- A loonshot is a breakthrough innovation.
Types Of Loonshots
The question one must ask is, why so commonly, do leading innovative teams fail after a long reign of domination? This, has been the case far too often for companies such as Nokia, IBM, & airline leader Pan Am.
As investors we have a duty to identity why these leading companies fail, and how we can predict these failures within our investments.
Specifically, what is so interesting about these companies listed above, is the fact that these companies – by far – had the best technologies of their time. But, still these companies failed within a dramatic and sudden fashion. The question is why? Why did these companies fail? What went wrong? And – what can we learn from these failures?a
Types Of Loonshots
To truly grapple with the notion that leading companies often fail, one must recognise the distinction between two types of innovations for companies.
The first type of innovation is referred to as an S type loonshot. An S type innovation speaks towards the change in strategy for a company in order to gain a competitive edge. Walmart perhaps is the best example of a successful S type loonshot. Sam Walton located his stores far from major cities, supersized them, and sold $1.20 women’s underwear for $1.00. There were no new technologies, but there was a change in strategy. Walton found a way to sell the same products, slightly cheaper.
Commonly, these changes in strategies are actually harder to replace, and even within hindsight these innovations can be harder to spot. Changes in strategy usually have more to do with understanding human psychology and behaviour, rather than complex technological thought.
S type loonshots can take something good, and make it into something amazing.
The other type of innovation is referred to as a P type loonshot. This type of loonshot is a breakthrough within innovation, and a technology that was wildly dismissed before ultimately triumphing. One can recall the countless times the internet was deemed as a scam, or when the telephone was commonly deemed as a passing trend. Now, with the power of hindsight, clearly this was not the case. These technological breakthroughs have been so revolutionary, that they have disrupted the fabric in which society operates within.
First intuition may assume that these breakthroughs within innovation and technologies will surpass trivial changes within strategies. But, history actually tells us the opposite.
The reason as to why a change in strategy can be fundamental towards the success of the company, is because changes in strategies often are operating within the complex behaviours of buyers, sellers and markets.
Having the best software, or the best search algorithm alone is not sufficient. One must couple this with intelligent and complex changes within strategies in order to enable success.
To put this simply, going bigger, better, and more powerful with each iteration is not sufficient. In fact, it can be detrimental. This is why leading companies such as Pan Am, and Polaroid have failed despite being prior industry leaders for such time. These leading companies failed because, they kept going bigger, better, and more. This insistence led to products in which were scientific breakthroughs, and aesthetic beauties, however failed to appeal to the commercial segment. Why?
Well, the lack of focus for consumers was based on the poor leadership structure and style.
This is based on a concept called the Moses Trap. To understand this, one must recognise the role of leader. The role of a leader is not to dictate which ideas fail, or succeed. The role of a leader must be more like a gardener. Namely, tending to the touches between the innovators, and the conventional workers. Pan Am, and Polaroid failed because their ideas only advanced at the helm of the holy leader, who acted for the love of the loonshot, rather than the strength of the strategy.
Whilst Polaroid and Pan Am created an amazing loonshot nursery, the leaders remained judge and jury of new ideas. The companies failed on dynamic equilibrium (exchange of ideas between innovators, and soldiers). These companies failed because the leader acted more like a dictator, rather than a gardener.
A leader should be more like a gardener, rather than a dictator. This is incredibly vital.
As investors, it can be hard to identify how a leader within a company is performing. However, it is a necessity that we gain an understanding of the role of leaders. This is the perfect example of a qualitative factor, in which we must understand. Qualitative factors are intangible business assets, such as talent, structure, and culture. These intangible, qualitative factors are leading indications of the financial success of that company.
Qualitative (intangibles), are far more vital than quantitative.
Pan Am was a leader, and dominant airline company that controlled the skies during the 1930s. The company, led by Trippe, was known for their amazing technologies and radical innovations. The company was popularised in ways that today is hard to imagine.
To summarise Pan Am, and their innovations, it can be explained within a simple quote:
“People said that there is no way this could ever work. But, then it does”.
The company was the first to fly to Latin America, across the Atlantic, and the Pacific, just to name a few. The public was in true awe of this company.
Trippe’s strategy of nurturing bigger, better and faster innovations – with a dash of marketing clamour – worked well. And, with each turn of the cycle, Pan Am grew in influence, and Trippe grew in ambition. Travelling around the world via plane would no longer be solely for elites. Pan Am would offer affordable, same day travel across the Atlantic, and eventually the world.
After years of domination, and years of bigger, better, and faster technologies, Pan Am signed the biggest deal in corporate history – for the time – $525M for production of 25 models of new first class planes. This cycle continued for many years.
But then it suddenly failed. Within dramatic fashion, the cycle turned one too many times. The notion of going bigger, better and faster, with each iteration, failed drastically. The music had stopped, but Pan Am did not notice. They were so focused on bigger, better and faster, that the company missed a vital change.
Whilst Trippe was so focused on P type loonshots, he missed a major change within the industry. Congress actually launched antitrust regulations into Pan Am, and their monopoly on the foreign routes. Populist voices complained that regulators were protecting industry giants, rather than consumers.
During this time too, there was a change in strategy that was found via smaller start-ups. These start-ups brought new ideas to the industry – namely Hub and spoke turnarounds. This was the ability to fly to secondary airports, in which reduced turn around times to 20 minutes. Similarly to Wallmart, this new idea did not involve a radical new technology. These were all small changes in strategy that nobody thought would amount to much. They were all S type loonshots.
The music had stopped for Pan Am. But, they did not notice. The company ordered $100Ms of new airplanes, and splurged $200M on revamping new airports. So, whilst Pan Am were focused on expanding their franchise, competitors were focused on changes in strategies. It turnd out that this was the failure of Pan Am.
The small changes that improved efficiency, and lowered costs – very boring – suddenly became the key for survival. Pan Am missed this, with their focus on technical breakthroughs.
The company lost money every year for 8 years. It stayed alive by selling pieces of itself. The office buildings. Hotels. Magical routes to China. All sold in a dire attempt for survival.
Finally, there was nothing left. In December of 91, Pan American World Airways ceased to exist.
A similar fate occurred for Polaroid back in the 1900s. The company was at the forefront of technology, creating breakthrough after breakthrough. But, similarly to Pan Am, something suddenly changed, and the company failed.
Edwin Land, the CEO at the time, began with a hidden property of light. He built an empire, in which innovations led to growing franchises, that then fed more loonshots. This cycle continued for many years.
Edwin Land built the Polaroid Corporation by inventing a new remarkable use for this hidden property of light.
Land got his first major deal with the military, in whom snapped up the polarized products and innovations to eliminate glare from the sun. This was part of the invention that led to the domination in the camera industry soon after.
The Navy ordered millions of these products from the company in order to aid the ability to sight aircrafts, tanks, and surfaced submarines. The Army and Navy ordered millions of polarised goggles.
Today if you are using a laptop or a smartphone to watch something on an LCD screen, you are using a variation of Land’s innovation. This should give perspective as to how vital Edwin Land’s inventions have been for the advancements in technologies.
Land translated this technology that was first used within the Navy into 3D glasses for cinemas and photography, film photography, and other vital breakthroughs such as the instant polaroid. The media labelled the array of innovations as some of “the greatest advancements in the history of photography”.
The sales for Polaroid went from just under $1.5M in 1948, to $1.4B in 1978. And, for 30 years Polaroid dominated the photography segment, just like Pan Am dominated the international travel sector.
Both companies delivered innovation after innovation, and breakthrough after breakthrough. The wheel kept turning, the franchise kept growing, and the loonshots kept coming.
For Polaroid, their reign ended in late 1978. The crash was sudden, dramatic, and very unexpected. This was after the launch of the new product, namely the world’s first Polavision player that could product instant video. Even today, one must appreciate this product. The fact that back in the 1970s, Polaroid invented the use of a video recorder, that within 90 seconds could appear on a TV screen.
The media labelled the new product as “magical”. Technology magazines stated that: “the company that seems to specialise within turning the impossible into real hardware have done it again”. Others noted that this new product was the “highlight of the company”.
You may at first assume that this radical new innovation would have inevitably resulted into drastic sales. But, it did not. In fact, within a year the product was dead. Customer were not buying it. Despite the resolution and quality being superior, and the aesthetics of the products far outpacing those of other products. customers were not interested.
Customers did not need the extra resolution for home movies. And, customers deemed that the elegant design could not overcome the convenience of other products. Other video tapes, such as the Super 8 Film, were easier, cheaper and erasable.
Wall Street analysts stated that: “this is a product that has much more scientific and aesthetic appeal, than commercial significance”.
Soon after, the company were losing money rapidly. A door of revolving CEOs came through, but it was too late. The company found themselves in a dire situation, solely based on the obsession of a leader for newer, bigger, better and more, whilst totally disregarding other vital aspects of the company.
This is another example of the Moses Effect, and the evidence that the best technology over time does not always win. Having the best technology alone is not sufficient. The best technology does not result in success.
What have we learnt thus far? Let’s recap:
Firstly, there are two types of innovations.
S type loonshots are changes in strategy. Whereas P type loonshots are radical breakthrough technologies. S type loonshots are underrated and should be focused upon more within companies. The changes in strategy are playing within the complex behaviours of buyers and sellers, and thus can create something good and turn it into something amazing. Whilst P type loonshots are needed, the obsession for bigger, better, faster and stronger can become detrimental for the success of companies.
The obsession of bigger, better, faster and stronger, can lead to major deficits within other domains of the product, thus loosing commercial significance. Consumers do not solely want something that is bigger, better, faster and stronger. Consumers instead want something that is convenient and frictionless, whilst also enjoying technological improvements.
Qualitative factors far outpace the significance of quantitative factors. Qualitative factors are leading indicators for the future finances of the company.
The role of a leader is not to solely dictate. But instead, the role of the leader is to nurture. A leader should be more like a gardener – tending to the touches and balances between soldiers and conventional workers (information flows).
Within these two specific case studies, the companies failed because of the Moses Trap. The two companies experienced the leader being the sole dictator of ideas that flourish and fail. Pan Am, and Polaroid failed because their ideas only advanced at the helm of the holy leader, who acted for the love of the loonshot, rather than the strength of the strategy. This is dangerous.
The best technology does not always win. Life is never black and white.