By Gerard Tellis
(Jossey-Bass, 332 pages, $41.95)
If you want to be eternally innovative as a company – and avoid the innovator’s curse which topples large companies that fail to remain dynamic – you must adopt three practices.
The extensive research of University of Southern California business professor Gerard Tellis shows that you must provide incentives for enterprise (rather than incentives for the status quo); build internal markets that create competition and reward, rather than stifle, the best ideas; and empower innovation champions.
That cuts to the heart of his fascinating new book, Unrelenting Innovation, which brings together his studies over the years with other academics on successful and unsuccessful innovators.
He starts with the fact that market leadership frequently passes from company to company, contrary to the common belief that large organizations are behemoths that can’t be budged. He notes how in mobile music, Sony was the leader until Apple came along. In video games, we have seen leadership change from Magnavox to Atari, then Nintendo, Sega, Sony, Microsoft, and Nintendo again. For microcomputers, it has been Altair, Tandy, Apple, IBM, Compaq, Dell, and Hewlett-Packard. Light beer: Trommer’s, Gablinger’s, Brau, Miller, Bud.
After studying 66 markets, Prof. Tellis’s verdict is that “there are no permanently dominant firms or permanent market leaders. Perennial success belongs to those firms that innovate relentlessly.”
But many companies fail this test, despite being large and having abundant resources. In fact, that is the problem – what he calls the incumbent’s curse. Market dominance, power and success contain the seeds of their destruction. They fear cannibalizing their currently successful products, so they ignore or squash innovations that blossom internally.
Incumbents are also risk-averse, measuring new innovations unrealistically by the speed at which they can produce returns that match their current, highly profitable products. Finally, incumbents focus too much on the present, obsessing about marketing their current products and satisfying their existing customers rather than imagining the new pathways to which new products might lead.
Prof. Tellis points to Sony Corp., which created the mobile music market when it launched the Walkman and had an MP3 player before the iPod. But Sony’s version was not user-friendly, in part because of its anti-piracy software, and while the company’s huge music library could have been an asset in moving in the new direction, fears about it being cannibalized turned a potential help into a handicap.
Another example of a market leader that stalled is Xerox Corp, whose famed PARC lab in Palo Alto, Calif., developed many of the staples of today’s computers, from the laser printer to networking. Xerox could have led the world to the much-hyped paperless office, but it wanted to maintain demand for its photocopiers.
Someone who understands the incumbent’s curse is Google Inc.’s CEO Larry Page; when asked what was the greatest threat to Google, he replied: “Google.”
To overcome the incumbent’s restraining culture, it must develop a culture that encourages innovation. A study Prof. Tellis was involved with highlighted three key traits for ongoing innovation: a willingness to cannibalize current successful products; a comfort with embracing risk; and a focus on future markets. “[F]irms can buy equipment, intellectual property, or talent. But they cannot buy culture. Culture is that uniquely human product that is complex, ambiguous, slow to develop, difficult to change, and hard to analyze,” he writes.
Gillette Co. has overcome the fear of cannibalizing existing products by regularly introducing new brands even when an existing Gillette brand is at its peak. The company fosters an innovative culture; many new products are always being studied and employees test razors and blades on their own bodies. This leads to a thirst for improvement and innovation when they find something better.
Prof. Tellis notes that in incumbent dominant companies, incentives are usually pegged to current sales or satisfaction of current customers. Worse, sometimes the incentives support seniority and longevity, which fuels loyalty but not innovation. When incentives are linked to innovation, he finds the connection perverse: weak rewards for successful innovation and strong penalties for failure.
So the first practice for innovation is to encourage enterprise that inspire employees to take on risk – “strong incentives for successful innovations but weak penalties for failure,” he recommends.
The second practice he proposes is to establish internal markets that encourage teams, divisions and business units to compete to develop new innovations. For years, he notes, HP’s laser printing and desktop printing divisions were separate, each trying to outdo the other. By developing rival technologies, the company flourished.
Finally, Prof. Tellis argues that certain employees must be viewed as innovation champions and be granted the resources and mandate to explore new possibilities. “Because of the champion’s special mandate, he or she is not encumbered with the firm’s current successes, commitments, or products. Innovation champions exemplify the traits of an innovative culture. They are comfortable with change, embrace risk, and want to shape the future,” he says.
Unrelenting Innovation is an insightful book. The ideas are well-grounded in solid research. Discussion of that research and the proposals emanating from it are presented clearly, without academic language or fog. And examples abound, strengthening understanding.
Toronto management consultant Ian H. Gordon offers strategies to engage social customers and build lasting value in Managing the New Customer Relationship (John Wiley, 327 pages, $39.99).
David Weiss, a Toronto consultant who has written or co-written five books about leadership and human resources, looks at transforming HR to deliver value for business in Leadership-Driven HR (Jossey-Bass, 271 pages, $44.95)
Doug Lipp helped build Disney University, which specializes in developing engaged employees. He shares some of its secrets in DisneyU (McGraw-Hill, 22 pages, $28.95).
Special to The Globe and Mail
Harvey Schachter is a Battersea, Ont.-based writer specializing in management issues. He writes Monday Morning Manager and management book reviews for the print edition of Report on Business and an online work-life column Balance. E-mail Harvey Schachter