Of the leading 500 companies in Brazil in 1973, 77% no longer exist. It is no better in the United States. Of the top 25 industrial Companies in the US in 1900 only two remain there today and of the top 25 on the Fortune 500 in 1961 only 6 remain there today.
According to a KPMG CEO survey conducted in 2014, 72% of CEOs are worried that their products will no longer be relevant within 3 years. 90% are concerned that their competitors will take customers, and 83% feel that they are not innovating adequately.
Companies have a good reason to be concerned.
Technological innovation continues to accelerate, building upon itself at unprecedented speed, with no indication that it will slow. This results in putting businesses under extraordinary pressure to innovate but current methods just don’t seem to be working.
Internal innovation attempts are often ineffective as a result of corporate cultures that were designed to reduce risk and provide structure. Entrepreneurs are, in many cases, unwilling to work for larger non-tech based businesses.
As an alternative, many companies have tried acquisition strategies, but in Brazil, according to a study by FDC, 100% of “spin-ins” in the last several years has failed.
A more current trend is for companies to try creating their own incubators, but these too are failing for a variety of reasons, and the next wave is expected to be a venture investment strategy modeled after the US market.
Incubators
Most incubators have a collection of entrepreneurial businesses that are unlikely to succeed. The entrepreneurs often target consumer markets that are notoriously difficult and expensive to enter. Few will obtain funding, and most will underestimate the cost of customer acquisition, dooming their companies to exhaust their resources.
The selection process for most incubators is through business plan competitions for which the judges, who cannot be experts at every proposed business, are ineffective at making a selection. According to a recent Babson College study, there is a negative correlation between having a business plan and finding success.
Venture & Angel Investing
While it is possible to point to huge business successes like FaceBook who were venture funded, the real history of venture funding from either the perspective of the investor or the entrepreneur is not so bright. A recent study by the Kauffman Foundation titled: “We have met the enemy and… he is us” reports on their experience of having invested $0.5B in venture funds and discovering:
Only twenty of 100 venture funds generated returns that beat a public-market equivalent by more than 3 percent annually, and half of those began investing prior to 1995.
The majority of funds—sixty-two out of 100—failed to exceed returns available from the public markets, after fees and carry were paid.
From the entrepreneur’s perspective of venture or angel investment, few businesses are able to raise venture funding, and of those that do, most still fail.
Innovation & Invention
Technology drives most innovation. Yet, technology is increasing in complexity and diversity at exponential rates. Key, therefore, to innovation is one’s ability to remain aware of the latest in technological innovations so that one can apply those improvements to their business model when available. We believe that it is the application of ideas that are already in existence elsewhere in society that affords each of us the opportunity to move our own businesses forward.
Understanding Invention
Most of us have been educated to believe that great inventors create great inventions and that they experience a Eureka moment of innovative clarity that causes an invention to be born. Let me outline an alternative view.
First, if we were to take a photograph of the entire planet, and freeze it in time, we could catalog all of the living organisms on the planet and call that collection the “then current biosphere.” As well, we might understand that if we allowed the film to run, then the “then current biosphere” would change over time, as a result of evolution, into new forms of plants, fungi and animals that never existed a moment before. Essentially, life is a form of information theory, where the information is encapsulated in the DNA and RNA of the living organisms.
Likewise, if we were able to “photograph” all of the human thoughts and ideas at a unique moment in time, including for example, all of the written texts, all of the information in computers, and all of the thoughts in people’s heads we could call this, as coined by Tielhard de Chardin, A 20th century Jesuit priest and philosopher, the Noosphere; the collection of all of the information created by humans (and not lost) up to that point. Like genetic evolution, if the movie of the Noosphere is allowed to run, this information evolves over time as well, adding new ideas, or we might call some of them: inventions.
If we assume that an invention is the assembly of known facts in a new and innovative way, for example, the “invention” of powered flight relying upon aluminum casting to make lighter engines, and Bernoulli’s principles to generate wing lift, then it’s likely that if the current information about underlying principles is widely understood, then it should lead, therefore, to simultaneous invention at multiple places on the planet. And, that’s just what happened. While the Wright brothers were inventing powered flight at Kitty Hawk in 1903, Santos Dumont was also inventing it in Brazil, and Clement Adler in Europe.
Stuart Kauffman, a theoretical biologist refers to this “next step in evolution” as “the adjacent possible,” and whether one is considering the next step of biological evolution or the next step in thought evolution, the concept still applies.
One hundred years ago, at the time of Adler, Dumont and the Wrights the speed at which information disseminated over our planet was limited. But today dissemination is virtually instantaneous with the Internet and cell phones. Thus, today, the likelihood that simultaneous “inventions” are occurring in every known field, all over the planet is close to certainty.
This raises an interesting dilemma for the innovator. If, for example we work at a company that does not have lots of technologists who are constantly surveying the current state of the art (or the state of the Noosphere) then it becomes likely that an innovation that is relevant to our business and possibly our survival will occur without our knowledge.
The most important aspect of this is as follows:
Many in industry understand the importance of innovation to their company’s survival. And, as well, many understand that there are commonly two places to look for innovation opportunities: one being in the current processes as defined by the current business model, and second, in the underserved needs of customers.
The challenge, however, is not simply identifying opportunities in these two areas of need, but more importantly, knowing what specific innovations in technology offer unique solutions to either of the two problem sets. And, to make matters worse, it is often true that there’s more than “one way to skin a cat,” or more precisely more than one technological advance that can be exploited to offer a technological innovation that has value to the company. As well, we know that simply the process of commencing one project that exploits one innovative opportunity consumes resources that then cannot be used for a potentially better choice that is identified later. Thus, it is not adequate to simply know what you can do with current technology, but one must also know what you will soon be able to do with any new technology that may offer an even greater advantage.
I offer the following visualization of this problem.
Think of the “opportunity set” as being a set amoeba with tentacles that extend from its core business. Each tentacle’s length could be related to the size of the opportunity. Each tentacle is reaching out into a space that is occupied by other amoeba’s tentacles that are reaching in the opposite directions (towards the first set). These tentacles represent the growing set of “solutions” that are possible through technology.
Whenever two tentacles touch, a new business model becomes rational for the application of a particular technology to a particular problem set. But, note that with a little more time, any problem set might intersect many different technological solutions, clearly some being better than others. So, to the business manager, the selection of which opportunity should be joined with which technology requires understanding the broader question of which matches already currently exist, and which will soon be coming.
Or, much more simply in one simple case: “should I change my incandescent light bulbs today to fluorescent, or should I wait for tomorrow’s LED solution? And, even harder, I observed that there’s a new engine replacement for my fleet of trucks that’s even a bigger saver, but it’s coming next year, so maybe I should wait with the lights and conserve my resources until then?
Corporate Innovation
There appear to be two major classifications of corporate innovation: the first attempts to extend the life and growth of an existing product or product line through various methods of innovation through process improvements in any parts of the value chain. For example, decreasing the manufacturing cost, or distribution cost has the potential of increasing the competitive advantage which in turn can increase the volume or simply expand the market through price/volume elasticity. This form of innovation is referred to in some literature as “stretching the S-Curve.”
Alternatively, companies often appear to make an innovative leap to a new market that, by virtue of its size offers considerable growth. While this form of innovation can often be more rewarding as it was for Apple when they entered the cellular phone market, it can also lead to failure as it did in the same industry for so many companies like Google and Amazon who brought their own smart phones into the market. This form of innovation is referred to in the same literature as “building a new S-Curve.”
Stretching the S-Curve
Finding opportunities to stretch one’s S-Curve is often not that hard. It requires in-depth interviews of staff at all levels within an organization and an analysis of existing processes in an attempt to identify frustrations, problem areas and resulting opportunities that exist to create efficiencies in the process that essentially reduce cost and offer either increased profit, or decreased price in the search of expanding one’s market size.
There are two challenges to this methodology. First, one must identify the opportunities for change, and then one must identify the technology that affords the potential change. The first of the two is often best done by simply bringing in external consultants who can bring an objective view to the process and aren’t bound to the current operating methods, or schedules. Their independence gives them a simpler ability to create an objective analysis. The second part of this methodology is a bit more difficult because it requires a general understanding of technology and an intuitive sense of what might fit and where. The third challenge is to pick which of the many paths presented offer the best return on capital for the company.
Creating a new S-Curve
The potential of creating a brand new opportunity for a company is a more difficult challenge. It relies upon all of the following:
· An analysis of the asset strengths of the company and a test of the importance of each of those strengths to the new opportunity. For example, does the particular nature of the brand equity (reputation) of the company add important value to its ability to compete in this new business opportunity? Often, brand equity, cash, or distribution channel can influence the ability to enter a new market more than direct experience in the product category.
· An analysis of discontinuities that are occurring in the ecosystem, which are often, themselves driven by technology.
· An analysis of the plans of competitors at the moment that the discontinuity is perceived.
Let us examine two examples to see what happened.
Apple’s transition from the IPOD and IMAC market into the cellphone marked would look insane by many measures. Strong companies like Motorola, Nokia and Blackberry dominated the market. However, Apple had strong brand equity, plenty of cash and Moore’s law continued to drive the cost and power dissipation of processing down in size and up in performance.
However, most importantly, the service providers including AT&T, Sprint and others were driving their network capacity up with 3G, 4G etc. without any clear understanding of how consumers would use this additional bandwidth. The market entrance of a “web surfing device” in the form of the first iPhone was transformative but it relied heavily on all of these factors to be successful. Had the IPhone been brought out three years earlier, it would have likely flopped from exceedingly poor performance based upon the network capacity at that time. So, timing is everything to this type of innovation and the benefits are huge. Even later entrants including Amazon and Google were unable to bring compelling products into the market. I find also, most interesting, is the evidence that even AT&T didn’t anticipate what was about to occur as evidenced by their offering unlimited data contracts to their clients back then that are still grandfathered in.
Another example is GOPRO who makes a waterproof digital video camera. Clearly this same technology was available years before GOPRO from other vendors, but GOPRO’s success hinged upon the existence of YouTube (and all of the related infrastructure) that allowed GOPRO users to share images and result in viral growth of their market.
Thus, we commonly see inventions that seem to work well, but unfortunately are not well timed to the market and often; it’s the timing with other related technologies that have failed. An analysis of the ecosystem and an understanding of the impending changes that are occurring in it, are essential to finding success.
Another common root of failure to be able to bridge to another new S-curve is a company’s inability to pivot around assets that are not necessarily related to what is seen by management and the board as the “primary business” of the company. A good example is Kodak that at its peak had 80,000 employees. Its board defined their destiny as being related to imaging, while in fact, their best assets may have been their chemists, their brand equity and their rights to the Bayer brand in the US. In their attempt to shift to digital imaging and compete against consumer electronics companies they failed potentially to exploit their true powers.
CONCLUSION
Innovation in the corporate environment is hard but essential to survival and growth. Using outside consulting resources that have objectivity with respect to the current business models, and broad technological experience is probably the best method for corporations to create innovation strategies.