Page 89 - ENTREPRENEURSHIP Innovation and entrepreneurship

53231_Innovation and Entrepreneurship.qxd 11/8/2002 10:50 AM Page 82

82 THE PRACTICE OF INNOVATION

During the early or mid-sixties, the structure of American health
care began to change very fast. Three young people, the oldest not
quite thirty, then working as junior managers in a large Midwestern
hospital, decided that this offered them an opportunity to start their
own innovative business. They concluded that hospitals would
increasingly need expertise in running such housekeeping services as
kitchen, laundry, maintenance, and so on. They systematized the
work to be done. Then they offered contracts to hospitals under which
their new firm would put in its own trained people to run these serv-
ices, with the fee a portion of the resultant savings. Twenty years
later, this company billed almost a billion dollars of services.
The final case is that of the discounters like MCI and Sprint in the
American long-distance telephone market. They were total outsiders;
Sprint, for instance, was started by a railroad, the Southern Pacific.
These outsiders began to look for the chink in Bell System’s armor.
They found it in the pricing structure of long-distance services. Until
World War II, long-distance calls had been a luxury confined to gov-
ernment and large businesses, or to emergencies such as a death in the
family. After World War II, they became commonplace. Indeed, they
became the growth sector of telecommunications. But under pressure
from the regulatory authorities for the various states which control
telephone rates, the Bell System continued to price long-distance as a
luxury, way above costs, with the profits being used to subsidize local
service. To sweeten the pill, however, the Bell System gave substan-
tial discounts to large buyers of long-distance service.
By 1970, revenues from long-distance service had come to equal
those from local service and were fast outgrowing them. Still, the
original price structure was maintained. And this is what the new-
comers exploited. They signed up for volume service at the discount
and then retailed it to smaller users, splitting the discount with them.
This gave them a substantial profit while also giving their subscribers
long-distance service at substantially lower cost. Ten years later, in
the early eighties, the long-distance discounters handled a larger vol-
ume of calls than the entire Bell System had handled when the dis-
counters first started.
These cases would just be anecdotes except for one fact: each of
the innovators concerned knew that there was a major innovative
opportunity in the industry. Each was reasonably sure that an innova-
tion would succeed, and succeed with minimal risk. How could they
be so sure?