Why established firms lose their ability to innovate?

There is a recurring question (and observation) regarding the ability of established companies to innovate within their established organization; albeit within their core business or far from their market boundaries.

Harvard Professor Clayton Christensen has tried to explain this phenomenon. His explanations seem sometimes somewhat radical though. Some of the most astonishing ones are the following:

• “The way we teach ‘Marketing’ at school causes innovation to fail.” Amazing, isn’t it? Coming from the mouth of one of the most prestigious Harvard Business School Professor.
• The idea of understanding the customer and give the customer what he/she needs contributes to the failure of new innovation.”
• “The unit of analysis of coming with innovative ideas is “the jobs sitting out there and waiting to be done”, for which our products and services might get hired.”

Innovations in established firms

Every innovative idea pops out of the innovator head in a half built condition, not in the form of a complete business plan.  So the idea has to go into the established process. By the time the idea gets to the market, it has been twisted and shaped to confirm the firm's business model.  Very often companies lose their ability to innovate, not only because there are no good ideas, but because the innovative ideas have to go through the established processes with which the companies are familiar, companies are good at doing; as opposed to confirming and developing a business plan that fits to the market needs.

From Innovative idea to normalized idea 

What type of Market Segmentation?

According to Clayton Christensen, 75% of the products introduced into the market fail. After they have done market research, built business cases, tested the products, etc... Even one of the best among the best companies in Marketing like Procter & Gamble’s, has a success rate in product introduction of around 15%, only 15%!

Why is that? What causes this high failure rate? According to Christensen, it is due to the way companies segment their market into products and customers, instead of to be structured in terms of jobs customers need to get done.

This is how Christensen explains it “When companies look at the market, it appears to be that the market is structured by product category and customer category.  If you’re in the car industry, your market is segmented into SUV, compact, mid-sized, mini vans, etc… they can tell you exactly how big each of those segment is and who’s got what share. They also segment their market by demographic segment 18-34 year old female with or without children or male 18-25; but if you are in the market
 ‘a customer’, that’s not how the market is segmented for you.

That’s not what the market looks like at all.  If you’re a customer, stuffs just happen to you.  Jobs are raising your lives and you hire them to get the job done!”.

Book Review - The New Capitalist Manifesto: Building a Disruptively Better Business

Book Title: The New Capitalist Manifesto: Building a disruptively better business  

ISBN: 978-1-4221-5858-6
Author: Umair Haque

Review: The book is a call for re-inventing the 21^st century capitalism; capitalism with a human face; capitalism that reinvents societal ties; capitalism that no longer divides, exploits and sheds societal disasters wherever it surges. The open-ended consumption model we have today is not sustainable. The book is a call for a capitalism that cares about others; economic, social, environment.

The foreword written by Gary Hamel is a strong support to the call for the 21^st century capitalism. Hagel questions why “…consumers doubt that large corporations are good for society. Why are executives regarded as ethically more inferior than lawyers, journalists or doctors?”

Umair Haque makes strong argument for what 21^st capitalism should look like, in a very passionate style and with strong arguments from different industries. In order to make his case, Umair Haque describes several examples, sometimes with astonishing and sharp analogies; companies like Wal-Mart, Google, Apple, Nike, Microsoft, Threadless, Gap, among others help illustrate different points. In this book, Umair haque uses, as a support to his case, the results of a study performed under his guidance on 250 companies.

Umair Haque introduces a blueprint for building a “disruptively better business”. How?

By throwing away the old cornerstones of capitalism (value chains, value propositions, strategies, protection, and goods) for the cornerstones of a 21st century constructive capitalism (value cycles, value conversations, philosophies, completion, and betters).

Umair Haque demonstrates how current capitalistic practices create what he calls “thin value”; that artificial, unsustainable value that depletes resources and never gets to re-use them or replace them with something better; value that is often created for shareholders at the expense of the people, communities, or society. In contrast, Umair Haque encourages companies to create “thick value”, which is described as generating profits by activities that create sustainable value in the benefit of both shareholders and society.

The book presents a visionary, idealist, realist and human look at how we should create economic value in the future; how we could build up “constructive capitalism”.

The book Chapters:

Chapter 1: The Blueprint for a Better Kind of Business sets the scene and makes the argument that the current type of capitalism is not sustainable. Haque introduces the concept of thin/thick value and lays the groundwork for how capitalism can go through a revolution to meet the challenges. Thin value is Artificial, Unsustainable, and Meaningless with respectively examples like McMansion, Hummers and McDonald; “Who benefits when we all eat Big Macs?”

The Blueprint for a Constructive Capitalism

Chapter 2: Step 1: Loss Advantage, from value chains to value cycles, this chapter

describes in detail the elements of the first step to become a constructive capitalist and the value cycle– with which Umair suggests to replace the current (Porter’s) value chain - using StarKist and Wal-Mart strategies as an example. “…Loss advantage happens by re-conceptualizing, re-organizing, and re-building production and consumption as a value cycle instead of value chain.” The goal of value cycle is simple: waste nothing, replenish everything.
“Cycles yield a new kind of economy for the 21^st century: economies of cycle.”

The Value Cycle - Umair Haque 2010

Chapter 3: Step 2: Responsiveness, from Value Propositions to Value Conversations is all about gaining agility and ability to engage customers, suppliers and the Market; mastering responsiveness. Don’t dictate Value propositions, hold Value Conversations instead! Threadless business model is used as the main example to support this topic. 20^th century businesses were built on value propositions, but 21^st century businesses are built on a new institution: the value conversation. Participation, Deliberation, association and Dissent are the main pillars for value Conversation.

Chapter 4: Step 3: Resilience, from Strategy to Philosophy, this chapter is about mastering resilience. The ability to evolve by constantly challenging its own business model, products and markets. Google is used as an example of a resilient organization that has the capacity to evolve itself faster than rivals; interesting analogy between Microsoft MSOffice and Google’s data liberation front. “Disrupt yourself instead of protecting yourself.”

Chapter 5: Step 4: Creativity, from Protecting a Marketplace to Completing a Marketplace is about mastering creativity. The chapter discusses the different levels of creativity and how they apply to new ways of looking at market opportunities. TATA, Hindustan Unilever, Microsoft Zune vs. IPod, Sony PS3 vs. Nintendo Wii, this chapter provides good examples on how different the approach is between “protecting a marketplace” and “completing a new one”.

Chapter 6: Step 5: Difference, from Goods to Betters, this chapter is about mastering difference. This chapter is a focus on creating products that support positive outcomes rather than just delivering features and functions. Nike Plus, Nintendo Wii are cited as examples of producing betters. Instead of just producing goods, a constructive capitalist makes betters – bundles of products and services that make a difference to people, communities, and society by having a tangible, meaningful, enduring positive impact on them.

Chapter 7: Step 6: Constructive Strategy, from Dumb Growth to Smart Growth covers how to create constructive strategy and business models based on ideas such as Generosity, Creativity, Resilience, etc. This chapter offers a broader strategic model, starting with the game board tool.

Chapter 8: Constructive Capitalism provides a summary of how the steps and concepts fit together. Specialized definitions are described for an accurate understanding.

Six steps to Constructive capitalism

The Constructive Capitalist Game board, Umair Haque 2010

Conclusion:

The book is complex, profound and academic, but accessible to profanes. The book invites us to think about how the future should look like, what we should stop doing, what we must do more and recommends a blueprint how to do it.

The New Capitalist Manifesto is a “Food for thoughts” book, for strategists and those who are looking to understand; for those who share the noble idea that capitalism should create “economic value” and “thick value” at the same time. 

The book is a must read for anyone wondering what will come next.

The New Capitalist Manifesto is recommended for executives, who want to understand how to compete in the future, and how to help build up the “Constructive Capitalism”.

Question to Umair: What is (or should be) the relation of your “manifesto” and Michael Porter’s “shared value” concept? Shouldn’t you work together to create the best framework ahead?

Book Review - The Silver lining

Book Title: The Silver Lining: An Innovation Playbook for Uncertain Times

ISBN: 978-1-4221-3901-1
Author: Scott Anthony

Review: The first thing that captured my attention in this book is the fluid writing style, infused with numerous examples that provide supportively, brilliance to the analysis and the book as a whole. Scott provides insightful analysis and guiding tools that can support firms to come out stronger from the current tumultuous business environment -"Great Disruption" -, as an analogy of the "Great depression" of the 1930’s.

Since nobody can mention "disruption" without referring to one of Professor Clayton Christensen book "The innovator’s dilemma", Scott starts with describing the disruption mechanisms as related by Christensen; "… Subsequent research and fieldwork have identified more than 200 disruptive developments over the past 50 years across a range of industries. Some disruptions, like retailing (Wal-Mart), low-cost automobiles (Toyota), Steel mini-mills (Nucor), and digital music (Apple), reshape existing markets. Other disruptions, like personal computers, online advertising (Google), and online auctions (eBay), create entirely new markets…"

Chapter 1: The Great Disruption - "…Tough economic times are going to force innovators to do what they should have been doing already... The challenge is reinvention, or transformation... Perpetual transformation is the only way to thrive during the Great Disruption…"

“The book is intended to be a guide for executives and innovators seeking to seize the silver lining in today’s difficult times, for strategists and investors trying to spot industry winners and losers, and for individuals thinking about how to tighten their own belts or reinvent themselves.”

Chapter 2: Prune Prudently – “Which would you shut down? A project with first-year revenues of $220,000 or one project with first-year revenue of $200 million?” The first page of this chapter starts with this astonishing (and challenging) question. And then the answer is even more revealing! "What if you knew that the smaller project (Google) would change the world and the larger project (Vanilla Coke) would be discontinued."
The portfolio checkup is a good tool for determining the health of a firm's innovation/growth portfolio. Companies should stop taking portfolio decisions based only on first-year revenues, Net-Present-Value. A different approach is proposed.

The chapter describes things companies should stop doing. 

Chapter 3: Refeature to Cut Cost – When times get tough, innovators have to figure out how to improve the productivity and profitability of existing products, services, and processes.
Companies should follow a three-step process where they:

• Segment customers using the concept of job-to-be-done.
• Investigate discrete customer segments to determine thresholds and trade-offs.
• Refeature offerings so they are more aligned with customer demand.

Chapter 4: Increase Innovation Productivity - excellent chapter, as it helps to identify capabilities, constraints, weaknesses, structures.
Spearhead innovation!
Cisco has created an autonomous growth group, Cisco Systems Emerging Technology Group, which has the mandate of creating stand-alone billion-dollar businesses. One business that came from the group is TelePresence.

Try to do the “Innovation capabilities audit” exercise!

Chapter 5: Master Smart Strategic Experiments – “ Often, the reason that people perceive innovation to be risky and expensive is their failure to couple technical experimentation with strategic experimentation.”

A good perspective on technical experimentation vs. strategic experimentation.

Chapter 6: Share the Innovation Load - Entrepreneurs don't take risk; they manage risks.
The chapter describes things we need to do differently. Scott refers to Henry Chesbrough Open innovation paradigm.

Chapter 7: Learn to Love the Low End –a lesson on how to turn the disruptive threat into an opportunity.

Good Enough Can Be Great!

A very good chapter with a large list of examples of incumbent companies who launched low-end solutions.

Chapter 8: Drive Personal Reinvention – “Leaders face another important challenge beyond improving their own abilities: motivating creative, innovative employees who don’t land an exciting innovation project.”
This chapter describes things firms are not doing yet, but need to get started immediately. 

The last chapter 9: What's Next for Innovation - is an epilogue, which highlights ten specific disruptors. Here are some of them:

• Skype: 2008 revenues: $500 million; 2005-2008, growth rate: 2,116%. Why is it disruptive: simple, affordable, good enough telephone and video-conference.
• Cisco TelePresence: (launched in 2006). Why is it disruptive: realizes the promise of video-conferencing, cheaper and easier to people.
• LinkedIn (estimated 2008 revenues: $100 million). Why is it disruptive: makes it simpler and easier for people to manage professional networks.
• Alibaba.com (2008 revenues: $4000+ million. Why is it disruptive: allows small Asian businesses to reach much wider markets.

Conclusion:

I have truly enjoyed reading (am still digesting) the author's playbook.
It’s that kind of books that you have to read all over again and again in order to digest the massive volume of valuable information it contains.

Every manager, leader, executive or innovator should read the book at least once.

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