A survey of ideas, trends, people, and practices on the business horizon

GRIST

No Monopoly on Innovation MICHAEL RIORDANFifty years ago, when the American Tele-phone and Telegraph Company still helda monopoly on U.S. phone service, thefirst minute of a toll call could easilycosta dollar-the equivalent of about $5today. But a few pennies ofthat 1950sdollar supported research and develop-ment efforts at Bell Telephone Laborato-ries and at AT&T's manufacturing arm,Western Electric.

This corporate combination was prob-ably the most potent innovation enginethe world has ever known, spawningsuch midcentury marvels as the transis-

tor, the laser, the solar cell, cellular tele-phony, and satellite communications.And it developed almost all of the silicontechnology that others used to invent themicrochip. Without a doubt, Bell Labsand Western Electric laid the founda-tions of the information age and today'sglobal society.

But these institutions have been de-clining since the 1984 breakup of AT&TSoon that corporate colossus-once thelargest company in America-will nolonger exist, having been acquired bySBC Communications for only $i6 billion.

Bell Labs, whose physicists have garneredsix Nobel Prizes for their scientific break-throughs, is but a shadow of its formerself under Lucent Technologies. And in2002, Lucent spun ofT most of the remainsof Western Electric as Agere Systems. Along-distance call may now cost pennies,but the nation has lost one of its leadinginstitutions of science and technology.

Many economists argue that monopo-lies stifle innovation. The lack of competi-tion induces corporate somnolence, andnew technologies are patented mainly toconsolidate and protect a company's

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dominant market position rather than toencourage the creation of revolutionaryproducts and services. But innovationwas a much different affair at AT&T,which espoused a corporate ethos of uni-versal service-and especially at BellLabs, which adhered to a managementphilosophy calculated to attract some ofthe world's best scientists and engineersto work in an industrial lab. A healthypercentage of the costs of R&D werebuilt right into the calling-rate base. Thusassured ofsteady financing, lab manag-ers could afford to take the long view andpursue breakthrough technologies thatmight not pay off for a dozen years ormore but might ultimately be of enor-mous value to society. AT&T's patientcapital and secure cash flows allowed thecompany to take the substantial risks in-volved in atxempt\t)g sustained innova-tion across a broad technology front.

The transistor is perhaps the best ex-ample ofthat process. AT&T's managersrecognized the long-range need for asolid-state amplifier and switch duringthe 1930S, but it wasn't until 1947 thatJohn Bardeen, Walter Brattain, andWilliam Shockley invented the device.And it took another 15 years or so of tech-nology development before transistorsbegan to assume their modern form. BellLabs and Western Electric fostered al-most all the subsequent innovations thistransformation required: purifying sili-con, growing large crystals of this semi-conductor material,diffusing layers ofimpurities intothe crystals, patterningthe layers using a protective oxide sur-face layer,and soon.

During the 1960s, Fairchild Semicon-ductor and Texas Instruments adaptedmany of these technologies to developthe microchip, whose manufacture nowadds more than a trillion dollars perdecade to the global economy. Thesesmaller, less-robust companies couldnever have pursued the many differentinnovations that made their core prod-uct possible. But they were exquisitely

poised to drink from the rich technologystream flowing from Bell Labs and West-ern Electric.

Only a large corporation such asAT&T-or others like Genera! Electricand IBM-could ever afford to supportthe sustained, multidisciplinary, mission-oriented R&D efforts needed for theseinnovations without worrying too much

about the short-term impact on the bot-tom line. And it was crucial that this workbe accomplished in a pragmatic indus-trial setting, with a long-range goal of de-livering better goods and services-anethos that hardly exists in government oruniversity laboratories.

Such farsighted institutions, perform-ing basic research and development

STUDME^S SHOW

Those Who Can't, Don't Know Itfay MARC ABRAHAMS

The ancient phrase "A fish rots from the head down" describes the pernicious ef-fects that incompetent managers have on those below them. But such managersare hard to correct or criticize because they don't recognize there's a problem.

Psychologists David Dunning of Cornell University and Justin Kruger, now atNew York University's Stern School of Business, supplied scientific evidence thatincompetence is bliss-bliss, that is,for the incompetent person. Their study,"n-skilled and Unaware of It: How Difficulties in Recognizing One's Own Incompe-tence Lead to Inflated Self-Assessments," appeared in 1999 in the Journal of Per-sonality and Social Psychology.

To explore the breadth and depth of human incompetence, Dunning andKruger staged a series of experiments. In one, they asked 65 test subjects to ratethe funniness of certain jokes. They then compared each test subject's ratingswith those of eight professional comedians. Some of the participants repeatedlycouldn't predict what others would find funny-yet described themselves as ex-cellent judges of humor (rather like the character David Brent in the British ver-sion of the TV series The Office). Although less colorful, Dunning and Kruger'sother experiments-involving grammar and logic-yielded similar results.

Incompetence, the study demonstrated, represents a dismaying troika of clue-lessness: Incompetent people don't perform up to speed, don't recognize theirlack of competence, and don't recognize the competence of others. "The skillsthat engender competence in a particular domain are often the very same skillsnecessary to evaluate competence in that domain," the researchers conclude. Inother words, if incompetents have people reporting to them, their poor judg-ment may damage careers besides their own. "Unskilled and Unaware of It"is online at www.apa.org/joumals/features/psp776n21.pdf.MARC ABRAHAMS 5 the editor and cofounder of the scientific humor magazineAnnals of Improbable Research (www.improb.com). In this regular Forethoughtcolumn, he unearths studies that shed the oblique light of multidisciplinary researchon the science of management.

Reprint FO512B

DECEMBER 2005 19

within industry, are necessary if societyis to realize fundamental breakthroughs,like the transistor, that have the potentialto transform it, AT&T's seemingly exces-sive charges on toll calls served as a kindof R&D tax: The company provided a reli-able mechanism for diverting a tiny frac-tion of our everyday expenses-com ingfrom all corners of the U.S.economy-to long-term R&D projects that eventu-ally made tremendous improvements inour lives.

Surveying today's science and technol-ogy landscape, I can find nothing compa-rable to the AT&T-Bell Labs-WesternElectric innovation machine. But at leastwe can now call anywhere in the countryand gab for hours, never worrying aboutthe costs.

MICHAEL RiORDAN (riordan@stanford.edu)teaches the history of physics and technol-ogy at Stanford University in California andat the University of California, Santa Cruz.He isa coauthor of Crystal Fire: The Birthof the Information Age (W.W. Norton,1997). Reprint FO512A

MARKETING

How Not to ExtendYour Luxury Brandby MERGEN REDDY AND NIC TERBLANCHE

In 1972, Diane von Furstenberg createdthe multifunctional wrap dress, whichcaptured the imagination-andthepocketbooks-of a generation. By 1976,she had sold more than five million ofher designs and was hailed by Newsweei(as "the most marketable woman In fash-ion since Coco Chanel." Von Furstenbergdidn't stop there: She developed a line ofbeauty products and fragrances and

stamped her name on everything fromluggage to eyeweartojeans to books.

The strategy worked at first. VonFurstenberg's premium name gener-ated high margins for every product itadorned, regardless of the category.Buta few years into this heady growth,the brand lost momentum. Revenuesand profits plummeted, and, ulti-mately, von Furstenberg had to sellher design and cosmetics houses topay off debts.

What happened? Generally, luxurybrands increase in profitability whenconsumers perceive that these goodsoffer more value (or premium degree)than other comparable products. Brandslike Bose, De Beers, Louis Vuitton, andRolex all became more profitable astheir premium degree grew. Von Fursten-berg products showed this same effect,for a time.

But our study of 150 luxury brands, in-volving interviews with more than 300executives worldwide and analyses of ap-proximately ten years'worth of financialdata for each brand, shows that this ruledoesn't always hold. Specifically, our re-search found that a luxury brand's prof-itability will usually increase as the pre-mium degree increases-butonly if thebrand is extended into product catego-ries adjacent to the core brand. VonFurstenberg's problem, it appears, wasnot that the name had lost its cachet orthat the guality ofthe goods carrying itwas poor; it was that a brand people as-sociated with high-end dresses just didn'ttranslate well to nonadjacent productssuch as luggage and books.

Consider Louis Vuitton and Cartier,each of which has gross margins above79%. These brands have profitably ex-tended their names into categoriesadjacent to their core products. Cartierexpanded its brand from jewelry towatches, perfumes, and accessories. LouisVuitton transferred its name from hand-bags toclothingjewelry, perfumes, andaccessories. However, remember PierreCardin? The brand's early extensionsinto perfumes and cosmetics in the 1960ssucceeded so well that the companybegan to sell licenses indiscriminately.By 1988, it had granted more than 800

licenses in 94 countries, generating a$1 billion annual revenue stream-andprofits plummeted. It wasn't until thePierre Cardin name started appearing onwildly nonadjacent products such asbaseball caps and cigarettes that marginscollapsed. Initially,the brand extensionsinto the perfumes and cosmetics catego-ries were successful because the pre-mium degree ofthe Pierre Cardin brandtransferred undiminished into the new,adjacent categories. The owners ofPierre Cardin, unfortunately, attributedthis to the strength ofthe brand ratherthan to the brand's fit with the new prod-uct categories.

Of course, some brands leap success-fully among categories. Such successoften depends on whether the corebrand's value, in the eyes of consumers, isprimarily symbolic or functional. Someluxury brands are valued for their func-tional aspects; people buy Porsches, forinstance, in part because ofthe vehicles'world-class performance and engineer-ing. Other luxury brands, like Louis Vuit-ton, are valued more for the lifestyle theyproject than for the particular expertiseor functionality they embody. We'vefound that symbolic brands can be moreeasily exported into nonadjacent catego-ries than functional brands and can suc-ceed in these categories when they con-sistently promote their core symbolicattributes. (For more on this concept, see"Marketing Malpractice: The Cause andthe Cure" also in this issue.) For example,when Bulgari licensed its name to Mar-riott to create a chain of luxury hotels,customers bought into the concept be-cause ofthe symbolic value ofthe Bulgari

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