Breaking the Incumbent s Curse: Create a Culture for Unrelenting Innovation

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1 Breaking the Incumbent s Curse: Create a Culture for Unrelenting Innovation Gerard J. Tellis Marshall School of Business University of Southern California

2 Question Why do great firms fail? How stay relentlessly innovative?

3 Basis Studied 66 markets from inception to maturity/decline Studied development of 90 radical innovations Surveyed 770 firms, across 17 nations, 9 languages

4 Findings Market leaders often stumble or fail e.g., HP, Kodak, Blackberry, GM, Sony Firms fail at their peak of success: incumbent s curse Few firms move from strength to strength e.g. Amazon, Apple, Google, Samsung Why this difference? Culture

5 How Culture Affects Innovation Innovations should lead to wealth and still further innovations Yet the firm on top for one platform rarely survives change. Why? Success leads to complacency, arrogance, and lack of innovation The Incumbent s Curse

6 Incumbent s Curse Intel Dominated PCs (85%). Grew to $464 bill. Struggling in mobiles (1%) Nokia Dominated global market for mobiles phones Struggling in smart phones Blackberry Pioneer in smart phones Missed touch screen smart phones

7 What Is Culture for Innovation? Three corporate traits 1. Cannibalize Successful Products 2. Embrace Risk 3. Focus on Future Mass Markets Three corporate practices 1. Empower Product Champions 2. Set Incentives for Enterprise 3. Foster Internal Markets

8 1. Willing to Cannibalize Successful Products Corporations nurture and sustain their most successful products Innovations are either Threat to current success Costly, distant in payoff, and highly uncertain Examples Who introduced Walkman? Who introduced ipod?

9 2. Embracing Risk Innovations have a high failure rate Success requires embracing failure But incumbents tend to be risk averse, unaccepting of failure

10 Example Which was biggest computer and printer company? HP HP had a tablet in 2005 five years before ipad

11 Why HP Passed on the Future What happened at HP $100 billion company Tablets appeared as a $1 billion rounding error!

12 3. Focus on Future Mass Markets Firms focus on current mass markets; all encompassing Today s mass markets will be gone tomorrow Todays niche markets are likely to be tomorrow s mass markets Must focus on future mass markets

13 Example Who introduced camera and film? Kodak What was Kodak s undoing? Digital photography?

14 Who had most patents in digital photography? Kodak

15 3. Focusing on Future Means seeing beyond innovations Inferior look and performance of innovations Niche demand for innovations Innovators outsider status

16 What Is Culture for Innovation? Three corporate traits 1. Willing to Cannibalize Successful Products 2. Embracing Risk 3. Focus on Future Mass Markets Three corporate practices 1. Incentives for Enterprise 2. Internal Markets 3. Empower Product Champions

17 1. Incentives for Enterprise Incentives for seniority, age, retirement, stimulate loyalty but kill innovation In many firms, failure is a shame Incentives for innovation must be asymmetric Strong rewards for success Weak penalties for failure Examples J&J Germany, Japan vs US, Silicon Valley

18 2. Internal Competition Employees love job security Innovators love adventure Bring the market within: competition in Idea fairs Funding contests Prototype races Competing divisions Take innovations out: delegate commercialization Spinoffs, buyouts, licenses, alliances Take options in these Employees generate, peers judge, managers facilitate Crowdsourcing ideas, innovators

19 3. Empowering Innovation Champions Every employee can be an innovator Freedom to innovate Resources to support Innovations often emerge deep in the bowels of big organizations Top innovators sometimes leave corporations Bottom-up vs top-down innovation Google (APM) vs Apple (single CEO)

20 Drivers of Unrelenting Innovation Practices Empower Innovation Champions Incentivize Enterprise Internalize Markets Attitudes Cannibalize successful products Embrace Risk Focus on Future Innovation

21 Applications Developed A tool to evaluate culture of innovation and benchmark against over 770 firms in our data base (tellis@usc.edu) Models for predicting takeoff of innovations and disruption of technologies Book with examples and principles

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23 Thank you! ( )