3a. Lecture 5 - Demystifying Innovation (10/6)

What We Did: Our fifth BMGT lecture was spent exploring why some firms fail to innovate and why others succeed. I learned that there are several hindrances to innovation that lead to the failures of incumbent firms.

Þ   Costs & margins – might not make enough financial sense to take risk

Þ   Thresholds – firms have revenue benchmarks that aren’t always immediately reached

Þ   Wait and see attitude – large, successful firms afraid to try new things

Þ Acquisition – firms think they can buy small competitors’ innovations before they take off (ex: Facebook)

We also talked about the three traits of a culture of innovation.

1.     A willingness to cannibalize their existing products

• ·      “If you don’t cannibalize yourself, someone else will” – Steve Jobs
• ·      Most established firms refuse to kill their cash cows for various economic and organizational factors. This is suffering from the “incumbent’s curse” – a self-destructive culture that results from prior success.
• ·      Example: Apple releasing the iPhone ultimately led to the demise of their iPod market because now people just keep all their music on their phone in one place. Apple wasn’t afraid to cannibalize itself when its product was already doing well, and as a result, they became exponentially more successful following the iPhone’s release. They took a risk that paid off.

2.     A corporate environment that embraces risk

• ·      Incumbents view risk differently from start-ups, as they have less to gain and more to lose.
• ·      They don’t want to suffer from the “hot stove effect” (once bitten, twice shy)
• ·      Example: Facebook had dozens of offers to buy the company within the first year, but Zuckerberg declined them all knowing that he had so much more to do and banking on it all working out. He took risks in order to achieve his vision of worldwide connection

3.     An ability to focus on the future

• ·      With overwhelming evidence supporting failure, incumbents are normally less excited about future uncertain markets
• ·      Example: Kodak ruled film photography until digital cameras took off. They failed to recognize that the digital world was coming because they were too busy enjoying the finite success of their film industry.

The biggest risk a company faces is the failure to adopt unrelenting innovation. Many companies don’t do this because they are too afraid of self-cannibalization or might decide it’s too expensive. Firms can also suffer from the reflection effect (not wanting to take risks when already profiting from innovation) or the expectation effect (if no profit is made within a certain time frame, the firm may prematurely discontinue the product before it takes off. i.e. the HP tablet before the Kindle).

Our class also touched on the importance of company culture in shaping the attitudes and behaviors of employees. “Organizational culture” is defined as the shared social knowledge within organizations. There is a direct correlation between companies with established cultures and being top innovators. For example, Facebook is a unique company embracing a “hacker culture” or trying new things, as well as a philosophy that says “done is better than perfect”. The company asks questions like “What would you do if you weren’t afraid?” CEO Mark Zuckerberg strongly believes in human connections making an impact and telling a story. An interesting part of the Facebook culture is that its employees are very young; the average age is 26. This goes without saying that there are plenty of young and bright minds at the company, making it arguably the world’s most innovative company.

Key Takeaways and Future Applications: Large companies are their own worst enemies. This leads me to think about the advantages this gives to economic newcomers. In contrast, smaller and newer firms have less market to lose, giving them an incentive to take more innovative risks. Risk grows as companies do. I believe this is how new firms end up surpassing established ones. Technologies today are advancing very rapidly, meaning that the current position of any company is never certain. Leading firms in their markets are actually the most vulnerable. This is because the strong position they have at the time can mislead them into thinking they face no competition. After today’s class, I now know this is not the case.

From today’s lecture and the readings I did the night before, I actually started to get scared for the future. I never realized how many forces are working against incumbents looking to innovate. A successful firm will also have a clearly communicated culture based on missions and values. Because I eventually want to work in marketing, I figured I’d better start researching what successful firms I should mimic if I want to prosper as well.

I first studied Gillette, a leading brand of innovating champ Procter & Gamble. The reason why Gillette is able to maintain a roughly 70% share of the global men’s razor market is because it introduces new brands even when previous ones are at the top. This self-cannibalization causes them to always be on top and never fall behind, as well as making it nearly impossible for a new competitor to emerge. The introduction of new disruptive brands is a major risk because it could ruin Gillette’s older brands without the guarantee of a higher profit margin. However, it is clearly a practice that I can learn from, because Gillette has managed to remain on top.

“If you don’t cannibalize yourself,

someone else will.” – Steve Jobs

I next decided to study Amazon.com, which was launched in the late 1990’s to be the world’s largest selection of everything from books to kitchen appliances. From the very beginning, Amazon offered low prices, speedy delivery and emphasized customer satisfaction. In order to maintain a culture of remarkable customer service and mutual trust between company and customer, the very approachable CEO Jeff Bezos puts his personal email online. Amazon’s earliest innovation was one-click buying. The company then enabled book-readers to publish reviews online for others to see. This created a pioneering online community for book commentary. However, I discovered that Amazon’s most radical and admirable innovation of all was the introduction of its own product in 2007 – the Kindle. Years before, HP had developed an e-book reader in the mid 2000’s but didn’t think there was a market for it. Only until Amazon released their Kindle did HP take the market seriously, and by then it was too late. This situation is a perfect portrayal of what Clayton Christensen explained in his book, The Innovator’s Dilemma.

“When established firms wait until a new technology has become commercially

mature in its new applications and launch their own version of the technology only in response to an attack on their home markets, the fear of cannibalization

can become a self-fulfilling prophecy.” – Clayton Christensen

HP committed one of the cardinal crimes of self-destruction: too much concentration on the present and failure to focus on the future. This is a mistake I will not make in the future. I now understand that if I’m not one step ahead, I am already behind.