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Nick Carr's essay blog
November 07, 2005
by Nicholas G. Carr
In the popular psychology of business, the modern company is split in two. There’s the organization’s creative right brain - the restless, rag-tag collection of researchers, product developers, marketers and technologists who dream big dreams and think in the future tense. And then there’s the rational left brain - the financial analysts, accountants and controllers who crunch the numbers and balance the books, their field of vision reaching only so far as the end of the current quarter. The former are innovation’s free-wheeling champions; the latter are its risk-fearing enemies.
It’s a tidy little dichotomy, but it’s all wrong. It ignores the fact that business innovation is less a matter of invention than of synthesis. The greatest breakthroughs are usually made by those with the broadest perspectives and the deepest knowledge—the ones who not only can see the potential in a new technology or design but also understand the economics of production and distribution, the dynamics of supply and demand, the motivations of competitors, and the needs and caprices of consumers. And that capacity - what might be called analytical creativity - is much more likely to be found among the suits than the turtlenecks.
These thoughts are inspired by the book They Made America, Harold Evans’s grand tour of the world-shaping business innovations of the last two hundred and fifty years. Evans tells, among many other instructive tales, the little-known story of Samuel Insull, the starched English bean-counter who became Thomas Edison’s most indispensable partner. Insull took care of all the business details that Edison couldn’t be bothered with - the financing, the operations, the hirings and firings, the mergers. With a deft combination of discipline and daring, he sowed the seeds of what is now one of the world’s very largest companies, General Electric.
But Insull’s greatest achievement came after he left Edison’s employ and, in 1892, journeyed from New York to Chicago to become the president of a tiny electricity producer. The move baffled Insull’s associates. How could he give up the helm of Edison’s empire in order to lead a backwater company with three little generators and a paltry 5,000 customers? But Insull saw something that the rest missed - something that would not only lead to the creation one of the most dominant businesses America has ever seen but would also change the lives of nearly every citizen in the land.
Lighting Many Bulbs
When Insull went to Chicago, electricity was very much a luxury good. Produced in small, coal-fired power plants scattered through big cities, its high cost relegated its use to prosperous companies and rich citizens. Even the wealthiest burghers couldn’t afford to turn on the juice for long. They outfitted their chandeliers to run on both electricity and gas. When guests arrived, they switched on the light bulbs; when guests departed, they cut the current and went back to burning the much cheaper gas flames. No one in the electricity business saw any alternative to this arrangement - or even the need for an alternative.
No one, that is, except Insull. Having studied both the technology and the economics of electricity generation, he was the first to realize that electricity could become a cheap, mass-market product. The cost could be driven down by centralizing production in large-scale generating plants and distributing the power to far-flung customers via alternating current rather than the traditional but less transportable direct current. Taking a huge risk in pursuing his vision, Insull installed a massive 5,000-kilowatt turbine, the first of its kind, in a new Chicago plant.
But Insull’s most radical innovation was not technological - it came in the seemingly mundane practice of pricing. The big economic problem with selling electricity back then (and even today, for that matter) was that you had to build the generating capacity required to meet periods of peak usage, but those demand spikes tended to be short-lived. Most of your capacity went unused most of the time. Given that the costs of power generation were mainly fixed rather than variable - and the shelf life of electricity was brief - the unevenness of demand destroyed your ability to turn a profit. And the penalties grew as your operating capacity expanded.
Insull solved that problem by charging different rates to different customers in order to boost demand during the times when it tended to be slow. In particular, he drastically cut the price of electricity for home users, knowing that their daily usage patterns would tend to run opposite to those of the big business users that accounted for most of the peak demand. Then, to the consternation of his competitors, Insull offered to wire houses for free to rapidly expand his clientele. It was clear that he was delivering kilowatts to the home market for less than the average cost of producing them. What he knew, though, was that every cent of added income would help offset the high fixed costs, making huge generating stations both feasible and profitable.
Insull’s pricing breakthrough was, Evans writes, “the single most significant innovation in the single most important technological advance of the 20th century.” And it paid off mightily, as Insull rapidly took over the market. By 1898, he had bought out all the other power generators in downtown Chicago. Within another fifteen years, his rapidly growing utility - now named Commonwealth Edison - had become the dominant energy provider in the Midwest, and Insull himself had become one of the richest businessmen in the country. More important, Insull’s vision had democratized electricity, bringing its myriad benefits to the masses.
To boil it down, Insull’s essential act of innovation was to craft a coherent business strategy out of what at the time must have seemed a cacophony of contradictory technological, economic, and market forces: the scale advantages of centralized production, the high fixed costs of generation, the uneven nature of power demand, the frugality of the average consumer, the wealth of electricity’s potential uses. It was an act of innovation that could only have come from the mind of a person who was at home in the confines of a counting house.
An Unyielding Medium
“Confines” is a word worth pausing over. Many of today’s most vocal promoters of business innovation urge executives to tear down the obstacles to innovation within their organizations, to let creativity flow unimpeded. That can be good advice; mindlessly bureaucratic controls can stifle good ideas. At the same time, though, it ignores the value of obstacles in structuring creative thinking and routing it toward productive ends. Whether in business, science, or art, the greatest innovations tend to emerge only within the presence of constraints - within a set of rules or laws that provide rigid boundaries to the mind. Unconfined, thought grows frivolous.
The great 20th century composer Igor Stravinsky wrote, in The Poetics of Music, that “you cannot create against a yielding medium.” Stravinsky’s innovations were nothing if not revolutionary, but he knew that he could not have produced them if he had not been constrained by the traditions of music and the mathematical strictures of music. “Let me have something finite, definite,” he wrote. “My freedom will be so much the greater and more meaningful the more narrowly I limit my field of action and the more I surround myself with obstacles. Whatever diminishes constraint, diminishes strength.”
It was the laws of economics and competition that provided the constraint - the unyielding medium - which freed Samuel Insull to re-imagine and then re-create the entire electricity industry. And that is precisely the advantage that those with a deep understanding of the “hard side” of business bring to innovation. They can dream in dollars, in the real currency of the marketplace. With them, there is little gap between the imagined and the real.
Not every accountant is a Samuel Insull, of course. Most do an adequate job of placing numbers in the right categories - a useful skill in itself - but few can see beyond the rows and columns of a spreadsheet. Insulls do exist, however, and if executives took a hard and open-minded look at the operating and financial sides of their business, they’d likely find a good number of them.
Unfortunately, few managers seem to make that effort. Buying into the popular but false distinction between suits and turtlenecks, they tend to leave creativity to the so-called creative types. That’s a shame. Think of how much more productive corporate innovation might become if those with a deep understanding of the numbers were brought more fully into the processes for generating and commercializing new ideas. Edisons need their Insulls.
The article originally appeared, in a slightly different form, in Strategy and Business.