In today's bubble 2.0 world, billions of VC dollars go into nascent concerns that will supposedly transform the world. The truth is that very few of them survive and the ones that do generally yield incremental changes at best (thanks to "me-too" cluster investing). I find some of the best innovation not on Sand Hill road but in new entrants to existing industries where oligopolies rule. Companies that have strong principled-based cultures can give consumers what they want, turn market leaders into followers, and provide long-term stability to an industry. In other words, every market needs a Southwest Airlines.
Someone recently asked me if I thought the proposed US Airways / American merger would be good for the industry and consumers. Many analysts think so under the assumption that three strong competitors will be better than numerous failing ones. While that logic may be true, it doesn't really matter as long as Southwest is in the game. Since its entrance, Southwest has forced price discipline, maintained quality service levels, and continue to bring innovation into the industry. Despite the decades of turmoil in the domestic airline space, Southwest has consistently managed to Herb Kelleher's simple of goal of giving the ability to fly for all Americans (and made a tidy profit along the way).
Companies that do things their own way that bring meaningful change. Sam Walton brought low costs and corporate distribution efficiencies to small towns in the US. Despite the negative impact on mom and pop stores, Walmart has certainly kept all of its competitors in check by substantially bringing down prices for most consumer staples. Amazon has had a similar effect online (although its unclear if its strategy will change in the long-term given its low margins). It's not only about price - Whole Foods brought natural groceries on the map. While business schools debate whether founders should remain CEO's, it is usually the ones that do that keep the disruption continuing.
What's next on the horizon? Certainly struggling markets is a key area of potential. Can Elon Musk's Tesla Motors be the next game changing event since the Japanese invasion? Industries such as traditional media and housing have been on a significant decline and in need of transformation. How about financial institutions that have been battered by greed, bad bets, and too much leverage? Bringing efficiencies is one thing, but many of these laggards need a complete makeover in order to survive. Necessity breeds innovation, right ?
With the myopic focus on technological enabling companies, many lose sight of the fact that true innovation still rests in the hands of visionary entrepreneurs. However, now that it is commonplace for billion dollar industries to disappear overnight (just ask Apple), it will be very interesting to see what impact the accelerated pace of technology will have on business innovation. It may very well be that a sound business model and management are no longer enough to transform an industry. But I think in the end, people just want peanuts, free bag check, and a cost effective way to get to Abilene, Texas.
