Innovation Lessons from Erstwhile Ahabs
I came across an amazing article about the rise and fall of the Whaling industry by Derek Thompson in the Atlantic Magazine. Whaling was very popular worldwide in the 1800s and the United States was the dominant player in the whaling industry, the fifth largest sector in the U.S. economy. The main products of whaling were whale oil used as fuels for lamps and whale bones used as stiffeners for ladies clothes.
The graph below highlights the whaling output in the United States. It appears to follow a classic product life cycle (PLC) curve with a sales takeoff (see the sharp elbow) around the 1830s and peaks around the mid-1850s. It is a familiar tale of technology improvements (bigger and faster ships, better harpoons, winches) and innovative business practices (compensation policies) fostering spectacular business performance.
What happened then? A short while into the 1860s, the whaling industry appears to have descended into a steep decline and fading away into obscurity. Why? Part of the answer is over-whaling causing a depletion of a renewable resource hunted at rates faster than whales could reproduce. Part of the answer is the availability of alternative sources of fuel such as petroleum. What else could explain this precipitous decline? The article suggests that increasing wages in the U.S. made the domestic whaling industry unviable causing shifts in investments to other industries. Because whaling is a supranational resource, lack of economic opportunities abroad pushed seamen from other countries (for example, Norway) to get into whaling wherein low wages provided a low cost advantage.
Money quote from Derek Thompson at the Atlantic:
"The life and death of American whaling might seem like a precious nostalgia trip, but it's really a modern story about innovation. It's about how technology replaces workers and enriches workers, how rising wages benefit us and challenge companies, and how opportunity costs influence investors and change economies."
Look at the price of whale oil and whale bones after the peak of the whaling industry (courtesy: Ugo Bardi). Obviously there were cheaper substitutes for whale oil; whale bones were not that essential to people’s lives and so people could live without using whale bones. The U.S. whaling industry became unviable. There are too many eerie parallels to many of today’s mature industries.
Bottom line, head on competition raises costs for established companies creating opportunities for other low-end entrants. This process is akin to a wheel, a circular process that seems to repeat itself. Examples abound in the real world: think discount stores such as Wal-Mart and K-Mart upending department stores such as Sears, China becoming a preferred manufacturing base over the past two decades, or India’s success in being an outsourcing hub for business process services in the late 1990s.
There are many key lessons for managers. Be careful about the relentless focus on innovations per se without a simultaneous focus on customer needs and preferences. Do consumers really need a ten-blade cartridge? 755 channels on their cable TV line-up? Failure to adhere to this simple mantra could cause companies to overshoot customer needs causing entrants come up with simpler, cheaper offerings. More importantly, always envision the future while delivering the present.
Professor of Business Administration and
James F. Towey Faculty Fellow and
Executive MBA Academic Director