Figures and Tables
Figure 1.1: Dynamics of Components of Culture of Innovation Figure 2.1: Life Cycle of Radically New Products in the United States Figure 2.2: Rate of Technological Evolution
Figure 2.3: Technological Evolution in Six Markets Figure 2.4: Annual Market Capitalization of Sony and Apple After Launch of iPod Figure 2.5: Annual Market Cap of Eastman Kodak 1996– 2011 (US$ Millions) Figure 2.6: Annual Sales of Digital and Analog Cameras (Million Units) Figure 2.7: Gillette’s Brand Cannibalization in the Wet Shaving Market Figure 3.1: Innovation’s Loss Function Figure 3.2: Amazon’s Losses Relative to Sales Over Time Figure 3.3: Early Growth of Federal Express Figure 4.1: Typical Growth in Sales of Radically New Product Figure 4.2: Change in Hazard of Takeoff at Three Rates of Annual Price Drop Figure 4.3: Technological Evolution in Auto Batteries Figure 6.1: The Market for Talent Figure 8.1: Size of Firms Introducing Radical Innovations by Time Period Figure 8.2: Technology Evolution in Printers Figure 8.3: Effects of Alternate Variables on Innovativeness of Firms
Table 1.1: Examples of Multiple Changes in Market Leadership Table 2.1: Defining Levels of Technology Innovation Table 2.2: Emergence of Dimensions by Market Across Time Table 3.1: Payoff to Radical Innovations Table 3.2: Innovation’s Gain-Loss Tradeoff Table 3.3: Real and Opportunity Costs from Type 2 Errors (Missed Opportunities) Table 3.4: Awards for Prius Table 4.1: Takeoff of New Products by Country Table 4.2: Price Points at Which Some Radically New Products Took Off in the United States Table 4.3: Studies of Users Building Own Solutions Table 6.1: Classification of Organizations by Degree of Internal Markets Table 6.2: Criteria for Setting Up Internal Markets Table 8.1: Countries and Firms Sampled Table 8.2: Productivity of Patents in Sony and Apple in 2006
today invention is critical for the success of firms and the wealth of nations. But what causes or hinders initiation ? Researchers throughout the world are trying to ascertain the principal driver of initiation itself. Through decades of rigorous research, Professor Gerard Tellis posits a herculean dissertation : that the home polish of a tauten is the primary driver of invention. His explanation based on polish contrasts with many others that have been proposed, such as size, open invention, area of beginning, or investment in R & D. In contrast to these variables that can be easily measured, culture is a soft, ambiguous factor. furthermore, culture is hard to control. Tellis shows that it is crucial. I like the central argumentation of the book : success breeds complacency, inanition, or arrogance—in short, a culture that embraces the status quo alternatively of the future abhors gamble and protects current successful products. Because this culture arises from the success of current incumbents, Tellis calls it the incumbent ‘s curse. He proposes a compelling antidote for this culture : three traits and three practices that promise grim initiation and market dominance. His dissertation is brilliant, just developed, and herculean. The three traits he proposes for invention are a stress on the future, an embrace of risk, and a willingness to cannibalize successful products. These traits are tough to enforce in a firm, specially in a short-circuit time. That is why successful turnarounds are thus rare, as Tellis persuasively argues. however, senior managers control three practices that can inculcate the traits. These practices are incentives, home contest, and authorization. Incentives are unquestionably the linchpin. As Tellis argues, set the incentives for enterprise and you have a vibrant, innovating party. Set the incentives for seniority or loyalty and you get an age, stultifying culture. Tellis puts the burden wholly on senior managers of the firm to control the practices and set the tone and agenda of the organization. Besides these rich insights, this ledger offers valuable tools to implement the practices that foster the culture of brutal invention. Tellis is one of the few who moves seamlessly between the world of academics and the world of practice. He has won many prestigious awards from academic organizations for his groundbreaking inquiry. He has presented with eloquence and conviction to executives from major corporations. This reserve is deep in theory and rich in insight. The theory is obviously accessible to managers. More important, it integrates findings from clever research on scheme with those from social and organizational psychology. The record combines the rigors of sophisticated models with concern idiosyncrasies of human nature and practical tactics for change. Tellis has woven his dissertation with many examples. He shows that his thesis accounts for authoritative fumblings of innovations at Xerox and Kodak, with recent stagnation or decline at firms such as Microsoft, Sony, HP, Yahoo !, Nokia, and Research in Motion. The latter firms have had a reputation for invention but have stumbled, declined aggressively, or gone into bankruptcy—all afflicted by the incumbent ‘s curse. Tellis argues that polish best explains the failures of these giants with the get up of the raw stars such as Facebook, Google, and Apple, and the turnarounds of early advanced giants such as IBM and Samsung. The lessons apply for big firms and young promise entrants alike : the incumbent ‘s curse shadows success. A culture of invention promises long-run market authority. And there are lessons for government agencies and nonprofits, such as universities, who are threatened by new entrants and technologies that threaten to render their current businesses obsolete. With his dissertation of culture, Tellis has opened a solid new sphere of discussion, inquiry, and applications. Unrelenting Innovation is timely education for CEOs riding the wave of success. It is insightful reading for CEOs struggling to understand why their companies are in decline. It is a must read for all managers of innovations. Vijay Govindarajan Earl C. Daum 1924 Professor at Tuck School at Dartmouth
Author, New York Times and Wall Street Journal best-seller Reverse Innovation
Why Incumbents Fail
Success is empowering. But achiever is besides enthralling and embeds the seeds of failure. incumbent FIRMS that dominate their markets often fail to maintain that domination for long, despite all the advantages they enjoy of market leadership. For model, Sony created the market for mobile music with the insertion of the Walkman. Yet, Apple ‘s ipod now dominates that market. Kodak dominated the marketplace for film photography but declined and ultimately went bankrupt as digital photography took off. Barnes and Noble dominated the bible market for decades, but Amazon is nowadays the biggest storm in koran retailing. Intel dominated the grocery store for PC chips, yet is a minor musician in the aggressive market for cell call and tablet chips. research in Motion dominated the grocery store for smartphones with their once democratic Blackberry. Yet Apple nowadays dominates that grocery store. indeed, market leadership frequently passes from firm to firm in many markets. In the grocery store for Internet research engines, leadership passed from Wandex to AltaVista to Overture to Yahoo ! to Google. In the personal computer market, leadership passed from Altair, to Tandy, to Apple, to IBM, to Compaq, to Dell, to HP. immediately tablets are threatening HP ‘s leadership. In retail, commercialize authority has passed from Sears to Wal-Mart and is nowadays moving toward Amazon. A follow-up of the development of markets shows that many firms often do not stay as market leaders for long ( see Table 1.1). Moreover, recent research suggests that the duration of market leadership is dropping by as much as half a year, every year!¹ Table 1.1 Examples of Multiple Changes in Market Leadership source : Adapted from Tellis and Golder, Will and Vision : How Latecomers Grow to Dominate Markets, New York : McGraw Hill, 2001. sometimes, firms not only fall from leadership but completely fail and exit the market. For exemplar, three erstwhile leaders of the personal computer market, MITS ( owner of Altair ), Tandy, and IBM, have since quit the market. Why do great incumbents lurch, refuse, or fail ? Professor Peter Golder of Dartmouth College and I studied the origin, growth, and development of sixty-six markets spanning up to 150 years. ² Our research strongly suggests that the primary reason for firm failure is a failure to innovate unrelentingly. No barrier to competitive entry provides a permanent protection against the force of innovation. Innovation regularly breaks down barriers, be they in economies of scale, patents, business models, or relationships with buyers and sellers. As a result, there are no permanently dominant firms or permanent market leaders. Perennial success belongs to those firms that innovate unrelentingly. then, why do incumbent firms, particularly commercialize leaders, fail to innovate relentlessly ?
Why Incumbents Fail to Innovate Unrelentingly
A firm requires a big deal of resources to stay relentlessly innovative. incumbent firms have at their disposal more resources, experience, expertness, endowment, and cash for initiation than lesser rivals or fresh entrants. thus, incumbents are in the best place to stay innovative and dominate their markets. indeed, a lack of resources is not the reason that incumbents fail. On the reverse, many incumbents fail to innovate tied though they are blessed with abundant resources. ironically, market incumbents fail to innovate relentlessly even though many, if not all, rose to that position of commercialize authority by introducing a radical invention. ³ Nonetheless, some incumbents do maintain their leadership for decades. Why do so some incumbents maintain their laterality while others fail ? Professor Rajesh Chandy of London Business School and I sought to address this issue with an in-depth sketch of ninety-three innovations together with interviews of executives and a surveil of about two hundred firms. ⁴ Our research suggests that incumbents fail because they fall victim to the incumbent’s curse: a self-destructive culture that results from their prior success.
Paradox of the Incumbent’s Curse
many incumbents are at the top of their game because they market a lake superior product that emerged from a radical initiation. Because of their dominant allele position, they enjoy high prices, large market plowshare, and solid cash flows. This position imbues them with market ability and prestige. market authority does not come well. It is the yield of initiation, cagey strategies, and effective management over many years—if not decades. But marketplace authority, exponent, and success contain the seeds of self-destruction. They lead to three traits that hamper continued invention and obstruct continued leadership. first, incumbents fear cannibalizing their current successful products. Cannibalizing means letting a new intersection replace a current product in sales to customers. Incumbents are reluctant to change the status quo and endanger their successful products. When innovations threaten their successful products, market incumbents ‘ contiguous reaction is to protect those products that have brought them persuasiveness and success. even though they themselves develop some radical innovations, incumbents are reluctant to commercialize them for fear of jeopardizing their cash flows from successful products. This reluctance arises from some economic and psychological principles. chapter 2 explains the economics and psychology of this trait. second, incumbents are risk antipathetic. They tend to overweight their current successful products relative to risky, unsealed innovations for the future. Leaders measure all new innovations by the speed with which they can yield returns that match up with those from their enormously successful products. This weight is not illogical. Innovations that create new markets involve huge investments, take a retentive fourth dimension to bear fruit, and meet many failures. therefore, innovations are hazardous. Incumbents are antipathetic due to three biases in their perception of risks and dealing with failures : the reflection effect, the hot-stove effect, and the expectations impression. chapter 3 explains these causes of risk aversion. Third, incumbents focus excessively much on the present. They channel their efforts to carefully marketplace their current successful products to satisfy current customers. Because of their engagement with the current problems and crises, the confront looms big while the future seems distant. therefore, incumbents develop a diagonal that focuses on the give at the cost of the future, even though the future belongs to innovations preferably than to present successful products. The bequest of the past and salute becomes a hindrance to embrace the innovations of the future. chapter 4 explains the psychological biases that cause this emphasis of the salute over the future. fear of cannibalizing successful products, risk antipathy, and focus on the award form three roadblocks for commercializing innovations. The forte and success of incumbents, particularly marketplace leaders, engender these traits that hamper future invention and success. Though incumbents ascended by embracing revolutionary innovations, their success creates a self-defeating culture of inertia that hampers commercializing future innovations. We call this the incumbent ‘s curse. It explains the epigram at the start of this chapter, Success …embeds the seeds of failure. Lou Gerstner, the former CEO of IBM who transformed the culture of IBM between 1994 and 2003 and prevented impending death, comments on this problem : This codification, this severity mortis that sets in around values and behaviors, is a trouble that is unique to—and much devastating for—successful enterprises …What I think hurt the most was their [ successful enterprises ‘ ] inability to change highly structured, sophisticate cultures. ⁵ The adopt particular examples illustrate this paradox .
In the late 1970s, Sony created the mobile music grocery store with the launch of the Walkman. Sony ‘s CEO had to push the Walkman to grocery store against intense home opposition from Sony ‘s engineers and managers ( see Chapter 7 ). once introduced, the Walkman took off promptly, exceeded the expectations of all its managers, and created a unharmed new category. Yet when MP3 technology came along, Sony failed to retain laterality of the mobile music commercialize with an easy-to-use MP3 player. alternatively, it ceded that marketplace to Apple and its ipod. Ironically, Sony did have an MP3 player before the ipod. however, Sony ‘s MP3 player was not user-friendly partially ascribable to its anti-piracy software. such software was included in deference to the music business that wanted to protect royalties ( see Chapter 2 ). ⁶ Here again, fear of cannibalizing royalties, a focus on the present, and risk aversion crippled Sony’s MP3 player. Sony’s huge music library could have been an asset in marketing its MP3 player, but instead became a handicap. A similar fib occurred at Xerox, though on a a lot larger plate. In the mid-1970s, Xerox had developed in its PARC lab most of the innovations of the modern personal computer coevals. These innovations include the Ethernet, the personal computer, the laser printer, personal computer network, electronic mail, the mouse, graphic user interface ( GUI ), son march, the WYSIWYG editor, and object-oriented program. Xerox was ahead of all competitors in these technologies and was ready to launch the paperless office, as envisaged by its late chief executive officer, Joseph Wilson. however, we do not see Xerox ‘s appoint on any of these products nowadays. The reason is that Xerox ‘s elder managers were besides focused on the replicate business. They did not see the prize in the paperless function and were afraid that these new technologies would cannibalize its copy business. Though unwilling to put forth newer technologies, Xerox itself sprang up from a radical invention that incumbents at the time ignored and belittled. In 1935, the lone research worker Chester Carlson developed xerography, or dry replicate, in his garage after being dissatisfied with existing alternatives for copying. however, none of the colossus firms, including 3M, Kodak, RCA, or IBM, were concern in investing in xerography. In 1944, a minor firm called Haloid took up the challenge of developing a imitate machine from Carlson ‘s invention. That quest byzantine across-the-board research and development, extreme hardships, great risks, and fifteen years. Haloid ‘s CEO, Wilson, championed the engineering and steered Haloid through those ruffianly times. By the conclusion of that road, Haloid had developed the Xerox 914. When commercialized in 1959, the Xerox 914 was a huge success and propelled bantam Haloid to leadership of the copy market, ahead of all the incumbents of its clock time. Haloid changed its identify to Xerox. however, its great success in xerography rendered Xerox short-sighted, gamble antipathetic, and fearful of cannibalizing its then successful copy business. frankincense, it did not embrace and aggressively commercialize the future frontier of root innovations in the form of the paperless office, which its own lab developed. The examples of Sony and Xerox are not isolated but typical examples of roadblocks facing successful companies. Some CEOs of successful companies realize that their own success and indeed their own companies are the greatest menace to future innovations and success. For exercise, when Google CEO Larry Page was asked what was the greatest threat to Google, he replied in one son, Google. ⁷ He had realized the paradox of the incumbent’s curse. Ex-CEO Eric Schmidt elaborated, The problems of Google’s scale are always internal. …Large companies are their own worst enemies because internally they know what they should do, but they don’t do it.⁸ Eric Schmidt’s explanation is right on target except for one word. It is not the problem of scale per se, but the incumbent’s curse. Success creates large scale but success also creates the incumbent’s curse that hinders future innovation and success.
The Preeminence of Culture
How can a firm overcome the incumbent ‘s curse ? Our research over two decades strongly suggests that the inner culture of a tauten is the most authoritative driver of a firm ‘s invention. ⁹ The cause of failure and the impediment to success lies not in hard formulae, models, technologies, buildings, or dollars, but in a soft, mushy, difficult-to-grasp, and tough-to-master thing called culture. The importance of culture is tersely summarized again by Lou Gerstner, “I came to see, in my time at IBM, that culture isn’t just one aspect of the game—it is the game.¹⁰ The culture at many firms is not fully explicit or written down in rule books. But as Gerstner states, Still, you can quickly figure out, sometimes within hours of being in a place, what the culture encourages and discourages.¹¹ In a global survey of the top one thousand firms on the metric of R&D spending, Booz and Company conclude that Culture Is Key.”¹² However, neither of these sources provides a deep understanding of culture. What does culture mean ? How does it relate to innovation ? Over a period of four years, Rajesh Chandy, Jaideep Prabhu of Cambridge University, and I studied over 770 firms across seventeen countries. ¹³ Our research suggests that a firm’s culture is its set of traits or values and practices or traditions that constitute the internal human working environment for employees. In particular, the culture for innovation consists of a parsimonious set of three traits and three practices. The traits are a willingness to cannibalize current (successful) products, embracing risk, and focusing on future markets. These three traits overcome the incumbent’s curse. The three practices are empowering innovation champions, providing incentives for enterprise, and fostering internal markets. Figure 1.1 summarizes these cultural components and shows how they relate to each other. Figure 1.1 Dynamics of Components of Culture of Innovation Traits are difficult to change. But practices are more amenable to change and can engender the traits. Creating a culture for unrelenting invention is very bad for large, successful firms because of the incumbent ‘s execration. For exercise, during his tenure as CEO of Sony, Howard Stringer struggled to change the culture of the company to make it more agile and advanced. In the end he failed because Sony ‘s culture is highly resistant to change. Commenting on Sony ‘s failure to change and innovate successfully in the 2000s, Howard quipped, Love affairs with the condition quo continue even after the quo has lost its status. ¹⁴ In the world nowadays, firms can get funds from their own reserves, saint investors, venture capitalists, banks, or investors at large. ascribable to relatively efficient fiscal markets, funds are not hard to get. once they have these funds, firms can buy tools, land, construct, and plants. They can invest in R & D to develop or buy intellectual property including patents. They can hire endowment. In other words, given funds, firms can buy equipment, intellectual property, or endowment. But they can not buy culture. culture is that uniquely human intersection that is complex, ambiguous, slow to develop, unmanageable to change, and heavily to analyze. Money ca n’t buy culture. And culture plays a critical function in initiation. frankincense, carefully understanding what is the culture that helps or hinders invention is critical to being innovative and dominating markets in the farseeing term. Chapters 2 to 4 explain in detail the three cultural traits that foster invention ; Chapters 5 to 7 explain the three practices that engender those traits. here is a preview of each of these traits and practices .
Traits for Innovation
The examples above illustrate the incumbent ‘s curse—success with current products provides a strong motif to sustain the status quo and protest invention. The inaugural trait for invention is a willingness to cannibalize one ‘s own successful products. Incumbents have a high reluctance to cannibalize successful products ; small rivals or new entrants have no such inhibitions. For exemplar, the development of paid searched ad made Google a huge and highly profitable firm in just ten years. however, few people know that Microsoft had a model for paid search advertising before Google. A few of Microsoft ‘s own employees developed a research service with paid ads, called Keywords. however, Microsoft killed the service when it seemed it would cannibalize the streamer ad business of MSN. ¹⁵ In this case, fear of cannibalizing existing products led Microsoft to forego one of the most profitable business opportunities in the last decade. chapter 2 explains with examples the importance of a willingness to cannibalize successful products. It explains the economic and psychological factors that cause incumbents to be reluctant to do then. It argues that for many organizations, the challenge is not alone generating innovations but embracing them when they cannibalize successful products, even though these innovations arise from a firm ‘s own employees. The chapter besides explains the challenge of technological development and provides a framework to understand and manage it. Cannibalization is relatively easy when innovations occur in the lapp platform and market. Cannibalization is toughest when innovations occur in new platforms in fresh markets ; it is greatly facilitated by a concenter on the future and a willingness to embrace risk. The second trait for invention is embracing gamble. The path to a successful invention is strewn with failures, both before and after commercialization. failure is autochthonal to invention, with rates ranging from 50 % to 90 % at versatile stages of growth and commercialization. therefore, invention is a highly hazardous business. The gamble looms particularly big if a firm is presently dominant allele and has a sweetheart current of cash from a dominant grocery store place. The risk appears lower for a modern entrant that has no market to lose. As a consequence, incumbents prefer a modest but certain return over a huge unsealed wages, even though the latter has a higher expected value. This psychological asymmetry in risk percept is called the reflection effect. chapter 3 explains this effect and other effects that cause firms to be risk antipathetic. It explains the necessity tradeoff built-in in risk : poise Type One errors ( fail innovations ) with Type Two errors ( miss innovations ). Four case histories illustrate these principles in carry through. The third base trait for invention is a focus on the future. success in the current genesis of products leads to idealization of the past, preoccupation with the present, and disregard of the future. For exemplar, in the case of mobile music, Sony failed to see the future grocery store in MP3 players because of its interest in the Walkman and its preoccupancy with royalties from songs. Four biases underlie this misplace focus on the present over the future : hot-hand bias, handiness bias, paradigmatic bias, and commitment bias. chapter 4 explains the psychology of these biases, which cause incumbents to value the salute over the future. It describes four tools to foster a focus on the future : predict underlie technical development, predicting parody of innovations, targeting future batch markets, and identifying emergent consumers. While none of these tools are infallible, their combined use encourages incumbents to take time off from the present and forces them to think about the future in constructive ways. frankincense, willingness to cannibalize stream products, embracing hazard, and focusing on the future are three traits that constitute a culture for initiation. however, the traits of an innovative culture do not develop spontaneously within a firm, nor can they be mandated by managerial decree. On the contrary, they are profoundly psychological characteristics that emerge slowly from a firm ‘s practices. Understanding their psychology and economics is a foremost step toward their borrowing. Certain practices foster these traits ( Figure 1.1). Moreover, practices are more responsive to managerial dictates than are traits. Thus, although a firm may not be able to change its traits immediately in the short term, it can shape, cultivate, and foster them in the long term by adopting certain practices. What are these practices?
Practices for Innovation
Three practices promote the traits that engender initiation : provide incentives for enterprise, fostering inner markets, and empowering invention champions. here is a preview of these traits that are detailed in Chapters 5 through 7. In successful, prevailing firms, incentives are frequently set to current sales or gratification of stream customers. What ‘s worse, sometimes incentives may be set for seniority or longevity. such incentives foster loyalty but not initiation. When incentives are linked to invention, research shows that they do so in a perverse way : weak rewards for successful invention but strong penalties for failure. ¹⁶ The problem of risk-averse employees can be attributed primarily to a perverse incentive structure of the organization. Such an incentive system suppresses innovation.
One critical practice for invention is providing incentives for enterprise. such incentives must be asymmetrical in their wages structure : strong incentives for successful initiation but decrepit penalties for failure. An asymmetrical incentive structure encourages employees to take on hazardous projects. Incentives are brawny, vitally important for innovations, and relatively easy to change by top management. Incentives can be monetary, social, and moral and must be cautiously designed lest they backfire. chapter 5 discusses the costs and benefits of setting asymmetrical incentives for invention. It describes five event histories that illustrate these principles in carry through. For example, Google allows employees 20 % of their prison term to focus on innovations. Google encourages all its employees to experiment. If they succeed they are rewarded. If they fail, they are asked to learn from their errors and move on. Thus, Google has strong incentives for success with little penalty for failure. eminence, 20 % clock time is bad ( because most innovations fail ) and dearly-won ( because it takes time aside from stream priorities ). thus, the firm absorbs the gamble of invention, but gives the employee rewards for success, motivating the employee to innovate.