Thomas Edison and the Theory and

Practice of Innovation
Andre Millard

University of Alabama at Birmingham

In December1990FinancialWormtook a poll of the Business History Conference to determine the mostimportantindividuals and organizations in the business world in the pasthundredyears.The poll set out to find the greatestbusiness leaders of the twentieth century,the most important companies, andthebiggest business flops. Apartfromthe question aboutthe mostimportantinvention of the twentieth century, it is doubtful if Thomas Edison's namewill be mentioned in the responses to the poll, for here is a man associated more with invention thanwith management and a historical figurethatbelongs morein the nineteenth century thanin the twentieth. Yet as an innovator who setout to manufacture and markethis inventions, Edison set in motiona strategy that continues to dominate Americanbusiness. In a career that bridgedthe nineteenthand twentiethcenturies, Edison was an important pioneer in theinnovative business organizations andstrategies that are now claimedby someof America'smostsuccessful companies. Edison deserves to be recognized as an important business leaderof the twentieth
century.
The Reluctant Industrialist

In addition to a nominationfor creating one of the important companies of the twentieth century, Edisonalsodeserves a nomination asthe architect of someof America'sgreatest business failures.His reputation as a businessman hasneverbeenverygreat.His friendHenryFord summed it up when he said that Edison was the world'sgreatestinventor and worst businessman [6].The history of the electric utilityindustry serves to provethis point and to supportthe notionthat inventors and engineers do not make good managers. After inventing theincandescent lampandbuilding thecentral station system to bringelectric lightto citydwellers, Thomas Edison formed manycompanies that madethe equipment and provided the service. When

]I wish tothank theNational Park Service foraccess tothe Edison National Site, West Orange,
New Jersey, wherethe Edisonarchives are held.All Edisonquotations comefrom documents in this archiveand can be referencedby consulting my book, Edisonand the Business of Innovation (Baltimore,1990).

BUSINESS AND ECONOMIC

HISTORY, Second Series, VolumeTwenty,1991.

Copyright(c) 1991by the Business ltistory Conference. ISSN 0849-6825.

191

192

thesecompanies were amalgamated into GeneralElectricin 1892the great inventorwas given only a nominalrole as a member of the board. The newspapers at that time and later historians have agreedthat Edisonwas "frozen out"of the industry thathe hadcreated, a victimof the manipulations of big business and his ownpoorjudgement [3]. Edison'sfollow up to the great success of electriclightingwas an unmitigated disaster. His planto magnetically extract ironfromlowgrade ore wentagainst the conventional wisdom of the miningindustry. Edison built a hugemill in the mountains of New Jerseyand pouredawaythe profitsof electriclightingtryingto make it work. The total failure of this project brought him close to bankruptcy. It is no wonderthat management experts, suchasPeter Drucker,tendto depictEdisonas a disastrously bad manager who ruined the companies formedto develop his inventions [4]. Edison himselfattempted to downplay hisrole asa businessman by stressing the fact that he was an inventor who preferredto stayin his laboratory. A reluctant industrialist, he claimedthat he was forced into financing inventions and buildingfactoriesbecause entrepreneurs were too timid to do the job
themselves.

This story,like many othersconcocted by Edison,was completely untrue.It waspart of his successful creation of an Edisonmyth and a ploy to keephim out of the litigation that invariably accompanied his business activities. Edison's theoryof innovation wasbased on the inventor playing the centralrole in manufacture and marketing. He claimedthat any moneyhe madewas from manufacturing the invention and not sellingthe patent.He
described himself as an inventor or as a manufacturer; he saw the two

functions as overlapping. He did not use the term innovation to coverthe activities of settingup a commercial enterprise upon an idea, yet this was clearly in hismindwhenhe claimed thatcoming upwithideas for inventions was easybut it was "thelong laborious troubleof workingthem out and producing apparatus whichis commercial" that required the hardwork. Edisonwascertainly not content to be just an inventor, a person who turnsideasinto patents. He believed that a patentwas hardlyworth the trouble of inventing something. He knewfromexperience thatselling patents to businessmen oftenleft the inventor shortchanged. More oftenthannot the returns from a new idea went to the financier or manufacturer,while the inventor struggled to protect hispatentin the courts andobtainhisshareof theprofits. A patent alone wasnotenough, norwasan invention. The original

ideahadto be developed intosomething moretangible thana patent; it had to be transformed, or "perfected" into a working modelor a final product-something a businessman could seeandtouch ratherthanimagine. Thiswas essential to obtainmancial support. In Edison's words, the "money people" had to seemoneyin an invention beforetheywouldinvest in it. "Perfecting" an invention also involved finding andremedying the "bugs"--the defects and design problems--that inevitably cropped up in the development of an idea into a working modelor process. This stage of innovation endedwhenthe invention was translated into a factory-ready prototype. Its value was now muchgreater thana patent. The finalstepinvolved "pioneering" a technology by puttingit into production and proving its commercial feasibility. This

193

involved financing a manufacturing operation and administering it until it couldbe soldto entrepreneurs. Innovation covers whatEdison would havecalled inventing, perfecting, andpioneering a newtechnology. He hadplenty of experience of innovation by the time he setup his"invention factory" in Menlo Park,New Jersey in 1876.This prototype of the modernresearch and development organization wasdesigned to produce a stream of newproducts, andthe invention of the phonograph, highresistance incandescent lamp, and manyimprovements in telegraphy provedthat innovation couldbe regnlarized and placedin the formatof massproduction. It wasat Menlo Park that Edisondemonstrated that he was not contentto merely developnew products, for he was determined to controlall stages of innovation, especially the manufacturing stage wherehe couldemploy the resources of his laboratory to continually reducethe costof production. He beganto manufacture incandescent bulbs at Menlo Park and to think seriously about settingup factoriesto mass produce hisinvention [5]. The largefactory that he setup in Harrison,New Jerseymarked an importantpoint in his business career, for it was at Harrison that he discoveredthe major article of faith of American manufacturing in the nineteenth century:the costof makinga product could be successively lowered asthe manufacturer moved along the learning curve of massproduction technology, and at eachcostreduction more customers were attracted to purchase the product. The invention factory wasto be used to progressively lowerthe costof production. The miracles of costreduction that had beenachieved at the Lamp Workscouldsurely be appliedto other products. Edisonconsequently formulated a grandstrategy for a newlaboratory, envisaging a largeindustrial undertaking that wouldmanufacture the many new products devised in the laboratory. In 1886he beganits construction at West Orange, New Jersey. His close associate Charles Batchelor wastold of this scheme while the laboratory was beingbuilt. He wrote in his diary: "Edison's ideanowfor the futureis to getup processes for manufacture and start factories...as soon as the new laboratory is finished this will be commenced in earnest"[7].
The Manufacturing Strategy

Edison'splan was not to create anotherlarge scaleenterprise like electriclighting,but a focused manufacturing operation to bring consumer durables to a mass market.With the enormous costs of introducing electricity still fresh in his mind, Edisonwanted to avoid"cumbersome inventions like theelectric light" andconcentrate instead onsmall products witha highprofit potentialand low capitalrequirement; he planned to supply smallitemsof commerce--"useful things that everyman,womanand childwants."
As an industrialistin the 1870sand 1880s,Edison knew that he could

usethetelegraph andrailroad to reach a national market. Perhaps influenced by the success of the sewing machine, he sawan important newmarketfor consumer goodsopening up at that time. Americancitieswere growingat a furiouspace.Between1880and 1900the urbanpopulation of the United

194

States movedfrom 28% to 40% of the total.With the greatboom in railroad construction over, cities were becomingthe most important market for manufactured goods [2].After considering a widerangeof potential products, Edison decidedto concentrate on makingoffice machinery, including the electricfan and the phonograph. The latter couldbe turnedinto a dictating machine andEdisonbelieved thatits recorded cylinder--the phonogram--was goingto replacethe letter and the memoin Americanbusiness. The construction of the EdisonPhonograph Worksin 1888completed the plan for his West Orange operation--alarge manufacturing facility adjoining a laboratorycomplex, and all under the controlof one man. In controlling manufacture, and ultimately the supply of raw materials, Edison was coveringground that normallyis reservedfor the large, integrated corporation. Yet at the sametime, he had constructed a research laboratory that was equipped to move quicklyinto new technology, taking the larger organization with it. His desireto remainin complete controlof hisinventions reflected the unhappyexperiences of sellinginterestsin his projectsto financiers. The bankers, entrepreneurs, and professional managers he dealtwith were much too conservative and cautious whenit cameto introducing a new technology.
There were few businessmen in America in the 1890s who could match Edison

in gambling a fortuneon a new idea.The ore millingprojectwasa casein point.The millions of dollars he madein electric lighting werequickly poured into this ill-fatedventureas he liquidated his interestin electriclightingto financehisore mill. He persevered in thislosing proposition because he knew that if he succeeded the profitswould be around $3 million a year--far exceeding the returnon electric lighting--and theywouldgo to him alone. Ore milling was the "mostcommercial" technology Edison had ever devised. One hundred year later we seeonlythe colossal failureandnot the potentialfor profit. Historianshave estimated the value of thoseGeneral Electricshares if Edisonhad hungon to them--forgetting that whileEdison waslosing a fortune in hisore-milling project the electrical utilityindustry was goingto the wall. The greatdepression of the nineteenth century that began in 1893provided the financial shock that nearlybroughtdownthe electrical industry. Edison believed that the greatcompanies such as GeneralElectric and Westinghouse had too greata burdenof debt and that there were few profitsto be had in providing electric light.The decade of the 1890s proved him right [9]. The samedecade alsoprovedthat moneycouldbe made in manufacturing consumer durables for the growingurban market.By 1900 Edison had rebuilt his business empire around the phonograph as an entertainment machinethat wouldgo into everyhome.He also made the prerecorded cylinders that wereplayed on the phonograph. By 1906he had manufactured over one millionmachines and twentymillion recordings--the phonograph industry wasenjoying a boomperiodthat wouldlast until the
early 1920s.

At the turn of the centuryEdisonwas also enjoying the profitsof anothernew industry that hadbeencreatedaroundone of hisinventions. The motionpicturecamerawasone of manynew products that cameout of the West Orangelaboratory; it occupied a placein a list of inventions thatbegan

195

with the aeroplaneand ended with X-rays. Many of these stunts,as the laboratory staffcalledthem,cameto nothing. Several were takenup by other inventors andbrought to a successful conclusion elsewhere, suchasradio.But it took only one successful stuntto make goodthe losses on all the failures. The invention of motionpictures reestablished Edisonasthe world'sgreatest inventor after the lossof facein the electrical industry and the disaster of ore milling.It wasno lessa triumphfor hisbusiness enterprise; the firstviewing machine, calledthe Kinetoscope, wasa vanguard of a newindustry [8]. The success of the motionpicturestuntprovedthe worthof Edison's basicbusiness strategy of creating a diverse product line on the streamof new products comingfrom his laboratory. An assembly line was set up for each new product and, if early saleswere encouraging, Edison quicklyset up companies andbuiltfactories. The speed withwhich he moved into newareas might horrify modern businessmen who prefer years of preparationand marketresearch beforeembarking on a newventure. But Edisonwasalways something of a gamblerand the yearsof intense competition in the telegraph and electrical industries had taughthim the meritsof movingquicklyoncea commercial technology had been developed. This strategy wasnot withoutpitfalls,for the hastyintroduction of a half-realized productcouldendin disaster, andtherewere several of thesein Edison's longbusiness career. Yet he wasneveroneto dwellon failure,and there wasalways anotherpromising stuntin the laboratory to make up for past reverses. The motionpictureprojectwas pushedforwardwhen it was obvious thattheore-milling project wasdoomed. The diversity of experimental projects undertaken at the laboratory gavethe Edisonenterprise the means to ride out competition and depressions in onebusiness. It wasalsothe path for continued growthand expansion. The facilities erectedat West Orange werethebasis for the continual, systematic entrepreneurship thatwe nowsee as essential to remaincompetitive in the modernbusiness world.
Thomas A. Edison, Incorporated

The Edisonenterprise enjoyed a marvelous periodof growthafterthe worstof the depression was overby 1896.By 1910the Edisonproductline included phonographs, filmprojectors, electric fans, storage batteries, Portland cement, andmotionpictures. He owned recording studios, film makingunits, mines, andquarries in addition to the greatindustrial complex he hadbuilt at West Orange.There hadbeenlittle planning in the assembly of Edison's business enterprise. He pursued thepolicy of expansion without regard to the overall development of theorganization, forming newcompanies andbuilding factories as the needarose.Each new productled to a new company and often to a new manufacturing facility. Edison alsoembraced thestrategy of vertical integration, acquiring the facilities to controleachstageof production in muchthe sameway that Andrew Carnegieintegratedhis steel making operations and John D. Rockefellerbroughtall stagesof oil production and refiningunder one organization. In addition to the currenteconomic wisdom of securing the sources of rawmaterials andlowering costs, thereweregood technical reasons

196

to takeoverthe production of rawmaterials. The requirements for chemicals needed in the manufacture of batteries andphonograph records wereunique to Edison'soperations; the purity of raw materialsplayeda major part in determining the quality of the finalproduct. Eventhe slightest impurity in the chemicals used to make wax compounds, for example,could ruin the reproduction of soundfrom the phonograph. Edison's standards were the highest in the industry, andthereforeonlyhis ownraw materials were to be
used in manufacture.

An example of this policywas the Edisonstorage battery.He had embarked on an experimental project to improve storage batteries because he wasconvinced thata betterbattery wouldhavea muchlargermarketthanthe lead-acid batterythenin use.One newuseof an improved batterywouldbe the electric car--aproduct that appeared to havea brightfutureat the turn of the century. He envisaged controlling the storage battery operation from the mine providing the basicraw materialsto the assembly of electric automobiles and started in thisdirection as soonas the projectbegan. He acquired mines, constructed factories, andpurchased theLansden ElectricCar Companyof Newark in 1908. Where possible, Edison attemptedto gain control of companies providingparts or materialsfor his factories.He bought out smaller competitors in the NewJersey areaandalsoacquired an interest in factories in Europemaking histalking machines andrecords. The sizeof hisbusiness places it in the front rank of the largerorganizations formedin the era of consolidation in American industry. In 1910Edison beganto reorganize his sprawling business empireintoan organization thatwaseasier to manage. He formed ThomasA. Edison Incorporated (TAE Inc.) as the umbrella organization underwhichhe couldconsolidate hismanybusiness concerns. Thepolicy of diversification hadcreated many businesses in theEdison enterprise, eachonewith its unique technology. Eachof hisproducts had a differentmarket:primarybatteries weresoldlargely to the railroadindustry, storage batteries wentto industrial users anddelivery companies, the dictating machinewasmarketedto the business community, and the phonograph and motion picture werearticles of mass consumption whichdemanded a special knowledge of theworldof entertainment. The rapidswings of public tastein

phonographs andmotion pictures hadshown howimportant it wasto react quickly to changes in the market.The divisional policy wasframedwith this goalin mind.It wasintended to move decision-making closer to the customer by giving middle managers the opportunity to exercise theirspecial technical or marketing skills. It created channels fortheirinputwithin theorganization, providing the timely information withwhich to betterapply the engineering andmanufacturing resources of TAE Inc. to a changing marketsituation. The evolution of themodern business organization hasbeenchronicled by the historian Alfred Chandler. He has shown that the multidivisional, decentralized structure cameasa response to problems of running the large diversified businesses created during the merger movement at the turn of the
century. Companies diversified into new product linesto usetheir resources moreprofitably, but astheytookon moretypes of products, theyrequired a new organizational planfor the administration of their complex businesses.

197

The divisional structure answered many of their needsand it eventually became the standardof business organization in the twentiethcentury. Beginning withDu PontandGeneral Motors,Chandler hasdescribed howbig business in Americaembraced thisstructure [1]. As Edison's policyof diversification cametwo decades beforethose of Du Pontor General Motors,hismove to a divisional structure precedes theirs by several years. The divisional policy waslaid out by Edisonandannounced on March 15, 1915.It allottedeachmajorproduct in TAE Inc. to a separate division, eachtheresponsibility of a division manager. The divisional structure wasmodelled on theUnitedStates government; thecentral administration was the federalgovernment, eachdMsionwasa state,and the division manager wasthe stategovernor. The centraladministration wasto givethe division managers "as wide latitude as possible," after settinggeneralpolicy.Its
function was to coordinate the activities of the divisions.

At the top of the dMsionalstructure stoodEdison.He did not concern himselfwith the day-to-day affairs of the divisions but with the overall strategic planningof the enterprise. As chief executive and founderof the operation he wieldedtotal power.AlthoughTAE Inc.'s divisional structure was years ahead of its time, Edison remained firmly committedto the personal leadership in the moldof the nineteenth century familybusiness and wasreluctant to handovercontrol of hisbusiness to professional managers. His frequent retirements werefollowed by a sudden returnto WestOrange anda sharp change of course fromtwentieth century enlightened management to nineteenth century capitalism. He hiredprofessional managers and then overruled theirdecisions, making several critical errorsofjudgement thatwere to costTAE Inc. dearlyin the phonograph business. Edisonrefused to move into radio and electronicrecordingin the 1920sand thereforelost the technological leadership that had usedto be the hallmarkof his business enterprise.His own personaltaste determinedwhat recordsand f'fimshis company made, andtheresults werecompletely outof step withthechanging audience expectations of the1920s. Edison hated jazzandhiscompany missed thegreat boomin newpopular music in the 1920s. His choice of filmsubjects tended towards themes that wouldnot provoke censors. Advertised as"clean and wholesome" fare that wouldentertain and educate, Edisonpictures did not provide the titillationand violence that soldseats in moviehouses. TAE Inc. wasforcedout of two industries created by the inventions of its founder, leaving the film making business in 1918and finallyending the production of phonographs and records in 1929.In termsof the consumer market,the Edisonenterprise couldnot keepup with the times.The dosing downof the phonograph operation--a humiliating stepfor the inventor of the talking machine--while beinghonored asthe greatinnovator is an indication of the gulf that had arisenbetweenthe Edisonimageand reality.Despite several disastrous business reversals in the 1920s, the Edisonmyth continued to growmore potentin America.In 1929his great invention washonoredin "Light's Golden Jubilee."While he was being lionized during these celebrations of anAmerica gone by,hiscustomers weredeserting theproducts based on his traditional values and aesthetics.The competition had

198

successfully labeled hisproducts oldfashioned, andTAE Inc. struggled in the

consumer markets.
Conclusions

The Great Depressionwas two years old when Edison died. The organization did survive the Great Depression, just as it had survived the depression of the nineteenthcenturyand the depressions of 1907-8 and
1920-21. Edison senior had turned over a resilient business to the next

generation. In 1887he had lookedinto the future and envisioned a great industrial complex, telling a financial backer that"I honestly believe thatI can buildup a worksin 15 to 20 years thatwill employ 10 to 15,000 men andyield 500 per cent to stockholders." Although he did not producea business enterprise to rivalthat of Standard Oil or U.S. Steel,he did go a longwayin achieving this goal. At the time of his death, TAE Inc. was returninga dividend andhadan average yearlysurplus of $7 million. The divisional structure of TAE Inc. had helpedit weatherthe storm of the Depression and the declineof its core phonograph business. Edison's policy of diversity, established in the 1890s, proved to be the salvation of the company for as oneproduct wentinto decline, therewasanother to takeits place. The storage battery anddictating machine keptTAE Inc.solvent in the 1930s and madeup for the lossof the phonograph business. The instrument division maturedin the 1940sand helpedarm America duringthe Second WorldWar, providing a basis for the electronic andprecision products made
in the 1950s.

Edison's contributions to the qualityof life in the industrial Westhave oftenbeen acknowledged. The U.S. Congress passed a resolution expressing the nation'sthanksto the great inventor"whose conquests in the realm of
science have enriched all human life." After his death a host of tributes

underlined his pioneering role in many of the wonders of modernindustrial society, making Edisonthe "father" of everything from electronics to charcoal barbecuing. His contributions to American business havereceived muchless attention. To Edisonmustgo the honorof inventing the idea of industrial research--a permanentresearchestablishment devotedto improvingold products andfinding newones. He alsooriginated a method of managing this activity andorganizing a business enterprise around theflowof newideas and products comingfrom the lab. Edisonwas the pioneerof a diversified
business based on industrial research.
References

1. 2. 3. 4. 5. 6.

Alfred Chandler,Strategyand Structure(Cambridge,MA, 1962). , "The Beginningsof Big BusinessIn America," in James P. Baughman, TheHistoryof American Management (New York, 1969). Robert Conot,A Streakof Luck (New York, 1979). PeterDrueker,Innovation and Entrepreneurship (New York, 1986). RobertFriedel and Paul Israel, Edison'sElectricLight (New Brunswick,1986). Matthew Josephson, Edison: A Biography(New York, 1959).

199

7. 8. 9.

Andre Millard, Edisonand the Business of Innovation(Baltimore, 1990). CharlesMusser,Beforethe Nickelodeon (Berkeley,1990). Harold Passer,The ElectricalManufacturers(Cambridge,MA, 1953).