Innovation and Venture Investments during and after WWII
The Allies (Britain, France, former Soviet Union, and the United States) in 1940 were left off guard when the German Wehrmacht’s Panzer Division cut across through the thick forests of the Ardennes.
A little history to set the background. The United States neglected military preparedness and was left to quickly assimilate and strategize if the United States were to play an active role in the ensuing war. After Pearl Harbor, the United States formally entered the War. The military war supply turned out to be the most serious challenge. The United States had a large reserve of human capital. However, it lacked to meet the supply of a basic war machine – The Truck. Tapping on its immense human capital, the United States enlisted Mr. Charles Doriot to head the Production Expediting Section in the Procurement Control Branch. Charles Doriot was a Frenchman who came to the United States as a student and eventually became a professor at Harvard Business School. He taught the Manufacturing course at Harvard Business School. Doriot was known to be a great task-master who was always seen in a suit. Even so, his students had to wear one!
Coming back to our pre-war discussion, Doriot was keen to play a role in the war. However, the French neglected his technical and operating prowess. As the United States offered him a more relevant post, he was commissioned as a Lieutenant Colonel in the Quartermaster Corps. This sets our background in history and Doriot.
Doriot: The operational machine himself
One of his foremost challenges was the inadequate capacity of trucks. Given his family legacy rooted in automobiles and his studies at Harvard of the automobile industry, Doriot was an ideal candidate to estimate the needs and to size the capacity of finished vehicles, components, and replacements parts. In the second half of 1941, most carmakers were failing to reach half their production targets. The US Army and US Navy were also at odds to control manufacturing at a few auto plants. The American private auto company plants - Chrysler, Ford, General Motors (all headquartered in Detroit) – with their current operations could not meet the requirements of the army. So far, the Army was operating these factories and the auto companies sat back. Doriot proposed an interesting strategy. He acknowledged that the army was in no position to run the auto business. Doriot decided to turn the tables. He wanted the auto companies to be liable and responsible for productions targets. To the extent that he even suggested that Mr. Ford personally be given full charge and responsibility for manufacturing as many trucks as the army needs in his plants. Through this, Doriot built a “speedy” relationship with Detroit. This renewed faith and responsibility of the automakers led to production targets being met and more importantly, ended the Great Depression (unemployment rates at the end of 1941 was at a decade low of less than 10 percent). With this short-term goal fulfilled, a more pressing issue came to light. What about the all-important tires that go onto each truck?
In December 1941, the Japanese Army invaded the rubber-rich islands of Malaya and Indonesia. The United States could build trucks. But how could the trucks function without tires? According to Doriot, the United States would be left without rubber by mid-1943. The United States undertook a massive program recommended by Doriot. Apart from gas rationing and forbidding sale of new tires, the United States Government invested $700 million in fifty-one plants over two years to create an altogether new industry of Synthetic Rubber. Some of the other equipment’s developed under Doriot at war-speed included water-repellent fabrics and shoes, backpacks, insecticides, sunscreen, and plastic armour. Doriot also founded a European business school. More on that later on in this story…
Doriot: The Venture Capitalist
“Always consider investing in a grade-A man with a grade B-idea. Never invest in a grade-B man with a grade-A idea” - Charles Doriot
Soon after the war, Doriot founded the American Research & Development (ARD) Investment Company. With his learnings leaned from the war, he realized the potential and need to invest in young, new companies that are trying to create a niche for their products. In a sense, Doriot founded a venture capital firm (possibly the first) with external investors on-board.
He held a simple investment philosophy – analyze and study potential companies, steer the companies, and be patient. In the 1949 ARD Annual Report, Doriot said – “An average idea in the hands of an able man is worth much more than an outstanding idea in the possession of a person with only average ability”. With his leadership, Doriot was able to generate superior investment returns for his investors (for my fellow investment pundits – Doriot generated alpha over its benchmark Dow Jones Index) in ARD’s 21-year history! Let’s discuss one such investment. Digital Equipment Corporation (DEC). DEC started from a garage and went on to successfully compete with IBM in a short span of 10 years. What worked for DEC is that it challenged the mindset of consumers and went against IBM and other similar companies with seemingly nonchalant products. Back in the 1960s, a computer was considered a serious machine used only for serious tasks. It had no business playing The Beatles! DEC challenged this mindset when it launched the PDP-1 (Programmed Data Processor-1). PDP-1 was an interactive computer that would be easy to install and use and be sold at a fraction of the cost of an IBM machine. In a sense, PDP-1 liked The Beatles! Doriot understood businesses, people, and products.
Coming back to the school that Doriot established in Europe. He founded the Institut Européen d'Administration des Affaires in 1959. Still doesn’t ring a bell? INSEAD!
On the other side, we had the Axis Power – Japan
Just as with most people today, playing cards was associated with gambling in Japan.
To this effect, Japan had banned Hanafuda – flower cards - so called because the twelve different suits are represented by flowers. However, in late nineteen century, Japan lifted this ban to accommodate the growing western influence in its culture. To take advantage of this, a playing cards company was founded in 1889. In 1950, the founder’s great grand-son took over the operations of the business. Let’s name the great grand-son, Mario.
Mario’s company losing steam:
After World War II and in the 1960s, Japanese adults were turning to pachinko parlors (slot machines) and bowling alleys! Mario’s company was losing steam. Mario decided to venture into different businesses from food, taxi fleets to love hotels. This jaded vision got the company knee deep in debt. Mario sought engineering graduates to help create value. To his surprise, most top engineering graduates eyed big Tokyo companies. Mario’s company lacked everything these graduates eyed. Eventually, Mario hired a young local electronics graduate, Gunpei Yokoi. Gunpei had struggled through his degree and got no offers from top companies. Gunpei worked in the maintenance department in Mario’s company. Gunpei, throughout his life, was an enthusiastic hobbyist and worked on model trains, working on cards, and made things out of working scrap. He eventually led the company to innovate products that would transform the gaming industry in the second half of the twentieth century. His simple philosophy drives the company vision to date. The company in question?
Lateral Thinking: A forgotten skill
Gunpei’s lateral thinking philosophy needs to be given serious thought today. Lateral thinking is basically the re-imagining of information in new contexts, including the drawing together of seemingly disparate concepts that can give old ideas new uses. The heart of his philosophy was putting cheap, simple technology to use in ways no one else considered.
For example, Andy Ouderkirk, a scientist working at 3M, wanted to find a solution to reflect light from a surface at all angles. Until then, Brewster’s law, which stated that no surface could reflect light near perfectly at every angle, was given its due respect and no one really challenged a two-hundred-year-old principle. That’s when Andy was delighted to know that a group of optics specialists assured him that it could not be done. Andy knew that these specialists lacked a breadth of experience. Well, Andy and all the optic specialists in the world had the answer right in front of them every day. Andy looked at the plastic of a water bottle and realized the importance of polymers in light reflection. This led to creating a multi-film optic layer that glittered without bounds. This multi film layer is now used inside cell phones, laptops, LED light bulbs, solar panels, fiber optics, and projectors.
Our Present:
To recap, World War II led to worldwide destruction. World War II also led to an exponential growth in technology and innovation that gave us new household products and even nuclear power. Agile operations and strategies can be developed even when the roads seem the darkest. Innovation does not singularly mean complex ideas and complex machines.
We are at war again. This war is unique. It is a particularly peaceful war, so far! We need to act now to make a difference in our own way. Lessons from these great men in history must guide the inertia in us to higher potential.
I leave you with a few pleasing adverts published during WWII, some of which are relevant today:
The information in this blog is credited to the following sources:
Range by David Epstein
Creative Capital: Georges Doriot and the Birth of Venture Capital by Spencer E. Ante
National WW2 Museum Website: https://www.nationalww2museum.org/students-teachers/student-resources/research-starters/research-starters-worldwide-deaths-world-war