How Can a Company Innovate for 100 Years?

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Kevin Maney

NEW YORK ( TheStreet) -- IBM ( IBM) turns 100 this June. For the centennial, the company asked me to research 100 years of computing history and IBM's role in it. (A decade ago, I wrote a biography of Thomas Watson Sr., who built IBM -- so I knew my way around the corporate archives.)
IBM

Remarkably, IBM has contributed major innovations at every stage of computing. It created the first disk drive, the first widely-used computer language (FORTRAN), and the first relational database. It drove development of the bar code and airline reservation systems. Recently, it built a computer that could beat champions on a televised round of Jeopardy!.

IBM hasn't been on top of every development -- it came late to the personal computer and the Web, for instance. But the company is vibrant and relevant today because it has always stayed in the mix, creating new technologies time and again.

So, what can be learned from this? I looked at the historical sweep of IBM and computing, and picked out five key lessons that might help any company that wants to be enduringly innovative.

1. Really (gulp!) cannibalize.

By the end of World War II, IBM was getting one-third of its profits from making and selling punched cards. The rectangular cards had been the way companies had stored data for nearly 60 years, and they were a significant part of IBM's culture. But as data processing became more important to business, companies got overrun by cards. They set aside whole floors of buildings to store cards. Pressure built to find a solution.

At the time, magnetic tape was a new, untested technology. Bing Crosby had broken ground by using it to record his radio show. IBM thought it could be adapted for data, but this was truly a radical idea. It threatened IBM's cherished card business. It also meant asking corporations to put critical data on an electronic medium -- for the first time, a customer wouldn't be able to hold the medium in his hand and see the information (the punched holes!) in front of him.

In a dramatic meeting, IBM's President at the time, Thomas Watson Jr., pushed aside the old guard and moved ahead with tape. If IBM hadn't, some other tech company would have, and eaten IBM's punched card business anyway. Electronic storage turned into a huge IBM business. A single reel of tape could hold the equivalent of 35,000 cards.

Cannibalization is tough. Companies trip on it all the time, as documented in Clayton Christensen's The Innovator's Dilemma. To stay in the game for 100 years, you have to eat a few cash cows.

2. Don't quiet the wild duck.

Innovation comes from individuals, not processes. The bigger a company gets, the harder it has to work to make sure a rebellious voice gets heard. In the parlance of IBM of the 1960s, those people were called wild ducks.

I was struck at the impact of wild ducks on IBM's technology over the decades. In 1967, Robert Dennard was supposed to be working on one project to create new electronic memory, but had an epiphany about how to store a bit of data on a single transistor. His bosses let him work on it on the side, and the idea turned into Dynamic Random Access Memory, or DRAM, which revolutionized computing.

In the 1980s, working in IBM's labs, Bernie Meyerson went against scientific thought and figured out how to use Silicon Germanium in computer chips. Those chips are now key to most handheld, connected devices.

3. Sometimes, throw the book away.

In the 1950s, the Air Force asked IBM to create storage that would let it access any piece of information instantly and alter it -- a process that didn't work with punched cards or tape. To get it done quickly, IBM set up its first team in San Jose, Calif., and they experimented with whirring disks. Managers in New York headquarters dismissed the contraption as a "baloney slicer." But in 1956, IBM introduced the RAMAC 350 -- the first disk drive, albeit the size of a refrigerator.

In the 1980s, when IBM was behind in personal computers, CEO Frank Cary let a lower-level manager, Bill Lowe, develop the IBM PC in Boca Raton, Fla. -- and do it by breaking just about every development rule in IBM's book. The IBM PC was created in a year, unveiled in 1981 -- and by 1985 the PC division had annual revenue of $4.5 billion.

Basically, if a company knows it needs to invent something, and the core management team doesn't think it can get invented -- go around the core team.

4. Have the courage for a BHAG.

In Built to Last, published in the 1990s, management gurus Jim Collins and Jerry Porras wrote that enduring companies at some point make a gigantic gamble on a "Big Hairy Audacious Goal," or BHAG. Ford's ( F) BHAG was the Model T. Boeing's ( BA) was the first jetliner, the 707. IBM's was the System/360 in the 1960s.

BHAGs drive systemic innovation -- they are so big and complex, lots of inventions from all over the company have to come together to pull off the BHAG. A BHAG needs whole new kinds of parts. It needs a new manufacturing process; a new sales approach. Since BHAGs drive such broad innovation through a company, when a BHAG works it shoots the company far ahead of the competition, sometimes creating a years-long lead.

5. Reinvent the company around the inventions, not vice-versa.

This, in the end, is the key to innovating over 100 years: the company has to actually embrace the innovations it generates.

That doesn't always happen. Xerox ( XRX) invented everything it needed in the 1970s to become Apple ( AAPL) before Apple, but instead management famously decided Xerox was a copier business. Kodak invented the digital camera in 1975, but stood by its film business until it was almost too late.

IBM hasn't always been perfect in this regard, but it has remarkably moved from era to era, pulled along by its own inventions while displaying a willingness to let the past go. (IBM has over the years dumped the making of punched cards, typewriters, disk drives and PCs -- all once hugely profitable.) No other tech company has been a consistent contributor to change at every stage through a century. But most impressively, the change keeps changing IBM - which is why it continues to thrive. The IBM of Smarter Planet is nothing like the IBM of 1999's e-business or the struggling IBM of the late-1980s. If the tradition continues, something that's brewing in one of IBM's labs will redefine the company in the next era.

Excerpted from MAKING THE WORLD WORK BETTER: The Ideas That Shaped a Century and a Company (IBM Press/Pearson; June 16, 2011).

Kevin Maney is the co-author of MAKING THE WORLD WORK BETTER: The Ideas That Shaped a Century and a Company (IBM Press/Pearson; June 16, 2011). He was a reporter, editor and columnist at USA Today for 22 years and a contributing editor at Conde Nast Portfolio. He has also been a contributor to Fortune, Wired, The Atlantic, NPR and ABC News.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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