the Beef Industry Collaborate Its Way to Sustainability?” GreenBiz.com, January 9, 2014, http://www.greenbiz.com/blog/2014/01/09/can-beef -industry-collaborate-its-way-sustainability. 19.  David Lobato, Hewlett-Packard marketing executive, interview by the author, January 20, 2011. 20.  Jeffrey M. Jones, “In U.S., Most Do Not See Global Warming as Serious Threat,” Gallup, March 13, 2014, http://www.gallup.com/poll/167879/not-global-warming -serious-threat.aspx. 21.  Hering, “Report.” 22.  Can you really treat the best practices of innovation as if they apply equally everywhere? According to most business books, yes. Take the publisher’s description of one of my favorites in this category, What Would Google Do?: “By reverse-engineering Google, [this book] discerns its core practices, strategies, and attitudes to lay out a blueprint for what corporations, governments, and individuals can do to build their own success.” See “HarperCollins Publishes First Video Book Jeff Jarvis’ What Would Google Do?” February 3, 2009, http://corporate.harpercollins.com/us/press-releases/183/ HARPERCOLLINS%20PUBLISHES%20FIRST%20VIDEO%20BOOK%20JEFF%20 JARVIS’%20WHAT%20WOULD%20GOOGLE%20DO; see also Jeff Jarvis, What Would Google Do? (New York: Harper Business, 2011). 23.  Adam Bryant, “In Head-Hunting, Big Data May Not Be Such a Big Deal,” New York Times, June 19, 2013, http://www.nytimes.com/2013/06/20/business/in-head -hunting-big-data-may-not-be-such-a-big-deal.html. 24.  When I was a doctoral student, Bob Sutton and I spent eighteen months studying IDEO product development. We interviewed more than sixty IDEO designers and managers, observed projects teams at work, studied over twenty-four brainstorming sessions, and generally hung around in an attempt to determine what made the organization, already famous for its innovative designs for clients, so successful. One of our findings had to do with IDEO’s heavy reliance on group brainstorming sessions—a practice for generating novel ideas that is simultaneously praised by the management literature as a hallmark of innovative companies and vilified by the scientific literature. Laboratory experiments have consistently shown that face-to-face groups generate fewer nonoverlapping ideas per person than when people generate ideas alone, so we decided to look closely at how IDEO was using brainstorming and what, if anything, they were getting from it. We found that brainstorming played an integral role in supporting IDEO’s innovative capabilities by providing a venue for sharing information, modeling helping behavior, and encouraging the pursuit of novel ideas. In turn, IDEO’s strategic focus of working with clients from a range of industries supported brainstorming because participants brought their varied experiences from these different industries

Notes to Chapters 1 and 2   207

to sessions. In companies that work within only a single industry, on the other hand, brainstorming sessions are not as effective because participants share backgrounds and experiences. 25.  As Kathleen Eisenhardt and Jeffrey Martin describe them, dynamic capabilities include new product and process development, strategic decision making, resource allocation, and mergers, acquisitions, joint ventures, and partnerships that individually and together create value for firms by developing innovations that change a company’s offerings or the processes of making, marketing, distributing, selling, and servicing those offerings. See Kathleen M. Eisenhardt and Jeffrey A. Martin, “Dynamic Capabilities: What Are They?” Strategic Management Journal 21, no. 10 (2000): 1105–1121. 26.  Robert H. Thurston, Growth of the Steam-Engine (London: Kegan Paul, 1878), 88. 27.  Ibid., 93–95. 28.  Birmingham and Midland Institute, Transactions, Excursions, and Reports, 1870 (Birmingham: Josiah Allen, 1871), 99. 29.  The historian F. M. Scherer describes the focus of this work: “New designs and materials were proposed not only to solve strictly mechanical and technical problems, but also to simplify the fabrication of parts, to facilitate the erection and maintenance of engines, to prolong the life of engine components, to avoid expensive materials, to increase the engine’s operating efficiency, and even to avoid having to buy components from vendors whose prices were too high.” F. M. Scherer, “Invention and Innovation in the Watt-Boulton Steam-Engine Venture,” Technology and Culture 6, no. 2 (1965): 180.

Chapter 2 1.  Bob Casey, John Dodge, and Horace Dodge, “Henry Ford and Innovation: ‘From the Curators,’” p. 6, http://www.thehenryford.org/education/erb/HenryFordAnd Innovation.pdf (accessed January 21, 2015). 2.  Douglas Brinkley, Wheels for the World: Henry Ford, His Company, and a Century of Progress (New York: Viking Press, 2003), xxii. 3.  Daniel Sperling, Two Billion Cars: Driving toward Sustainability (Oxford: Oxford University Press, 2009), 27–30. As Sperling notes, “Honda and Toyota were building strong, profitable businesses with environmentally superior technology. American car companies don’t lag in advanced technology but rather in commercializing environmental technology. General Motors and Ford have invested in the development of fuel cells, plug-in hybrids, and other advanced automotive technologies. The real issue is their willingness to take risks and transfer technology from the lab to the marketplace” (8; emphasis in original)—in other words, their ability to recognize and commit to pursuing sustainable innovations in their market. 4.  Zachary Shahan, “Electric Car Sales Increased 228.88% in 2013 (US EV and Hybrid Sales Update),” Evobsession, January 7, 2014, http://evobsession.com/electric -car-sales-increased-228-88-2013/.

208   Notes to Chapter 2

5.  Lewis Carroll and Martin Gardner, The Annotated Alice: Alice’s Adventures in Wonderland and Through the Looking Glass (New York: C. N. Potter, 1960), 65. 6.  Bryce G. Hoffman, American Icon: Alan Mulally and the Fight to Save Ford Motor Company (New York: Crown, 2013), 5. 7.  Obviously, competencies are necessary, but at the same time, they create a trap in which our proficiency and experience with an existing solution lead us to repetition, which increases competency while making new and potentially better solutions look worse by comparison. Psychologists call this trained incapacity: “The more we know about how to do something, the harder it is to learn how to do it differently.” Abraham Kaplan, The Conduct of Inquiry (San Francisco: Chandler, 1964), 31. 8.  Carol S. Dweck, Mindset: The New Psychology of Success (New York: Random House, 2006), 6, 7. 9.  Benjamin S. Bloom, Developing Talent in Young People (New York: Ballantine Books, 1985). 10. Dweck, Mindset, 10. 11.  Robert J. Sternberg, “Intelligence, Competence, and Expertise.” In The Handbook of Competence and Motivation, ed. Andrew J. Elliot and Carol S. Dweck (New York: Guilford Press, 2005), 17. The influence of institutions on a fixed versus growth mind-set can perhaps be most clearly seen in how the original IQ test has become a device perpetuating fixed mind-sets when its origins had a quite different purpose. Alfred Binet, who wrote the original IQ test, meant it not to measure individual differences in intelligence but to identify who was not benefiting from the school system and understand how to provide different opportunities for learning. In other words, the fundamental assumption was that children could learn how to learn. 12.  Jack Welch and John A. Byrne, Jack: Straight from the Gut (New York: Warner Books, 2001), 384. 13. Dweck, Mindset, 124. 14.  In fact, there are tremendous potential benefits to this first mile in the smart grid. In arguing its case for smart meters, PG&E includes “hourly interval data of electric energy usage or daily gas usage; any tariff or demand response program which requires interval data, or web page presentation of that data to customers; remote service connect/disconnect capability; real-time meter diagnostic alarms and health assessment checks; real-time monitoring for security events on the metering device; remote firmware upgrades; outage information and power status; time-of-use (TOU) data collection and access to any tariff that requires a device to collect TOU data; and home area network (HAN) connectivity inside the home and access to any tariff or program that requires HAN.” Jeff St. John, “PG&E’s Smart Meter Opt-Out: The Ins and Outs,” Greentech Media, November 28, 2011, http://bit.ly/10n0qP9. 15.  Mark Jaffe, “Xcel’s SmartGridCity Plan Fails to Connect with Boulder,” Denver Post, October 28, 2012, http://bit.ly/138zHvW.

Notes to Chapters 2 and 3   209

16.  SmartGrid Consumer Collaborative, “Excellence in Consumer Engagement,” October 24, 2011, http://bit.ly/ZY2cGq. In their defense, given that utilities are regulated monopolies, they have not needed the ability to market to their customers. 17.  Quoted in April Nowicki, “Boulder’s Smart Grid Leaves Citizens in the Dark,” Greentech Media, March 18, 2013, http://bit.ly/ZXWZhH. 18.  Mindy Spatt, spokeswoman for the Utility Reform Network, quoted in Lois Henry, “Edison’s Smart Meter Rollout Shows How It’s Done,” Bakersfield Californian, September 8, 2012, http://www.bakersfieldcalifornian.com/columnists/lois-henry/ x51736554/LOIS-HENRY-Edisons-smart-meter-rollout-shows-how-its-done. 19. Tom Raftery, “PG&E Smart Meter Communication Failure—Lessons for the Rest of Us,” GreenMonk: The Blog, December 16, 2009, http://greenmonk .net/2009/12/16/pge-smart-meter-communication-failure/. In addition, the city of Sebastapol voted to ban smart meters—an unenforceable policy but public relations disaster nonetheless. This on the heels of a storm of complaints from across its territory throughout the roll-out. Jesse Berst, “CA Town Blockades Smart Meters, PG&E Declares Moratorium,” Smart Grid News, March 19, 2013, http://www.smartgridnews .com/artman/publish/Technologies_Metering/CA-town-blockades-smart-meters-PG -E-declares-moratorium-5601.html/#.VDcvBlffmFA. 20. “SMUD Completes Installation of Smart Meters,” Sacramento Observer, April 17, 2012, http://tw.gs/P1ybDz. 21.  These capabilities include everything involved with the successful generation, development, and introduction of new offerings and enabling processes: particular technology and market expertise, new product development, manufacturing, supply chain management, operations, finance, sales and marketing, human resources, government affairs, legal, compliance, strategy, and leadership.

Chapter 3 1.  J. M. Darley and C. D. Batson, “‘From Jerusalem to Jericho’: A Study of S­ ituational and Dispositional Variables in Helping Behavior,” Journal of Personality and Social Psychology 27 (1973): 100–108. 2.  Lee Ross and Richard E Nisbett, The Person and the Situation: Perspectives of Social Psychology (Philadelphia: Temple University Press, 1991), 125. 3.  General Dwight Eisenhower echoed these same comments a century later, ­saying, “I’d rather have a lucky general than a smart general. They win battles.” It’s not that competence doesn’t matter, but one particular competence is critical: the ability to respond appropriately when faced with opportunities and threats beyond your control. Quoted in Charles Vallance, “Business Leaders Who ‘Leave Nothing to Chance’ Attract Bad Luck and Missed Opportunities,” The Telegraph, April 20, 2014, http://www .telegraph.co.uk/finance/comment/10777363/Business-leaders-who-leave-nothing-to -chance-attract-bad-luck-and-missed-opportunities.html.

210   Notes to Chapter 3

4.  The same expansion of resources can be seen in energy and power. The development of coal greatly expanded Europe’s energy supplies. The development of the coal-powered steam engine, then electricity, and then the internal combustion engine expanded Europe’s stocks of industrial power, and colonialism expanded its stocks of low-cost raw materials and markets for finished goods. 5.  According to Bulcke, “Overuse of fresh water poses not only a serious environmental hazard, but also a major risk to political and social stability” and could be the cause of massive food shortages. Nestlé, “Nestlé CEO Warns Water Scarcity Is Major Threat to Food Industry,” February 25, 2013, http://www.nestle.com/media/newsand features/city-food-lecture. Other consumer packaged goods companies, such as ­Unilever, see similar threats. See Stuart Smith, “Is Unilever’s Sustainability Drive a Hostage to Fortune?” Marketing Week, December 8, 2010. 6.  See “Thailand Slashes Growth Forecast after Floods,” Financial Times, October 28, 2011, http://www.ft.com/intl/cms/s/0/2df28760-0137-11e1-ae24-00144feabdc0 .html#axzz3MYsvccLY; Supunnabul Suwannakij, “Thai Rice Production Seen ­Climbing to Record after Floods,” Bloomberg, January 19, 2012, http://www.bloomberg.com/ news/2012-01-19/rice-output-in-biggest-shipper-thailand-seen-gaining-to-record -after-flood.html; Larry Dignan, “Thailand Floods to Lead to Hard Drive Shortages for Months,” ZDNet, October 23, 2011, http://www.zdnet.com/blog/btl/thailand-floods -to-lead-to-hard-drive-shortages-for-months/61597; Lucas Mearian, “Impact of Hard Drive Shortage to Linger through 2013,” Computerworld, December 9, 2011, http:// www.computerworld.com/s/article/9222522/Impact_of_hard_drive_shortage_to _linger_through_2013. 7.  The City of Aspen report found several key changes taking place. First, Aspen’s climate has changed noticeably over the past twenty-five years. Temperatures have increased about three degrees Fahrenheit, and the average number of frost-free days per year has increased about twenty days (bad news for ski resorts). Second, total precipitation has decreased 6 percent in the past twenty-five years and the amount falling as snow has decreased 16 percent. Higher in nearby mountains, at 10,600 feet, total precipitation has decreased 17 percent. Finally, in the future, more of Aspen’s precipitation will fall as rain rather than snow. Snowpack will decline, and peak runoff will occur earlier in the spring. Summer and fall stream flows will be reduced, possibly declining below the minimum needed to protect aquatic species. The greater the temperature rise, the more extreme these effects will be. The implications are considerable and directly affect Aspen’s most important asset—the ski industry. Aspen Global Change Institute, Climate Change and Aspen: An Assessment of Impacts and Potential Responses (Aspen, CO: Aspen Global Change Institute, 2006), http://www.agci.org/dB/PDFs/Publi cations/2006_CCA.pdf. 8.  Jordan Weissmann, “The End of Soda?” The Atlantic, May 18, 2012, http://www .theatlantic.com/business/archive/2012/05/the-end-of-soda/257399/; Ben Forer, “New

Notes to Chapter 3   211

York Mayor Michael Bloomberg Proposes Ban on Large Sodas,” ABC News, May 31, 2012, http://abcnews.go.com/Health/york-city-mayor-michael-bloomberg-proposes -ban-large/story?id=16466872. 9.  Valerie Bauerlein, “PepsiCo’s Latest Challenge: ‘Snackify’ Some Beverages,” Wall Street Journal, December 28, 2010, http://online.wsj.com/news/articles/SB10001424052 970204467204576047900383643010. 10.  Increasingly, even the markets that these Silicon Valley companies launched are becoming brownfields, for the first time facing increasing political and regulatory issues that shape their challenges. 11.  Richard K. Lester, “America’s Energy Innovation Problem (and How to Fix It)” (MIT-IPC-Energy Innovation Working Paper 09-007, 2009), 13. 12.  In estimates by the International Energy Agency, solar photovoltaic technology is more sustainable than coal but represents less than 0.5 percent of worldwide electricity consumption now and will reach between 1 and 1.5 percent of consumption by 2035. International Energy Agency, “World Energy Outlook, 2013,” November 2013, http://www .worldenergyoutlook.org/pressmedia/recentpresentations/LondonNovember12.pdf. 13.  Alan Ohnsman, “Tesla Rises after Model S Sales in 2013 Exceed Forecast,” Bloomberg, January 15, 2014, http://www.bloomberg.com/news/2014-01-14/tesla -delivered-6-900-cars-in-fourth-quarter-executive-says.html. 14.  Martin Daum, CEO of Daimler Trucks North America, describes the considerations that went into designing the new and radically more efficient Freightliner ­Cascadia long-haul truck: “You have to make the technology mass-production capable, and then you have to test and make sure it is absolutely 100 percent reliable. . . . The customer in our industry expects nearly 100 percent reliability.” Quoted in Andrew Hargadon, The Business of Innovating: Bringing Low-Carbon Solutions to Market (Arlington, VA: Center for Climate and Energy Solutions, 2011), 18. 15.  Ibid., 17. 16.  Tom Wright, “Windmill Mishap Weighs on Suzlon,” Wall Street Journal, October 25, 2008, http://www.wsj.com/articles/SB122485006026866321. 17.  Frank H. Knight, Risk, Uncertainty, and Profit (Boston: Houghton Mifflin, 1921), 19. 18.  This isn’t a new problem. Odysseus ran into it trying to get home when he had to pass between the six-headed Scylla and the ship-eating vortex Charybdis. Scylla lived in the cliffs on one side and when ships came near would snatch six of their crew. Ships avoiding Scylla faced Charybdis, which might or might not sink the entire ship. As the goddess Circe warned, “No, keep closer to Skylla’s cliff, and row past that as quickly as may be; far better to lose six men and keep your ship than to lose your men one and all.” Homer, The Odyssey, trans. Walter Shewring (Oxford: Oxford University Press, 1980), 272. Like Odysseus, companies and individuals are always drawn to known rather than unknown risks.

212   Notes to Chapters 3 and 4

19. Hargadon, The Business of Innovating, 18–19. 20.  Ronnie Greene and Matthew Mosk, “Green Bundler with the Golden Touch,” Huffington Post, March 30, 2011, http://www.huffingtonpost.com/2011/03/30/green -bundler-with-the-golden-touch_n_842863.html. 21. Hargadon, The Business of Innovating, 18. 22.  Quoted in Bill McKibben, Eaarth: Making a Life on a Tough New Planet (New York: Times Books, 2010), 67. 23. Knight, Risk, Uncertainty, and Profit, 20. 24.  Vannevar Bush, Science: The Endless Frontier (Washington, DC: U.S. Government Printing Office, 1945), https://www.nsf.gov/od/lpa/nsf50/vbush1945.htm. 25.  Richard L. Florida and Martin Kenney, The Breakthrough Illusion: Corporate America’s Failure to Move from Innovation to Mass Production (New York: Basic Books, 1990). 26.  US Energy Information Administration, “Table 1.3: Primary Energy Consumption by Source,” Monthly Energy Review, December 2014, http://www.eia.gov/total energy/data/monthly/pdf/sec1_7.pdf. 27.  Vaclav Smil, Energy Myths and Realities: Bringing Science to the Energy Policy Debate (Washington, DC: American Enterprise Institute for Policy Research, 2010), 148–149. 28.  International Energy Agency, “Global EV Outlook: Understanding the Electric Vehicle Landscape to 2020,” April 2013, http://www.iea.org/publications/freepubli cations/publication/GlobalEVOutlook_2013.pdf. 29.  US Energy Information Administration, Annual Energy Outlook 2014 with Projections to 2040 (Washington, DC: US Energy Information Administration, 2014), http://www.eia.gov/forecasts/aeo/pdf/0383%282014%29.pdf. 30.  Auden Schendler, Getting Green Done: Hard Truths from the Front Lines of the Sustainability Revolution (New York: PublicAffairs, 2009), 95. 31.  National Academy of Sciences, National Academy of Engineering, and National Research Council, America’s Energy Future: Technology and Transformation (Washington, DC: National Academies Press, 2009); Jon Creyts, Anton Derkach, Scott Nyquist, Ken Ostrowski, and Jack Stephenson, Reducing U.S. Greenhouse Gas Emissions: How Much at What Cost? (New York: McKinsey, 2007).

Chapter 4 1.  There are many examples of innovations that take place without changes to the larger networks. These are, by definition, incremental: Intel’s advances in microprocessors, for instance, brought dramatic improvements in performance, size, and cost but did not alter the network of technical, social, and economic relationships between the diverse elements of the PC industry. And there are many examples of innovations

Notes to Chapter 4   213

that change the larger networks but don’t benefit that particular innovator—IBM’s ­development and introduction of the personal computer established the elements and organizing principles of the personal computer industry but almost immediately moved beyond its control (and benefit). 2.  Thomas P. Hughes, Networks of Power: Electrification in Western Society, 1880– 1930 (Baltimore: Johns Hopkins University Press, 1983), 18. 3.  Vaclav Smil, Creating the Twentieth Century: Technical Innovations of 1867–1914 and Their Lasting Impact (New York: Oxford University Press, 2005), 59. 4. Hughes, Networks of Power, 21. 5.  For more on these companies, see “Edison Companies,” Thomas Edison Papers, Rutgers University, http://edison.rutgers.edu/list.htm. For a more in-depth discussion of the challenges of creating and coordinating such a diverse set of organizations, see Thomas Hughes, Networks of Power. 6.  Note that nexus work also enables project teams and entire companies to find broader solutions. For example, solutions for meeting emissions requirements for diesel engines are more limited than solutions that involve the power train, cab design, cab and trailer combination, and even driver training and monitoring. Driver behavior alone may be responsible for 30 percent of the variance in mileage by freight trucks. 7.  Marco Iansiti and Ron Levien, The Keystone Advantage: What the New Dynamics of Business Ecosystems Mean for Strategy, Innovation, and Sustainability (Boston: ­Harvard Business School Press, 2004), 9. 8.  Economists call the elements of such networks “complementary assets” that enhance the value proposition of a product or technology. An individual company’s ability to deliver value and compete against the alternatives of incumbents or upstarts depends on its ability to build an equal or stronger network. Indeed, this competition between networks lies at the heart of a long literature understanding the role of complementary assets in shaping path dependence among competing technologies. See, for example, Paul A. David, “Clio and the Economics of QWERTY,” American Economic Review 75, no. 2 (1985): 332–337. 9.  Iansiti and Levien, The Keystone Advantage, 11. 10.  The more visible examples of nexus work lie in the roles played by producers in music, film, and theater, who identify diverse resources and bring them together to create each piece of art. For these industries, nexus work is primarily project work that results in a finished good (a song, movie, or performance) and, as a result, provides only a partial glimpse into the process. Much of the effort of nexus work takes place after the initial relationships are developed and the early products or services created. The real effort, and reward, of nexus work resides in the continued evolution of the network and its parts as it grows and changes shape. See, for example, E. L. Lingo and S. O’Mahony, “Nexus Work: Brokerage on Creative Projects,” Administrative Science Quarterly 55

214   Notes to Chapter 4

(2010): 47–81. For a discussion of the work of building effective networks inside organizations, see D. Krackhardt and J. Hanson, “Informal Networks: The Company Behind the Chart,” Harvard Business Review, July–August 1993, pp. 104–111. 11.  New technologies or policies can often enable new partnerships to emerge between firms, as when advances in information technology enabled Walmart to reorganize its network of suppliers or when the regulated breakup of Ma Bell let other companies build telephone networks. 12. Hughes, Networks of Power, 18. 13.  Some networks are easier to build than others. Compared to the decades-long emergence of the semiconductor industry or even the personal computer, the seemingly overnight rise and spread of companies like Google and Facebook was made possible by existing infrastructure, the Internet, and personal computing revolutions. Google had to piece together the software, programmers, computing power, investors, and advertising partners to become the leader in online search. It had the advantage, however, of timing because the Internet—the system its service was for—was well developed and users just arriving en masse needed a way to make sense of it. 14.  For the sake of simplicity, these activities are presented separately, but note they neither unfold in a simple and linear fashion nor are truly independent from one ­another. 15.  These associations include the German Association of the Automobile Industry in the initial development of the SCR technology and, in the rollout of SCR in the North American truck fleet, the American Trucking Association and the National Association of Truck Stop Operators. 16.  As with any attempts to describe organizational processes, the actions of nexus work look much cleaner on paper than they do in real life, where they take place in parallel, sometimes in conflict, and always iteratively. The company’s leadership, culture, structure, and routines may support nexus work or continually undermine it by fights over who has the right to set strategy, talk to customers, or find new suppliers; by organizational routines that impede if not outright ban talking to anyone outside the company about strategy or innovation or contracts or intellectual property; and by structures that link customers exclusively to your sales organization, suppliers to manufacturing, technology partners to engineering or R&D, and strategic partners to the market-and-acquisition group. In other words, nexus work is embedded in and supported by the organization and not, as presented here, simply a series of steps. 17.  George Basalla, The Evolution of Technology (New York: Cambridge University Press, 1988), 48. 18.  Andrew Hargadon, The Business of Innovating: Bringing Low-Carbon Solutions to Market (Arlington, VA: Center for Climate and Energy Solutions, 2011), 28. 19.  For this discussion I am indebted to Thomas Hughes and his grounded yet theoretical chapter “The Evolution of Large Technological Systems,” in The Social

Notes to Chapter 4   215

­ onstruction of Technological Systems: New Directions in the Sociology and History of C Technology, ed. Wiebe E. Bijker, Thomas P. Hughes, and Trevor Pinch (Cambridge, MA: MIT Press, 1994), 51–82. 20.  The new system also required mathematicians, scientists, and accountants, who became systems engineers responsible for integrating new engineering and economic decisions into the design of the fast-growing energy generation and distribution ­networks. 21.  Nexus work requires setting aside egos and individual interests. Daimler’s willingness to remove its brand from the technology and the additive demonstrated its recognition that competing carmakers would not want someone else’s brand on their vehicles. 22.  Creating new (greenfield) systems has the benefit of defining elements and their relationships de novo but also carries the risks that come with piecing together an untested system made up of equally new and untested parts. On the other hand, trying to redefine the relationships within an existing (brownfield) system has the benefit of working with proven companies, technologies, and policies but the added challenge of established roles and relationships. 23.  Paul Israel, Edison: A Life of Invention (New York: John Wiley, 1998), 210. 24.  Companies often construct partnerships through legal, financial, or technical vehicles as nondisclosure agreements, joint development agreements, joint ventures, joint investments, common standards, or shared revenue streams. These options involve partnerships but are not necessarily evidence of pursuing the kinds of new roles or even relationships that fundamentally reshape networks. Daimler had to convince competitors to jointly commit to the new diesel platform rather than abandon diesel (in the US market) or develop competing alternatives. Edison sold franchises to local investors in other cities, which shared the capital costs of building electricity grids and garnered political support from locally influential individuals. 25.  Almost by definition, building new networks does not begin with legal contracts and clear language that defines and delimits behaviors, expectations, and returns on investment. It begins with people talking to people about a vision. For Henry Ford, the initial reorganization that was to become his system of mass production began with hiring people who had the same vision and the right backgrounds and experiences to know which other people, technologies, and organizations could play valuable roles. When Ford committed to mass producing his Model T, he hired two of the finest machine tool designers, Max Wollering and Walter Flanders, and gave them significant control over the redesign and rebuilding of his production facilities. When Ford discovered in the wreckage of a French racing car a highly durable steel alloy of vanadium, he hired a French metallurgist and built the first US vanadium-steel mill to make it for his cars. Ford Motor Company also built one of the first national networks of independent auto dealers to sell Model T’s (and used it as a source of capital, demanding upfront

216   Notes to Chapters 4 and 5

payments before building and shipping cars). While Ford himself initiated many such dealings, once his system was set in motion, his lieutenants took over most decisions. Similarly, at Daimler, while the overarching strategy was determined by senior leadership, the individuals responsible for its engineering and compliance were the ones most directly engaged in building the clean diesel network. In other words, people at all levels of the organization were responsible for recognizing and nurturing the relationships that made the new networks and for determining the different and complementary roles each company or group would take. 26.  Joseph Schumpeter called these emerging networks “new economic spaces,” and Martin Kenney, for example, uses this framing to study the emergence of the commercial field of biotechnology in the mid-1970s. As Kenney writes, “Biotechnology as a business arises out of an intersection of the scientific practices of molecular biology— formerly undertaken only in universities—and the engineering practices of biochemical engineering and other technologies necessary to produce biological commodities.” See Joseph Schumpeter, Business Cycles: A Theoretical, Historical, and Statistical Analysis of Capitalist Process (New York: McGraw-Hill, 1939); Martin Kenney, “Biotechnology and the Creation of a New Economic Space,” in Private Science: Biotechnology and the Rise of the Molecular Sciences, edited by Arnold Thackray (Philadelphia: University of Pennsylvania Press, 1998), 131. 27.  Quoted in Andre Millard, Edison and the Business of Innovation (Baltimore: Johns Hopkins University Press, 1990), 101.

Chapter 5 1.  The observations and arguments made by Copernicus, Brahe, Kepler, and Galileo (among others) represented the beginning of the scientific revolution and the pursuit of knowledge derived by observation and experimentation. 2.  For a wonderful narrative of the discovery of the mechanism of transmission during the cholera outbreak in Soho, London, in 1854, see Steven Johnson, The Ghost Map: The Story of London’s Most Terrifying Epidemic—and How It Changed Science, Cities, and the Modern World (New York: Riverhead Books, 2006). 3.  Stephanie Strom, “Has ‘Organic’ Been Oversized?” New York Times, July 7, 2012, http://www.nytimes.com/2012/07/08/business/organic-food-purists-worry-about-big -companies-influence.html. 4.  This is true in the evolution of any industry. Edison led the most famous standards war in his fight against alternating current, but fights over standards have occurred in many innovations, from computing (the Wintel standard) to electronics (anyone remember VHS vs. Beta?) to corn-based ethanol to innovations currently emerging in health care, energy, and water. And don’t think the abuse of power is limited to long-entrenched interests. It doesn’t take long for new companies and standards to become entrenched. It took Edison four short years to become entrenched and ­resistant

Notes to Chapter 5   217

to change. And today, despite a rapidly evolving understanding of what constitutes sustainable fishing, for example, the Marine Stewardship Council is accused of using tactics that maintain the dominance of its certification process. Claire Christian, David Ainley, Megan Bailey, Paul Dayton, John Hocevar, Michael LeVine, Jordan Nikoloyuk, et al., “A Review of Formal Objections to Marine Stewardship Council Fisheries Certifications,” Biological Conservation 161, no. 3 (2013): 10–17. 5.  Quoted in Shelley DuBois, “Vying for a School Lunch Revolution.” Fortune, May 10, 2012, http://archive.fortune.com/2012/05/09/smallbusiness/school-lunch -revolution-foods.fortune/index.htm. 6.  See Andrew Hargadon and Yellowlees Douglas, “When Innovations Meet Institutions: Edison and the Design of the Electric Light,” Administrative Science Quarterly 46, no. 3 (2001): 476–501. 7.  P. J. Huffstutter, “Exclusive: Cargill to Change Beef Labeling in Wake of ‘Pink Slime’ Furor,” Reuters, November 5, 2013, http://www.reuters.com/article/2013/11/05/ us-usa-cargill-labeling-idUSBRE9A40XE20131105; Associated Press, “Beef Company Closing 3 Plants Due to ‘Pink Slime’ Controversy,” New York Daily News, May 7, 2012, http://www.nydailynews.com/life-style/health/beef-company-closing-3-plants-due -pink-slime-controversy-article-1.1074056. 8.  Michael M. Grynbaum, “New York’s Ban on Big Sodas Is Rejected by Final Court,” New York Times, June 26, 2014, http://www.nytimes.com/2014/06/27/nyregion/ city-loses-final-appeal-on-limiting-sales-of-large-sodas.html. The Boston ban was followed by a study, funded by the Robert Wood Johnson Foundation, that tracked ninth through twelfth graders for two years and found the ban effective at reducing sugarsweetened beverage consumption both inside and outside school (falling from 1.71 average servings per day in 2004 to 1.38 servings in 2006, a roughly 25 percent drop). “Study: Boston Public Schools’ Sugary Drink Ban Is Working,” CBS Boston, August 9, 2011, http://boston.cbslocal.com/2011/08/09/study-boston-public-schools-sugary -drink-ban-is-working/. 9.  Lisa Polley, “Introducing the New Footprint Chronicles on Patagonia.com,” The Cleanest Line blog, April 25, 2012, http://www.thecleanestline.com/2012/04/intro ducing-the-new-footprint-chronicles-on-patagoniacom.html. 10.  “The Value of Sustainability Reporting,” Ernst and Young, http://www.ey.com/ US/en/Services/Specialty-Services/Climate-Change-and-Sustainability-Services/ Value-of-sustainability-reporting; and Ernst and Young, “EY Americas Sustainability Report 2013: Building a Better Working World Together,” 2013, http://www .ey.com/Publication/vwLUAssets/EY-Americas-Sustainability-Report-2013/$FILE/EY -Americas-Sustainability-Report-2013.pdf. Similarly, the sports apparel company Puma commissioned TruCost and PricewaterhouseCoopers to determine its total environmental impacts across operations and supply chain—ranging from carbon emissions to water use, land use, and waste—and make an environmental profit and loss ­statement

218   Notes to Chapter 5

(its first report, in 2011, found an impact of 145 million euros). Puma’s reporting has, says its executive chairman, Jochen Zeitz, “been indispensable for us to realize the immense value of nature’s services that are currently being taken for granted but without which companies could not sustain themselves.” Putting an economic value on these impacts, as Alan McGill of PricewaterhouseCoopers notes, means Puma is better positioned “to know where the risks and opportunities for innovation are and where they should focus their scarce resources and avoid potential disruptions to business.” “PUMA’s First Environmental Accounting Values 2010 Impacts at € 145 Million,” Sustainable Planet, November 28, 2011, http://www.sustainableplant.com/2011/11/puma -s-first-environmental-accounting-values-2010-impacts-at-145-million/?show=all; Vinod Baya and Galen Gruman, “Sustainability: Moving from Compliance to Leadership,” Technology Forecast, no. 4 (2011), http://www.pwc.com/us/en/technology-forecast/ 2011/issue4/features/feature-sustainability-as-normal-business.jhtml. 11.  Unilever, “Unilever Sustainable Living Plan: Small Actions, Big Difference,” 2010, http://www.unilever.dk/Images/UnileverSustainableLivingPlan_tcm112-219379 .pdf. 12.  Quoted in Andrew Hargadon, The Business of Innovating: Bringing Low-Carbon Solutions to Market (Arlington, VA: Center for Climate and Energy Solutions, 2011), 126. 13.  MIT Sloan Management Review and the Boston Consulting Group, “Sustainability Nears a Tipping Point,” MIT Sloan Management Review, Winter 2012, p. 9, http:// www.sustainabilityprofessionals.org/system/files/MIT-SMR-BCG-Sustainability-Nears -a-Tipping-Point-Winter-2012.pdf. 14.  The field’s prevailing science, policy, and practice reflect the borders of our understanding of the science of sustainability, and they also reflect the different positions and views vying for dominance in each field. On the one hand, some of those competing views are trying to prevent change: the cigarette companies casting doubt on the link between smoking and cancer in the 1970s or oil companies casting doubts on climate change. On the other hand are competing views that are well-intentioned but disagree on the best way forward (e.g., some would ban fossil fuels while others advocate efficiency). In fact, trying to make sense of the metrics, policies, and practices in your industry can seem overwhelming. Yet by the time it is easy to understand, many of the opportunities will have passed and many of the threats will be upon us. When the field settles on a distinct set of beliefs, policies, and practices, the music stops. Those companies that have not been keeping up will have to adapt quickly or risk losing out altogether. Sustainable innovation requires the ability to see through the confusion of emerging science, policy, and practice in your field. 15.  U.S. Department of Energy, 2010 Buildings Energy Data Book (Washington, DC: U.S. Department of Energy, 2011), http://buildingsdatabook.eren.doe.gov/docs/ DataBooks/2010_BEDB.pdf.

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16.  David Kiron, “Get Ready: Mandated Integrated Reporting Is the Future of Corporate Reporting,” MIT Sloan Management Review, March 13, 2012, http://sloanreview .mit.edu/feature/get-ready-mandated-integrated-reporting-is-the-future-of-corporate -reporting. 17.  Quoted in Michael Connor, “Nike: Corporate Responsibility at a ‘Tipping Point,’” Business Ethics, January 24, 2010, http://business-ethics.com/2010/01/24/2154 -nike-corporate-responsibility-at-a-tipping-point/. Nike says, “In evaluating where our targets fell short, we saw a consistent pattern: a focus on auditing against a set of criteria sometimes results in on-the-ground improvements for workers, but it rarely produces systemic change in the area of concern. . . . On further reflection, we realized that, if we want to make sustainable improvements for workers, we need to significantly change the way we engage and interact with our supply chain as a whole.” Ibid. 18.  Quoted in Erik Siemers, “Nike Releases Its Green Design Tool,” Portland Business Journal, November 30, 2010, http://www.bizjournals.com/portland/blog/ sbo/2010/11/nike-releases-green-design-tool.html. 19.  McDonald’s, “Global Best of Green 2012: Building a Better Business through Effective Environmental Practices Around the World,” http://s3.amazonaws.com/ mcdbestof-section-pdfs/1/MCD_076_BOG_FINAL-ART_04.pdf. 20.  Daniel A. Crowl and Joseph F. Louvar, Chemical Process Safety: Fundamentals with Applications (Englewood Cliffs, NJ: Prentice Hall, 1990). 21.  Jeffrey Pfeffer, Managing with Power: Politics and Influence in Organizations (Boston: Harvard Business School Press, 1994), 12. 22.  Sustainable Apparel Coalition, “Mission,” 2014, http://www.apparelcoalition .org/overview. 23.  See Sustainable Apparel Coalition, “Current Members,” 2014, http://www .appar­elcoalition.org/current-members. 24.  In the beginning, this coalition included only Walmart and Patagonia. In fall of 2009, the CEOs of the two companies sent invitations to the CEOs of twelve handpicked companies that had already demonstrated a track record of commitment to sustainability. From this group was formed the original nucleus of the coalition because, as one recipient later said, “When you get a letter from Mike Duke and Yvon Chouinard, with the logos for Walmart and Patagonia side by side, it’s so bizarre that you have to read it.” Chouinard says of their efforts to construct an industry-wide set of shared metrics guiding apparel design, manufacturing, distribution, and recycling, “A company committed to sustainability but working unilaterally can accomplish only so much. If you really want to make a difference, work together with your partners and competitors to develop a value chain index.” See Yvon Chouinard, Jib Ellison, and Rick Ridgeway, “The Sustainable Economy,” Harvard Business Review 89, no. 10 (2011): 52–64. 25.  “Better Batteries Could Recharge Start-Stop Savings,” Chicago Tribune, October 26, 2013, http://cars.chicagotribune.com/fuel-efficient/news/chi-micro-hybrid

220   Notes to Chapters 5 and 6

-battery-20131025. As Mark Wagner, vice president of Government Relations for Johnson Controls, says, “We have a new technology for start-stop batteries [and we need to work with] the EPA [to ensure that they] take this into consideration when they write their regulations for emissions standards.” Quoted in Hargadon, The Business of Innovating, 127. 26.  Consider also Pepsi’s Global Nutrition Group, launched in 2010 as a subsidiary company headed by Mehmood Khan, Pepsi’s chief scientist and a former endocrinologist at the Mayo Clinic. The Global Nutrition Group oversees Pepsi’s portfolio of “nutritious and nourishing” food and beverage brands, including Quaker foods, Tropicana juices, Gatorade, its sports nutrition company, and its global dairy business—in total, roughly $13 billion of Pepsi’s annual revenues. Jeremiah McWilliams, “Pepsico CEO: ‘You Learn, You Continue to Improve, You Stay Ahead,” Atlanta Journal-Constitution, June 1, 2011, http://www.ajc.com/news/business/pepsico-ceo-you-learn-you-continue -to-improve-you-/nQtz5/. Much like General Electric’s ecomagination business, this move involves not only establishing a focus on sustaining innovation but also reorganizing both existing businesses and new opportunities into a single top line and strategic priority.

Chapter 6 1.  Abbott Payson Usher, A History of Mechanical Inventions (Cambridge, MA: Harvard University Press, 1929), 11; Joseph Schumpeter, The Theory of Economic Development (Cambridge, MA: Harvard University Press, 1934), 656. 2.  Andrew Peterson, “Tesla Extends Production Contract with Lotus,” Automobile, March 30, 2010, http://www.automobilemag.com/features/news/tesla-extends -production-contract-with-lotus-2822. 3.  “The Successful Ford,” Cycle and Automobile Trade Journal 10, no. 7 (1906): 105. 4.  David A. Hounshell, From the American System to Mass Production (Baltimore: Johns Hopkins University Press, 1984), 4:221. 5.  Alfred Dupont Chandler, The Visible Hand: The Managerial Revolution in American Business (Cambridge, MA: Belknap Press, 1977), 293. 6. Hounshell, From the American System to Mass Production, 4:229. 7.  Ibid., 4:241. 8.  Brent Goldfarb, “Adoption of General Purpose Technologies: Understanding Adoption Patterns in the Electrification of US Manufacturing, 1880–1930,” Industrial and Corporate Change 14, no. 5 (2005): 745–773. 9.  John Steele Gordon, The Business of America: Tales from the Marketplace—American Enterprise from the Settling of New England to the Breakup of AT&T (New York: Walker, 2001), 103. 10.  “Model T Facts,” Ford Motor Company Media Center, August 5, 2012, https:// media.ford.com/content/fordmedia/fna/us/en/news/2013/08/05/model-t-facts.html.

Notes to Chapter 6   221

11.  Initially developed in Japan, the technology to produce high-fructose corn syrup was adopted by ADM to convert excess corn into an ingredient used in the rest of the food supply. Supported by heavy lobbying in the 1970s to ban import of cane and beet sugar, high-fructose corn syrup was rapidly adopted in most processed foods. This was in equal parts because of US tariffs doubling the cost of importing “real” sugar (a successful lobbying effort by AMD), heavily subsidized domestic corn production, and a resulting liquid food additive that was cheap and stable, making it easier to transport and process. See Tom Philpott, “How Cash and Corporate Pressure Pushed Ethanol to the Fore,” Grist, December 7, 2006, http://grist.org/article/adm1/; James Brovard, “Archer Daniels Midland: A Case Study in Corporate Welfare,” Policy Analysis, no. 241 (1995), http://www.cato.org/pubs/pas/pa-241.html. 12.  Horace Lucien Arnold and Fay Leone Faurote, Ford Methods and the Ford Shops (New York: Engineering Magazine, 1915). 13.  The notion of recombinant innovation draws from my previous research, and more detailed discussion can be found in Andrew Hargadon, How Breakthroughs Happen: The Surprising Truth about How Companies Innovate (Cambridge, MA: Harvard Business School Press, 2003). 14.  Thomas Parke Hughes, American Genesis: A Century of Invention and Technological Enthusiasm, 1870–1890 (New York: Viking, 1989), 29. 15.  As importantly, Edison built a community at Menlo Park that was deeply committed to innovation through recombination. Edison modeled the laboratory after the machine shops from which he and many of the others had emerged, where mechanics and independent entrepreneurs would work side by side, sharing machines, telling stories, and passing along promising ideas or opportunities. The group at Menlo Park numbered approximately fourteen. Edison worked most closely with Charles Batchelor, whose training as both a mechanic and a draftsman so complemented (and grounded) Edison’s more flighty visions that the two split all patent royalties fifty-fifty. Many of the laboratory’s breakthroughs were attributed to Batchelor or one of the others who worked on the projects, while Edison dealt with clients or investors. As one such assistant, Francis Jehl, said, “Edison is in reality a collective noun and means the work of many men.” Robert E. Conot, A Streak of Luck (New York: Seaview Books, 1979), 469. 16.  Andre Millard, Edison and the Business of Innovation (Baltimore: Johns Hopkins University Press, 1990), 48. 17. Ibid. 18.  A subset of this strategy works in settings in which all the major components of both problem and solution are well known but how they fit together is flexible. This happens when surgical teams, law firms, business-to-business sales, and midstage drug development teams can address new problems by recombining their existing, modularized expertise. Rob Cross, Jeanne Liedtka, and Leigh Weiss discuss this in “A Practical Guide to Social Networks,” Harvard Business Review 83, no. 3 (2005): 124–132.

222   Notes to Chapters 6 and 7

19. Millard, Edison and the Business of Innovation, 3. 20.  Willard F. Mueller, “The Origins of the Basic Inventions Underlying Du Pont’s Major Product and Process Innovations, 1920 to 1950,” in The Rate and Direction of Inventive Activity: Economic and Social Factors, ed. Harold M. Groves (Princeton, NJ: Princeton University Press, 1962), 323. 21.  Charles E. Levy, “Lessons Learned from Raser Technologies’ ‘Revolutionary’ Product,” Breaking Energy, October 20, 2011, http://aol.it/14CcsuR. 22.  Cross, Liedtka, and Weiss, “A Practical Guide to Social Networks,” 2. 23.  Robert Sutton and I have written extensively about IDEO’s process, which we called “technology brokering,” in “Building an Innovation Factory,” Harvard Business Review, May 2000, http://hbr.org/2000/05/building-an-innovation-factory/ar/1, and I elaborate on it in How Breakthroughs Happen: The Surprising Truth about How Companies Innovate (Boston: Harvard Business School Press, 2003). 24.  Linda Tischler, “Fast 50 2008: IDEO,” Fast Company, February 19, 2008, http:// www.fastcompany.com/713911/fast-50-2008-ideo. 25.  Andrew B. Hargadon and Robert I. Sutton, “Technology Brokering and Innovation in a Product Development Firm,” Administrative Science Quarterly 42, no. 4 (1997): 735. 26. Paul DiMaggio, “Culture and Cognition,” Annual Review of Sociology 23 (1997): 280.

Chapter 7 1.  Anthony M. Fadell, “From Apple to Nest Labs, Always a Designer,” New York Times, July 20, 2013, http://nyti.ms/1fGn26r. 2. See the commercial at http://youtu.be/SU8PDySrKok. Or enjoy Control4’s ­vision: “The movie begins, the lights slowly dim, the temperature adjusts and the fireplace starts up. All at once, from just one press of a button, from one single remote.” “Control4 Show Watch Solutions,” http://control4canadabyhighdeftech.weebly.com/ control4-show-watch-solutions.html (accessed January 16, 2015). 3.  Ruth Schwartz Cowan, describing the origins of the modern refrigerator, asks the very same question: “If we can put a man on the moon, why have we been unable to pipe our garbage disposals into our compost heaps?” Ruth Schwartz Cowan “How the Refrigerator Got Its Hum,” in The Social Shaping of Technology: How the Refrigerator Got Its Hum, ed. Donald A. MacKenzie and Judy Wajcman (Philadelphia: Open University Press, 1985), 203. Fast-forward to the digital age, and we’re still asking, “Why won’t our refrigerators tell us when we’re out of milk or turn off our lights?” 4.  Stephen Lacey, “The US Smart Thermostat Market Is Potentially Massive,” Greentech Media, February 19, 2014, http://www.greentechmedia.com/articles/read/the-us -smart-thermostat-market-is-potentially-massive.

Notes to Chapter 7   223

5.  Stephen Lacey, “Google Acquires Nest for $3.2 Billion,” Greentech Media, January 13, 2014, http://www.greentechmedia.com/articles/read/google-acquires-nest -for-3.5-billion. 6.  Mark Rogowsky, “5 Reasons Nest Sold to Google,” Forbes, January 14, 2014, http://www.forbes.com/sites/markrogowsky/2014/01/14/5-reasons-nest-sold-to-google. 7.  Stephen Lacey, “Nest 3.5: How a Learning Thermostat Company Learns,” Greentech Media, May 17, 2013, http://www.greentechmedia.com/articles/read/nest-3.5-how -the-learning-thermostat-learns. 8.  Paul B. Israel, Keith A. Nier, and Louis Carlat, The Papers of Thomas A. Edison: The Wizard of Menlo Park, 1878 (Baltimore: Johns Hopkins University Press, 1998), 505. 9.  George Basalla, The Evolution of Technology (New York: Cambridge University Press, 1988), 48. 10.  As Laura Shapiro points out, this was one of several efforts designed to smooth the transition. Another was to shift the effort from baking to frosting and presenting the cake, giving home bakers the opportunity to still claim ownership of the end product. Something from the Oven: Reinventing Dinner in 1950s America (New York: Viking, 2004), 74–80. 11.  JoAnne Yates, “The Structuring of Early Computer Use in Life Insurance,” Journal of Design History 12, no. 1 (1999): 5–24; JoAnne Yates, Structuring the Information Age: Life Insurance and Technology in the Twentieth Century (Johns Hopkins University Press, 2005), 178. 12.  Yates, “The Structuring of Early Computer Use in Life Insurance,” 20. 13. Ibid. 14.  Lance Whitney, “Jonathan Ive: Steve Jobs Stole My Ideas,” Cnet, October 24, 2011, http://www.cnet.com/news/jonathan-ive-steve-jobs-stole-my-ideas; Jim Dalrymple, “Steve Jobs, Jony Ive Named Smartest in Tech,” Cnet, July 9, 2010, http://www.cnet .com/news/steve-jobs-jony-ive-named-smartest-in-tech; Walter Isaacson, Steve Jobs (New York: Simon and Schuster, 2011). 15.  Lacey, “Nest 3.5.” 16.  Lacey, “Google Acquires Nest for $3.2 Billion.” 17. Ibid. 18.  For an excellent discussion of the role of skeuomorphs in technological transitions, see Basalla, The Evolution of Technology. For a more detailed discussion of the role of skeuomorphs and, indeed, robust design in Edison’s introduction of his system of electric lighting, see Andrew B. Hargadon and Yellowlees Douglas, “When Innovations Meet Institutions: Edison and the Design of the Electric Light,” Administrative Science Quarterly 46, no. 3 (2001): 476–501. 19.  In June 2011, HP entered into a strategic relationship with Polycom, Inc., an industry-leading communications (UC) solutions provider that serves as an exclusive

224   Notes to Chapters 7 and 8

partner to HP for telepresence. Under the terms of this agreement, Polycom acquired HP’s Visual Collaboration business. HP continues to provide the networking and computing hardware that supports it. 20.  Carbon Disclosure Project, “Carbon Disclosure Project Study 2010: The Telepresence Revolution,” http://www.business.att.com/content/whitepaper/CDP_Tele presence_Report_Final.pdf. 21.  Mark H. Meyer, The Fast Path to Corporate Growth: Leveraging Knowledge and Technologies to New Market Applications (Oxford: Oxford University Press, 2007), 40. 22.  Willis F. Dunbar and George S. May, Michigan: A History of the Wolverine State (Grand Rapids, MI: W. B. Eerdmans, 1995). 23.  Andrew Hargadon, The Business of Innovating: Bringing Low-Carbon Solutions to Market (Arlington, VA: Center for Climate and Energy Solutions, 2011), 34. 24.  Eric Wesoff, “Why Are These Cleantech VC Investors Smiling?” Greentech Media, January 14, 2014, http://www.greentechmedia.com/articles/read/Why-Are-These -Cleantech-VC-Investors-Smiling; see also Rogowsky, “5 Reasons Nest Sold to Google.” 25.  See Eric Matheson Leifer, Actors as Observers: A Theory of Skill in Social Relationships (New York: Garland, 1991).

Chapter 8 1.  Mark W. Johnson, Clayton M. Christensen, and Henning Kagermann, “Reinventing Your Business Model,” Harvard Business Review 86, no. 12 (2008): 3. 2.  Ibid., 3. 3.  Abraham H. Maslow, The Psychology of Science: A Reconnaissance (New York: Harper and Row, 1966), 15–16. Maslow is not the first to have noted this phenomenon. In 1964, Abraham Kaplan called this the “Law of the Instrument,” capturing our predisposition to define problems in terms of the particular tools—solutions—we are familiar with and have at hand. Organizations may, in reality, be far more susceptible than individuals to this tendency. See Abraham Kaplan, The Conduct of Inquiry: Methodology for Behavioral Science (San Francisco: Chandler, 1964). 4.  Matt Marshall, “Musk Leads $10M Investment in SolarCity—to Provide Solar for All,” VentureBeat, September 15, 2006, http://venturebeat.com/2006/09/15/musk -leads-10m-investment-in-solarcity-to-provide-solar-for-all. 5.  For example, the California Solar Initiative, which launched in January 2007, initially provided a $2.50/watt rebate to purchasing consumers. With federal incentives, that covered roughly half the costs of installing a rooftop solar system. Over time, those incentives declined with a schedule based on the number of installed systems, and now the rebates are around $0.20. “California Solar Initiative Rebates,” http://www.gosolar california.ca.gov/csi/rebates.php (accessed January 17, 2015). 6.  Hanna Sistek, “SolarCity Provides SF Power Below Grid Price,” CNET, July 18, 2008, http://www.cnet.com/news/solarcity-provides-sf-power-below-grid-price/.

Notes to Chapters 8 and 9   225

7.  “Prior to 2010, there were few residential third-party ownership (TPO) vendors,” said Shayle Kann, vice president of research at GTM. “Since then, the success of companies such as SolarCity, Sunrun, and SunPower has led to a spate of new entrants into the market. Today, we count at least ten TPO companies operating, and a number of others still getting off the ground.” “US Residential Solar Financing to Reach $5.7 Billion by 2016,” Greentech Media, February 11, 2013, http://www.greentechmedia.com/articles/ read/us-residential-solar-financing-to-reach-5.7-billion-by-2016. 8.  John Earnest, “Leasing a Solar-Power System,” Union-Tribune San Diego, September 27, 2008, http://legacy.utsandiego.com/news/northcounty/20080927-9999 -1mc27solar.html. 9.  Shayle Kann, U.S. Residential Solar PV Financing: The Vendor, Installer and Financier Landscape, 2013–2016 (Boston: GTM Research, 2013). Third-party ownership (TPO) dramatically boosted customer adoption of residential solar installations. Companies pursuing TPO used design to shape their offering (and the capabilities needed to deliver that offering) in ways that turned a revolutionary technology into an evolutionary change in consumer behavior. And yet, as so often happens, the public appears to be getting comfortable with the new technology, and TPO may no longer be necessary to drive adoption; the percentage of installations taking advantage of this structure has leveled out. For more, see Mike Munsell, “Market Share for Leasing Residential Solar to Peak in 2014,” Greentech Media, June 24, 2014, http://www.greentechmedia.com/ articles/read/Market-Share-for-Leasing-Residential-Solar-to-Peak-in-2014. 10.  Herman K. Trabish, “SunPower, SolarCity, the CSI and Builders Driving New Solar Home Growth Surge,” Greentech Media, June 6, 2013, http://www.greentech media.com/articles/read/SunPower-KB-Home-and-the-CSI-Driving-New-Solar-Home -Growth-Surge. 11.  For a deeper description of the history of Revolution Foods, see Michael V. Russo, Companies on a Mission: Entrepreneurial Strategies for Growing Sustainably, Responsibly, and Profitably (Stanford, CA: Stanford University Press, 2010). 12.  Andrew Hargadon, The Business of Innovating: Bringing Low-Carbon Solutions to Market (Arlington, VA: Center for Climate and Energy Solutions, 2011), 108. 13.  Theodore Levitt, The Marketing Imagination (New York: Free Press, 1986).

Chapter 9 1.  Robert Freidel and Paul Israel, Edison’s Electric Light: Biography of an Invention (New Breunswick, NJ: Rutgers University Press, 1986), 8. 2.  For a nice introduction to Yvon Chouinard, his values, and how Patagonia, the company he founded, reflects these values, see Yvon Chouinard and Vincent Stanley, The Responsible Company (Ventura, CA: Patagonia Books, 2012). 3.  Richard R. Nelson, The Moon and the Ghetto: An Essay on Public Policy Analysis (New York: Norton, 1977).

226   Notes to Chapter 9

4. Plato, The Dialogues of Plato, ed. Erich Segal (New York: Bantam, 2006), 7. 5.  Jeffrey Pfeffer and Robert I. Sutton, Hard Facts, Dangerous Half-Truths, and Total Nonsense: Profiting from Evidence-Based Management (Boston: Harvard Business School Press, 2006). 6.  The confirmation bias has been noted in observations since Francis Bacon and, it is believed, has its origins in both cognitive and motivational biases that draw us to recognize and favor evidence that supports our existing views and ignore or downplay evidence to the contrary. In other words, we are doubly wired to find confirmation for our existing beliefs. For a good overview of the confirmation bias, along with other biases, effects, fallacies, illusions, and traps, see Daniel Kahnemann’s excellent review of the field, Thinking, Fast and Slow (New York: Farrar, Straus and Giroux, 2011). 7.  Clifford Pickover, “Traveling Through Time,” NOVA Online, November 2000, http://www.pbs.org/wgbh/nova/time/through2.html. 8.  William Duggan, Strategic Intuition: The Creative Spark in Human Achievement (New York: Columbia University Press, 2013), 64. 9.  Schon, Donald A. The Reflective Practitioner. New York: Basic Books, 1983: 40. 10.  Thomas Parke Hughes, American Genesis: A Century of Invention and Technological Enthusiasm, 1870–1890 (New York: Viking, 1989), 77. 11.  Eric Matheson Leifer, Actors as Observers: A Theory of Skill in Social Relationships (New York: Garland, 1991); Robert G. Eccles, Nitin Nohria, and James D. Berkley, Beyond the Hype: Rediscovering the Essence of Management (Boston: Harvard Business School Press, 1992). 12.  John Cook, “Jeff Bezos on Innovation: Amazon ‘Willing to Be Misunderstood for Long Periods of Time,’” GeekWire, June 7, 2011, http://www.geekwire.com/2011/ amazons-bezos-innovation/. 13.  Sun Tzu, The Art of War, trans. Samuel B. Griffith (London: Oxford University Press, 1971). 14.  Karl E. Weick, “Small Wins: Redefining the Scale of Social Problems,” American Psychologist 39, no. 1 (1984): 40–49. 15.  Niccolò Machiavelli, The Prince (London: Grant Richards, 1903), 23.

Index

Abound Solar, 30 Accenture, 137 Acumen Fund, 141 AdBlue diesel exhaust fluid, 120 Adidas, 59 ADM (Archer Daniels Midland), 134, 221n11 ADT Security Systems, 148 Air Products and Chemicals, 66–67 Alice in Wonderland, 41 Alstom, 16 Alstom Transport, 163–164 Amazon, 17 American Genesis (Hughes), 195 “America’s Energy Innovation Problem” (Lester), 63 analogies, finding, 194–196 Android (Google), 166 A123 Systems, 9, 44, 64 Apple: carbon neutral goal, 118; competition with Android, 161, 166; competition with Sony, 197; design and nexus work, 163; design linked to corporate strategy, 158; design philosophy of, 159; FoxConn running manufacturing, 64; highend strategy, 24; plans for carbon neutrality, 118; reliance on low-cost labor, 59; Walkman, 197. See also iPhone (Apple); iPod (Apple) Aramark, 174

Art of War, The (Sun Tzu), 198 Aspen, Colorado, 59, 32n7 Association of British Insurers, 71 AT&T Digital Life, 150–151 Bacon, Francis, 226n6 Bakersfield, California, 49 Bangladesh, 19 Batchelor, Charles, 221n15 Batson, Daniel, 55 Beacon Power, 30, 64 Beef Products, 111 Bell Telephone Company (“Ma Bell”), 214n11 Benz, Karl, 16 Berkley, James D., 196 Better Place, 30 Bezos, Jeff, 197 Binet, Alfred, 208n11 Blackberry, 154 Bloom, Benjamin, 45 BlueTEC (Daimler), 88–91 Bock, Laszlo, 23 Bon Appétit, 174 Bonmarché, 19 Booz-Allen, 137 Bornholdt, Oscar, 130 Boulder, Colorado, 48 Boulton, Matthew, 27–29, 33, 189 Boulton and Watt Company, 81 BP Solar, 4

228  Index

Brahe, Tycho, 106 Brazil, 204n3 breakthrough bias, 72–75, 78 Breakthrough Illusion, The (Florida & Kenney), 73 Brinkley, Douglas, 36 British Petroleum, 4, 173 Brown, Tim, 142 brownfield versus greenfield markets, 60–63, 76–77, 109, 215n22 Bruntland Commission, 2 Brush, Charles, 204n6 building networks of existing elements: Edison, 81–85, 94, 128, 135–136, 193; Ford, 131–132 Bulcke, Paul, 58, 210n5 Bush, Vannevar, 72 Business Model Innovation: in action, 180–184; defined, 176–178, 192; Hewlett-Packard’s, 178–180 business uncertainty, 71 CAFE (corporate average fuel economy) standards, 14 California as environmental leader, 21; all-electric vehicles, 128; CARB (California Air Resources Board), 90, 95, 97–98, 109; exhaust emissions standards, 91; healthy school lunches, 109, 174; residential solar power, 171, 224n5; successful and unsuccessful rollouts of smart meters, 49–50 Campbell’s Soup, 115 “capabilities,” 24–25 CARB (California Air Resources Board), 90–91, 95, 97–98, 109 Carbon Disclosure Project, 161 carbon footprint/environmental impact: of buildings, 117; carbon neutrality goals, 21–22, 69–70; clean energy

now competitive, 18; cost of, 21–22, 69–70; government policy, 21–22, 69; home energy management, 148, 151; involvement in strategic thinking, 121; involving utility customers, 67; local strategies, 119–120; low-carbon versus old innovation, 4–6; overlap of sustainability and innovation, 12–13; printing related, 179; telepresence, 161; tracking supply chain and consumer usage, 114–115, 217–218n10; using energy efficiency to reduce, 6 Cargill, 111 Carnegie, Andrew, 46 Carrier (UTC), 139–140 Carson, Rachel, 13 Catchlight Energy, 30 Catholic Church, 106 Center for Climate and Energy Solutions, 4 Center of Excellence, 121 Centers for Disease Control and Prevention, 141 CFCs (chlorofluorocarbons) ban, 13–14 changing policies, 3 Cheshire Cat, 41, 190 Chevron, 30, 173 chicken and egg issues, 190–191 Child Family Institute for Innovation and Entrepreneurship, 5 China, 204n3; coal-fired electricity, 73; greenfield opportunities in, 62; startstop battery market in, 124 Chouinard, Yvon, 189, 219n24 Christensen, Clayton, 43, 170, 173 Churchill, Winston, 38 cigarettes, 20 Cisco, 140, 161 Clean Air and Clean Water Acts, 13

index  229

clean diesel, 88–91 climate change consensus, 14, 21 Clipper Wind, 67 coal: in 18th century, 25–26; coal plants as assets or liabilities, 20; electric lighting reducing use of, 13; expanding Europe’s energy supplies, 210n4; improving efficiency of coal-fired electricity, 73; Pearl Street electricity, 61; solving England’s deforestation, 189 Coca-Cola, 59 commitment, 39 common best practices, 7 competing technologies, 3 “complementary assets,” 213n8 “confirmation bias,” 194, 226n6 Consumer Federation of America, 111 Consumer Reports, 66 Control4, 148, 222n2 Copernicus, 106 Cowan, Ruth Schwartz, 222n3 Daimler, 118–119; close relationship with regulators, 98, 109, 120; Daum on customer expectations, 211n14; early mover in sustainable innovation, 38; early use of biofuels, 128; giving competitors access to new technology, 98, 215nn21, 24; involvement of personnel at all levels, 216n25; nexus work in BlueTEC, 88–92, 163; Office of Certification and Regulatory Affairs, 120, 124; partnering with Exxon, 98; and pattern recognition, 193; reorganizing around new technology, 94–95, 97; SCR (selective catalytic reduction), 90, 92, 132. See also Mercedes-Benz Daimler, Gottlieb, 16

Dan River, North Carolina, 19 Darley, John, 55 DARPA (Defense Advanced Research Projects Agency), 16 Daum, Martin, 211n14 DDT ban, 13 declining resources, 57–60, 76 Dell, 59 DeLorean, 65 demand response, selling to utilities, 164–165 Department of Energy, 143 design: for the long view, 165–167; for the network, 162–165; power of, 148–150; revolutionary, 150–152; robustness of, 157–160 Di Capua, Michel, 19 Dichter, Ernest, 155 DiMaggio, Paul, 144 “disassembly” lines, 131 domesticating the future, 160–162 Dornbusch, Rudi, 15, 187, 204n4 Dow Chemical, 18 Drexler, Mickey, 199 Duke, Mike, 219n24 DuPont, 138 dwarf wheat, 132 Dweck, Carol, 44–45 “dynamic capabilities,” 24–25 dynamo technology, 15 Eccles, Robert G., 118, 196 Eckert, J. Presper, 155 EcoGuide, 142 ecomagination (GE), 38–39 Edison, Thomas/Pearl Street Power Station, 63, 153; AC system supplanted by DC, 16, 100, 166, 188, 216n4; backing by J. P. Morgan, 109; building networks of existing

230  Index

Edison, Thomas/Pearl Street (continued) elements, 17, 74, 81–87, 94, 128, 135–136, 193; clean energy then, dirty now, 61; creating independently managed companies, 83–85, 97, 173; designing for the long view, 165–166; developing investor relationships, 96; developing of emerging network, 93–94; developing revenue model, 182–183; Emil Rathenau on, 82; famous for market acceptance, not invention, 153–154; fitting into US economic/political context, 94–95; Harold Passer on, 100; initial opposition to, 109; inventing a whole system, 82–83, 87–88, 187; Menlo Park laboratory, 136, 221n15; merging arc lighting and incandescence, 15; sparking revolutionary change, 16; suppliers involved in, 84; switching from invention to business, 137; use of metaphor, 195; using skeuomorphic design, 160, 163 Einstein, Albert, 81 Eisenhardt, Kathleen, 207n25 Eisenhower, Dwight, 209n3 electric lighting and power, 15, 17, 80 emerging networks, 93–96 emerging networks, recognizing, 93–96 Endangered Species Act, 13 Energy Efficiency Center, 6 Energy Policy Act (US, 2005), 170 Enerl, 30 ENIAC, 155 Environmental Defense Fund, 18 environmental disasters, publicizing of, 19–20 environmental impact. See carbon footprint/environmental impact

environmental metrics, 18 environmental uncertainty, 71–72 EPA (Environmental Protection Agency), 90, 95, 97–98, 109, 120, 123–124 Ernst and Young, 113–114 ExxonMobil, 19, 30–31, 98, 173 Facebook, 17, 64–65, 118; carbon neutral goal, 118; process for rolling out new products, 64–65 Fadell, Tony, 147, 152–153, 159, 164 “faster, better, cheaper,” 64–67, 77 fighting the last war, 41–42 Fisker Automotive, 9, 30, 44, 64, 66 Flanders, Walter, 40, 137, 199, 215n25 Florida, Richard, 73 Ford, Henry: assembly line, 130–131, 134; betting on a strategy, 37; building on previous designs, 128, 132, 137, 215n25; changing the business model, 173; concentration on price, 129, 166; continuous flow production, 130; drawing in skilled people, 36, 40, 87, 199, 215; independent auto dealers, 36, 215n25; interchangeable parts, 129–130; on last year’s ideas, 42; linear network innovation, 163; network of dealerships, 36; redefining production process, 36–37; use of recombinant innovation, 133–135; using ideas from meatpacking, 131, 133; vision of market needs, 35. See also Ford Motor Company Ford Motor Company: delaying hybrid production, 37–38; early use of biofuels, 128; electric motor, 131; founding of, 35; Fusion, 142–143; grass roof installation, 3, 114; in greenfield market, 61; integrating

index  231

external suppliers, 98; introduction of Model T, 16, 129; resisting change, 35–36, 188; rigidity of, 100 FoxConn, 64 fracking, 132 Galileo, 106 Gap, 19, 199 Genentech, 67 General Electric, 48; energy and lifestyle management, 151; global ecomagination initiative, 38–39, 119; hesitation on pacemaker, 197; history of, 25, 84, 188; installing LED lights for Walmart, 66; pushing smart grid concept, 48; “Three Women,” 150 General Motors, 65–66, 100 generic models of innovation, 7 Global 250 sustainability reporting, 114 Global Energy and Sustainability, 121 Global Warming Solutions Act (2006, AB 32), 21 Good Samaritan experiment, 55 Google: carbon neutral goal, 118; hiring practices of, 23; as infrastructure, 17; process for rolling out new products, 64–65. See also Nest (Google) Graham, Wendy, 66–67 Gramme, Zénobe, 204n6 Greenewalt, Crawford, 138 greenfield versus brownfield markets, 60–63, 76–77, 109, 215n22 Greentech Media Research, 152, 171 growth mind-set, 44–47 Haas School of Business, 174 Hamilton Sundstrand, 139 Harvard Business School, 118 Healthy Hunger-Free Kids Act (US, 2010), 109

Hewlett-Packard: Business Model Innovation, 178–184; calculating energy efficiency, 115–116; customers making decisions based on sustainability, 20; declined on personal computer, 42; effect of flooding in Thailand on, 59; Managed Print Services, 177; moving into new industries, 139; telepresence reducing corporate travel, 161 Honda Insight, 154 Hughes, Thomas, 82–83, 87, 195 Huston, Randy, 49 hybrid cars, 37–38 Iansiti, Marco, 85 IBM: 650 computer, 156–157, 159, 160, 166–167; 702 and 705 computers, 155–156, 167; CEO business model survey, 170; competing in diverse markets, 140; declined on personal computer, 42; and smart grid technology, 19, 48; taking the long view, 165 idea is often easiest achievement, 30 IDEO: brainstorming culture in, 64, 206– 207n24; brokering strategy of, 136, 145, 222n23; “Faster, better, cheaper” saying, 64; recombinant innovation process, 141–144 Imaging and Printing Group, 180 India, 73, 120, 204n3 Industrial Revolution, 80 information revolution, 80 innovation a journey, 188 innovation best practices, 22 innovation cycles, 15 Innovation Strategy, crafting, 50–52; Step 1. defining strategic growth targets, 52–53; Step 2. defining

232  Index

Innovation Strategy (continued) innovation dependencies, 53; Step 3. assessing initiatives, 53–54; Step 4. defining priority projects’ needs, 54 Innovator’s Dilemma, 43 Institute for Building Efficiency, 117, 121 Institute for Transportation Studies, 37 Intel, 42, 212n1 Intergovernmental Panel on Climate Change, 14 internal combustion engines, 132 Internet, 16 iPad (Apple), use of low-cost labor for, 59 iPhone (Apple): commercials to communicate vision, 150; competition with Android, 166; design linked to corporate strategy, 158; skeuomorphs to introduce new technology, 161; use of low-cost labor for, 59 iPod (Apple), 147, 158, 163; design linked to corporate strategy, 158; ease-ofuse of, 147 Israel, Paul, 97 Ive, Jonathan, 158 Jehl, Francis, 221n15 Jobs, Steve, 147, 199 Johnson, Mark, 170 Johnson, Ron, 199 Johnson Controls, 86, 116; Global Energy and Sustainability, 184; Institute for Building Efficiency, 117, 121; new skill set for private market, 177; Power Solutions, 115; preparing for multiple markets, 197; start-stop battery, 123–124, 132–133 Jomard, Thierry, 140 Jones, Hannah, 119

Kagermann, Henning, 170 Kann, Shayle, 225n7 Kaplan, Abraham, 224n3 Kenney, Martin, 9, 73, 216n26 Kepler, Johannes, 106 Keystone Advantage, The (Iansiti and Levien), 85 Kimbara, Yoshiro, 38 KKR, 18 Klann, William, 131 Klein, Amy, 174 Knight, Frank, 68, 72 “know thyself,” 112–116 Lacey, Stephen, 152 “Law of the Instrument,” 224n3 leaded gasoline ban, 13 Leaf, Nissan, 65 Learning Thermostat (Nest), 147 LED lighting, 19 Leifer, Eric, 165, 196 Lester, Richard, 63 Levien, Ron, 85 Levitt, Theodore, 180 LFTB (lean finely textured beef), 110–111 Lightspeed Venture, 165 Liverpool to Manchester Railway, 16 Loewy, Raymond, 159 long fuse, big bang, 30, 92, 121, 165, 187– 188, 193; adapting quickly during big bang, 165; defined, 15; and Edison, 15–17, 153; idea often easiest achievement, 30; other examples, 16–17; and pattern recognition, 193; seeing through uncertainty, 92, 121–122, 187–188 look-back-from-the-future exercise, 92–93 Lotus Elite, 128

index  233

Machiavelli, 200 Managed Print Services (HP), 177, 179– 180, 181–183 Managing with Power (Pfeffer), 122 market confusion, 4 market uncertainty, 70 Mars, 59 Martin, Jeffrey, 207n25 Maslow, Abraham, 170 mass production, 80 Mattel, 19 mature versus immature technology, 4–5 Mauchly, John, 155 MAYA (most advanced yet acceptable), 159 Maybach, Wilhelm, 16 McDonald, Robert, 39 McDonald’s, 20, 39, 119–120 McGill, Alan, 218n10 McKinsey, 137 McKinsey Global Institute, 75 meatpacking, 131, 133 Medtronic, 197 Mehlman, Guillaume, 164 Mercedes-Benz: E320, 91. See also Daimler Meyer, Mark, 162 Miasole, 64 Microsoft, 42, 118; carbon neutral goal, 118; Windows desktop, 160 Millard, Andre, 136 “mimesis,” 3 Mindset (Dweck), 44–45 Mind the Gap: business model innovation, 184–185; developing and launching new model, 184–185; four-step innovation strategy process, 52–54; identifying challenges, 75–79; innovation through combining

existing elements, 145–146; nexus work, 102–104; robust design, 167– 168; science and policies, 124–126 Model T. See Ford, Henry; Ford Motor Company Moon and the Ghetto, The (Nelson), 190 Moore’s law, 57, 64 Morgan, J. P., 96, 109 Morrison and Foerster, 136, 177 Morse, Samuel, 204n5 Napoleon, 56 NASA space program, 128, 189 National Academy of Sciences, 75 National Association of Insurance Commissioners, 71 National Consumers League, 111 National Organic Standards Board, 107–108 National School Lunch Program, 109 National Venture Capital Association, 8 Nature Conservancy, 18 Nelson, Richard R., 190 Nesler, Clay, 121 Nest (Google): acquisition by Google, 152–153, 159; better design of familiar product, 148, 160; future goals of, 167; Learning Thermostat, 19, 30, 147–148, 152–153, 159; Protect, 148; providing demand response for utilities, 164–165; Trojan horse solution, 152–153. See also Google Nestlé, 58, 59 network, adapting the, 99–102 Newcomen engine, 128 new connections, building, 96–99 New York City proposed ban on large drinks, 59, 111

234  Index

nexus work, 192; adapting the network, 99–102; building new connections, 96–99; in Daimler BlueTEC, 88–91; defined, 80, 86–88; look-back-fromthe-future exercise, 92–93; observing in action, 92; recognizing emerging networks, 93–96 Nieh, Peter, 165 Nike: Considered Design, 119; foreignlabor issues, 59, 113; Mark Parker on transparency, 118; statement on corporate responsibility, 219n17 Nisbett, Richard, 56 Nissan Leaf, 65 Nohria, Nitin, 196 Nutrition Group (PepsiCo), 220n26 Odysseus, 211n18 oil crises of 1970s, 14 old ideas, value of, 133–135 Oliver, Jamie, 111 Opower, 30 Oppenheimer, J. Robert, 8 Organic Foods Production Act (1990), 107 Otis Elevator, 139 pace of innovation, sustaining, 2 Pacific Ethanol, 30 Page, Larry, 159 Palm Treo, 154 Parker, Mark, 118 Passer, Harold, 100 Patagonia: Chouinard on sustainability, 189, 219n24; Footprint Chronicles, 113; foreign-labor issues, 59; SAC (Sustainable Apparel Coalition), 122–123 pattern recognition, 193–194 Patton, George, 194

Pearl Street Power Station. See Edison, Thomas/Pearl Street Power Station Pentagon, 14 PepsiCo, 59–60, 220n26 Person and the Situation, The (Ross and Nisbett), 56 Pew Center on Climate Change, 4 Pfeffer, Jeffrey, 122, 193 PG&E (Pacific Gas and Electric), 49 “pink slime,” 110–111 policy uncertainty, 69 Porsche, Ferdinand, 37 PowerMeter, 159 Pratt & Whitney, 139–140 Princeton Theological Seminary, 55 Prius (Toyota), 37–38, 65, 119, 154, 177 Procter & Gamble’s, 39, 158 Protect (Nest), 148 Puma, 59, 218n10 punch cards, 155–157 PureCycle (UTC), 139–140, 145 pursuing wisdom, 192–193 putting a man on the moon analogies, 189–190 railroad industry, 16 Rathenau, Emil, 82 recombinant innovation, 133–145 Red Cross, 142 Renewables Portfolio Standard (RPS), 21 resources, declining, 57–60 revenue models, developing, 182–183 Revolution Foods, 108–109, 174–176, 182 Richmond, Kristin Groos, 109, 174, 175 right tools for the right job, 191–192 risk and uncertainty, 67–72, 77–78 Rive, Lyndon, 171 Roadster, Tesla, 59 robust actions, 196–197 Roebuck, John, 27–28

index  235

Rogers, Matt, 147, 159 Ross, Lee, 56 SAC (Sustainable Apparel Coalition), 122–123 SASB (Sustainable Accounting Standards Board), 18 Scherer, F. M., 207n29 Schon, Donald, 195 Schumpeter, Joseph, 127, 216n26 science, defined, 105 Science: The Endless Frontier (Bush), 72 SCR (selective catalytic reduction) technology, 90, 92, 132, 214n15 Scylla and Charybdis, 211n18 Serious Energy, 30 Shapiro, Laura, 223n10 shifting market preferences, 3 Siegel, Bettina, 111 Siemens, 16 Siemens, Werner, 204n6 Sikorsky Aircraft, 139 Silent Spring (Carson), 13 Sinovel, 67 “Skeuomorphs,” 160 small steps, 197–198 SmartGauge, 142 SmartGridCity, 48–49 smart grid technologies, 19, 47–50 Smil, Vaclav, 74 SMUD (Sacramento Municipal Utility District), 49–50 Sodexo, 174 SolarCity, 170–172, 176–178, 181, 193 Solyndra: cost of development, 70; DoE loan guarantees to, 66, 69; failed startup of, 9, 30, 66; not knowing what they didn’t know, 44; political fallout from, 64 Sony, 197

Sperling, Daniel, 37, 207n3 Stangis, Dave, 115 Steam Engine Act (1775, Great Britain), 28 steam railroads, 132 Sternberg, Robert, 46 Strom, Stephanie, 108 Sun Tzu, 198 Super Bowl advertising, 48 Supp, John, 171 sustainability reporting, 113–114 sustainable beef (McDonald’s), 39 sustainable innovation: crafting a strategy for, 50–52; defined, 2–7; despite declining resources, 57–60; elements of sustainability, 17–22; know thyself, know the field, 112–118; science and policy and, 108–112; shaping innovation, shaping the field, 118–124 Sustainable Living Plan (Unilever), 39 Sutton, Bob, 141, 193, 206–207n24 Suzlon Energy, 67 Swanson, Bob, 67 Swift meatpacking plant, 131, 133 Swiss Re, 18 Synthetic Genomics, 30 technology uncertainty, 70–71 telegraph technology, 15, 204n5 tending a thousand flowers, 40–41 Tendril, 143 Tesla, Nicola, 100, 173 Tesla Motors, 64–66; DoE loan guarantees to, 69; Roadster, 128 Thailand, flooding in, 58–59 thousand flowers, tending a, 40–41 3M, 139, 142 “Three Women” (General Electric), 150 Tobey, Kirsten, 174, 175

236  Index

Toyada, Eiji, 38 Toyota, 37–38, 65, 86, 119, 154, 177 TPO (third-party ownership), 171 Trojan horse solutions, 152–155, 157 Twain, Mark, 15 Two Billion Cars (Sperling), 37 two degrees, reaching out, 198–199 uncertainty, types of, 67–72, 77–78 Unilever, 39, 59, 113–114, 119 Union Carbide, Bhopal disaster, 120 United Technologies, 69 UNIVAC, 155–156 University of California, Davis, 5–6 USDA, 109–111 US Environmental Protection Agency, 13 Usher, Abbott Payson, 127 UTC (United Technologies Corporation), 139–140, 142, 145 values consumerism, 20 Veron, Maxime, 153, 159 Viacom, 179 Visual Collaboration Services, 161 vocabulary on types of innovation, 7–8 Volt (General Motors), 65–66 Wagner, Mark, 115, 220n25 Wagner, Tim, 71 Walkman (Sony), 197 Wallace, William, 187 Walmart: foreign-worker issues, 19; LED lighting in parking lots, 66; reducing environmental and economic impact, 113–114; reorganizing supply

network, 214n11; SAC (Sustainable Apparel Coalition), 122–123, 219n24 water shortage, global, 58 Watt, James: contributions by Wilkinson to design, 29; improving on Newcomen steam engine, 26, 128; letter to Roebuck, 27–28; poor judgment hindering progress, 27, 31–32, 188–189; success from partnership with Boulton, 28–29, 33 Weick, Karl, 198 Welch, Jack, 46 Western Digital, 59 Western Union, 42 Westinghouse, 16, 173 Westinghouse, George, 100, 188 Weyerhaeuser, 30, 173 What Would Google Do? (Jarvis), 206n22 what you don’t know you don’t know, 42–44 Wheatstone, Charles, 204n6 Wheels for the World (Brinkley), 36 Whole Foods, 174 Wilkinson, John, 29 wind energy, 18 wisdom, pursuing, 192–193 Wollering, Max, 40, 130, 137, 199, 215n25 Xcel Energy, 48–49 Yates, Joanne, 156 Zeitz, Jochen, 218n10