Friday, July 08, 2016

Retaining the innovative spark

Phil McKinney wrote a nice post yesterday about the failures of Kodak and Nokia.  I did some consulting work (systems, not innovation) years ago as Kodak was beginning its long slide toward obsolescence, and it was evident to everyone there that film was king.  Even as the first digital cameras were coming out, Kodak was far more focused on film. They were in a desperate fight with Fuji to retain market share in film, as the digital camera sales were ramping up.  McKinney's piece made me think about the typical "arc" of a company's existence.  Without a continuing focus on innovation, the arc follows a relatively straightforward and predictable path:  create an idea, create products, create profits, get complacent, fight for survival.  This conjecture is backed by evidence - a recent data point indicates that the lifespan of S&P 500 companies is rapidly shrinking.  In 1920 the average life expectancy of a firm on the S&P 500 was 67 years.  Today it is 15 years.  Competition is accelerating, of course, and so is innovation.  The firms falling off the S&P 500 aren't innovating, so they are complacent and then focusing on survival.

Let's think about this proposed "arc" and why consistent, continual innovation is so important.


When founders start a company, they do so based on an idea, or set of ideas.  They think they can realize their ideas as products or services, and hopefully scale up the ideas to a real business.  They are willing to do almost anything in order to succeed, and often change direction as their experimentation and new products succeed or fail.  The company is fluid, shifts direction and begins to gain traction.  Shape, structure, customers, are all secondary to the idea and its success.


As the company grows and develops products, part of its flexibility is lost, because it must sustain the products and protect market share.  For many firms this is the start of inertia and inflexibility.  Even as new products are introduced, there is still great uncertainty about profitability.  The first product is the realization of the idea, but not yet the perfection of the company. There remains some flexibility and the ability to reinvent.


Once products are profitable, there's much more comfort in sustaining existing products and services rather than creating risky new ones.  The more products that create revenue and profits, the less attractive new ideas and concepts can be.  McKinney's Kodak story illustrates this. It's common for the management team to turn over during this transition - idealistic people who created killer products leave and people who can manage existing products and squeeze revenue and profits from current operations take over.  Profits become more important than growth or innovation.  This is where inertia, defensive thinking and rigidity often settle in.


Kodak and Nokia are excellent examples of complacency.  Safe in their market leadership, both dominated their markets - film and cell phones - until new competitors with different technologies or platforms emerged.  McKinney notes that Kodak had many of the original patents on digital photography.  He doesn't note that Nokia created a touchscreen handset several years before the iPhone.  Both had the opportunity to continue to dominate their respective markets, but it required too much of a divergence from safe, predictable revenue streams.  Complacency took precedence over innovation and change.

Fight for survival

At the point where complacency sets in, every firm has the opportunity to take two paths.  The first requires sustaining existing products while simultaneously investing a lot in reinvention, new ideas, new technologies and new capabilities.  It's at this point that as Andy Grove used to say "only the paranoid survive", because only paranoid companies are reworking their revenue streams when they are highly profitable.  Many former innovators are now in a battle for their existence.  They don't recognize that smaller, more nimble firms that have higher tolerances for risk are slowly eroding their markets and customers.  Meanwhile management teams are far more comfortable cutting costs and extending the life of existing products, rather than recreating or reinventing.  That's because they are managers and caretakers rather than innovators. Entering this death spiral, as Kodak, Nokia and other venerated brands have done, it's exceptionally difficult to leave.  Even a vaunted leader like Marissa Mayer, moving to Yahoo from Google, has struggled to reinvent Yahoo once it entered the fighting for survival mode.

The lesson

The key lesson here is that the past is not a good model for the future, especially as we see the pace of change accelerating.  In the past, companies could scale up and produce products and services with long life cycles, reinventing those products after years of reaping returns.  The build up was slow and methodical, and there was plenty of time to reap profits and protect market share.  That era is over, done and in the grave.  It won't be coming back.  Just look at music distribution.  Records and CDs - distribution on physical media - lasted for over 100 years.  Yet once music was digitized, Apple disrupted the music distribution business with iTunes, which seemed poised to dominate the music distribution business for years.  iTunes was released in 2001.  Revenue peaked in 2012 and in 2016 there are articles written that suggest that Apple will shutter iTunes in the not too distant future because of Pandora and Spotify.  Did iTunes create blinders that made Apple miss the potential of streaming music, or did the business model simply change faster than Apple was able to change?

Fortunately for Apple it won't have to fight for survival yet because it still has profitable products like the iPhone and iPad, but we can assume these will come under increasing attack as well.  iTunes is simply a canary in a coal mine, a early harbinger of the need for reinvention.

What's your canary?  Are you paying attention to the amount of change going on around you?  Can you sustain a profitable business and conduct the amount of innovation necessary in order to succeed in reinventing yourself?  If not you'll soon find your company in a battle for survival.
AddThis Social Bookmark Button
posted by Jeffrey Phillips at 7:53 AM


Post a Comment

<< Home