Tuesday, June 20, 2006

Fear and/or Greed

What is "Why do firms innovate"?

At the risk of sounding like Gordon Gecco from the movie "Wall Street", most firms focus on innovation for two clear reasons: either they are at serious risk of being left behind by the market (see the Motorola and RAZR story) or they identify a niche or opportunity that if exploited will present them with a tidy windfall. Both of these are valid reasons for innovating, but represent the far ends of the spectrum in terms of proactivity. Of course for the sake of this argument I'm leaving out the incremental innovations that firms in the Consumer Packaged Goods industry do so well. You know, Tide, Tide with bleach, Tide with the fresh pine scent...

Entrepreneurial firms are all about the greed motivator. They want to exploit an opportunity with the latest and greatest idea to soak up a lot of market share and grow a company from a few people in a garage to a large, publicly traded organization. Or at least that's the myth. In reality, a lot of people in a lot of firms of varying sizes see new market niches and attempt to attack them, all for the same reason. In most cases, they believe they've identified a market with a large potential revenue stream they can dominate, generating profits for the firm. There's a fair amount of proactive innovation in most firms today, but not nearly enough, and most of it is still focused on cost cutting rather than gaining market share, new profits or exploiting new opportunities.

The fear factor is all about shrinking margins and the loss of market share. Larger firms often "innovate" and take big risks when they can't see any other method of sustaining and retaining market share and profits. Often it's the falling revenue and profit lines that engage the fear factor which releases teams to become much more aggressive with their innovation initiatives. We may look back at the iPod or the RAZR as examples of excellent innovation and new product development, but those products were built at a time of increasing desperation at Motorola and Apple.

What does this say about innovation in most firms? Innovation is problematic in many larger firms, requiring a significant market event or downturn to loose the innovation teams and release constraints. In fact, it appears that much innovation is very reactive to the future outlook of the firm and its place in the market. These are rarely market leading innovations but the results of some desperate acts that finally released creative people. That's not to say that the greed factor is always the correct approach. The greed factor all to often overlooks roadblocks and transition costs for new products or services that are introduced into the market.

On the whole though, I'd feel a lot better if I saw a little more fear in the eyes of the senior management teams of larger firms in the US. Complacency and a lack of risk taking will lead many of these firms to a point where they'll have no option but to free the innovation capability within them. The question is: at that point, will there be people left who are willing and able to innovate, or will they all have left to form startups?
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posted by Jeffrey Phillips at 2:53 PM

6 Comments:

Anonymous Brent said...

So you're saying that companies need to seriously consider Andy Grove's philosophy: only the paranoid survive. Definitely good advice. I wonder if Intel was measurably more innovative under Grove's leadership.

8:13 PM  
Blogger Jeffrey Phillips said...

Brent:

I think so. Most large businesses inevitably become complacent, so "paranoia" may be the right answer for a larger firm. It's funny that you brought up Intel and Grove, I had the same thought.

4:58 AM  
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