In the last few years, major firms such as Sony, Research in Motion (RIM), Kodak, General Motors (GM), and Hewlett Packard (HP) have stumbled or gone bankrupt. At the same time, other firms such as Apple, Amazon, Facebook, Samsung, and IBM have held or strengthened their positions in the face of fierce competition. Why do some great firms fail while others succeed?
My research has led me to conclude that innovation is the major cause of the growth, market dominance, and wealth of firms. And the internal culture of the firm is the major driver of innovation. This is what separates the two groups of firms above: the second group had a culture for relentless innovation. The first did not.
Sony, RIM, Kodak, GM, and HP were until recently all wealthy, dominant in their respective markets, and had deep R&D departments. Indeed, their labs had come up with many radical innovations. Yet their stumbled or failed. Why? What kept these firms from commercializing innovations?
I would argue that the hindrance to innovation is due to three cultural traits: a fear of cannibalizing successful current products, a focus on the present instead of the future, and risk aversion.
To understand cannibalization, consider that Sony had an MP3 Player before the iPod. But fear of cannibalizing royalties from its music and movie businesses led Sony to put onerous wraps around the MP3 player. As a result, the product became difficult to use and never took off.
To understand focus on the future, consider that HP had an e-book five years before the advent of the iPad. E-book ultimately evolved into tablets. But HP never commercialized its e-book because it focused on its huge and highly profitable computer and laptop business. At the time, even a 1 billion e-book market would have been a mere 1% of the $100 billion company. The firm was too tightly focused on the present.
To understand risk, consider RIM. Its engineers had developed a touch screen smartphone before the iPhone. But it was too risk averse to introduce the product in the face of the successful BlackBerry.
These three traits, focus on the present, risk aversion, and fear of cannibalizing successful products constitute what I call, the "incumbent's curse." They arise from the very success of large incumbents, especially those that dominate their markets. These firms are cursed by their own success. The antidote to the incumbents curse is obvious, embrace risk, focus on the future, and cannibalize successful products with innovations. But these are deep cultural traits that are not easy to create overnight. The three practices that help foster these traits are empowering innovation champions, offering incentives for enterprise, and fostering internal competition. Let me explain these in a few words.
The innovator is really a maverick: someone who sees the world differently and dares to change it. Mavericks are often not welcome within corporations. As a result, a big tragedy today is that firms lose their most promising innovators. For example, Roger Newton, the co-founder of Lipitor, left Pfizer, despite the drug being one of the most profitable in history. Tony Fadell, the co-developer of the iPod at Apple, left Philips because it was not hospitable to his ideas. Firms need to not only save such innovators from leaving, but they need to encourage all of their employees to be innovators. This is the concept of empowering innovation champions. The next two practices aid in this goal.
Most corporations today provide small rewards for innovation but steep penalties for failure. However, most innovations fail. To encourage innovation within, firms do need to offer asymmetric incentives, but opposite to current practice. They need to offer strong rewards for success with weak penalties for failure. For example, Google encourages its employees to experiment with innovation, if they fail, learn and move on. This attitude has spawned many innovations within the corporations.
Innovation tends to be a top down approach in many corporations, where senior managers provide directives as to what research to do and which innovations to develop and commercialize. Much more productive is to adopt a bottom-up approach. Treat all employees as innovators and encourage them to innovate. Firms can do this by having idea fairs, funding contests, prototype races, competing divisions, and skunk works for innovation. All employees and even outsiders can serve as judges of or at least vote on these various competitions. In this way, the firm can harness the energy and ideas of the whole organization for innovation.
The paradox of innovation is this. Great innovations lead to success and wealth that creates the incumbents curse, which in turn hinders innovation tomorrow. To overcome that curse, firms need to create a culture of unrelenting innovation. To do so, they need to adopt three practices that foster three cultural traits that keep the firm relentlessly innovative.
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