There is a big cry for innovation these days. Unfortunately, despite spending a lot of money on it, most innovation simply isn't. And that's why companies don't grow.
The giant consulting firm Booz & Co. just completed its most recent survey on innovation. Like most analysts, they tried using R&D spending as yardstick for measuring innovation. Unfortunately, as a lot of us already knew, there is no correlation:
"There is no statistically significant relationship between financial performance and innovation spending, in terms of either total R&D dollars or R&D as a percentage of revenues. Many companies — notably, Apple — consistently underspend their peers on R&D investments while outperforming them on a broad range of measures of corporate success, such as revenue growth, profit growth, margins, and total shareholder return. Meanwhile, entire industries, such as pharmaceuticals, continue to devote relatively large shares of their resources to innovation, yet end up with much less to show for it than they — and their shareholders — might hope for."
(Uh-hum, did you hear about this Abbott? Pfizer? Readers that missed it might want to glance at last week's blog about Abbott, and why it is a sell after announcing plans to split the company.)
Far too often, companies spend most of their R&D dollars on making their products cheaper, operate better, faster or do more. Clayton Christensen pointed this out some 15 years ago in his groundbreaking book "The Innovator's Dilemma" (HBS Press, 1997). Most R&D, in most industries, and for most companies, is spent trying to sustain an existing technology – not identify or develop a disruptive technology that would have far higher rates of return.
While this is easy to conceptualize, it is much harder to understand. Until we look at a storied company like Kodak – which has received a lot of news this last month.
Kodak invented amateur photography, and was rewarded with decades of profitable revenue growth as its string of cheap cameras, film products and photographic papers changed the way people thought about photographs. Kodak was the world leader in photographic film and paper sales, at great margins, and its value grew exponentially!
Of course, we all know what happened. Amateur photography went digital. No more film, and no more film developing. Even camera sales have disappeared as most folks simply use mobile phones.
But what most people don't know is that Kodak invented digital photography! Really! They were the first to create the technology, and the first to apply it. But they didn't really market it, largely because of fears they would cannibalize their film sales. In an effort to defend & extend their old business, Kodak licensed digital photography patents to camera manufacturers, abandoned R&D in the product line and maintained its focus on its core business. Kodak kept making amateur film better, faster and cheaper – until nobody cared any more.
Of course, Kodak wasn't the first to fall into this trap. Xerox invented desktop publishing but let that market go to Apple, Wintel suppliers and HP printers as it worked diligently trying to defend & extend its copier business. With no click meter on the desktop publishing equipment, Xerox wasn't sure how to make money with it. So they licensed it away.
DEC pretty much created and owned the CAD/CAM business before losing it to AutoCad. Sears created at home shopping, a market now dominated by Amazon. What's your favorite story?
It's a pattern we see a lot. And nowhere worse than at Microsoft.
Do you remember that Microsoft had the Zune player at least as early as the iPod, but didn't bother to develop the technology, or market, letting Apple take the lead in digital music and video devices? Did you remember that the Windows CE smartphone (built by HTC) beat the iPhone to market by years? But Microsoft didn't really develop an app base, didn't really invest in the smartphone technology or market – and let first RIM and later Apple run away with that market as well.
Now, several years too late Microsoft hopes its Nokia partnership will help it capture a piece of that market – despite its still rather apparent lack of an app base or breakthrough advantage.
Microsoft is a textbook example of over-investing in existing technology, in an effort to defend & extend an existing product line, to the point of "over-serving" customer needs. What new extensions do you want from your PC or office software?
Do you remember Clippy? That was the little paper clip that came up in Windows applications to help you do your job better. It annoyed everyone, and was disabled by everyone. A product development that nobody wanted, yet was created and marketed anyway. It didn't sell any additional software products – but it did cost money. That's defend & extend spending.
How much a company spends on innovation doesn't matter, because what's important is what the company spends on real breakthroughs rather than sustaining ideas. Microsoft spends a lot on Windows and Office – it doesn't spend enough on breakthrough innovation for mobile products or games.
And it doesn't spend nearly enough on marketing non-PC innovations. We are already well into the back end of the PC lifecycle. Today more bandwidth is consumed from mobile devices than PC laptops and desktops. Purchase rates of mobile devices are growing at double digits, while companies (and individuals) are curtailing PC purchases. But Microsoft missed the boat because it chose to defend & extend PCs years ago, rather than really try to develop the technology and markets for CE and Zune.
Just look at where Microsoft spends money today. It's hottest innovation is Kinect. But that investment is dwarfed by spending on Skype – intended to extend PC life – and ads promoting the use of PC technologies for families this holiday season.
Unfortunately, there are almost no examples of companies that miss the transition to a new technology thriving. And that's why it is really important to revisit the Kodak chart, and then look at a Microsoft chart.
Do you think Microsoft, after this long period of no value increase, is more likely to go up in value, or more likely to follow Kodak? Unfortunately, there are few companies that make the transition. But there have been thousands that have not. Companies that had very high market share, once made a lot of money, but fell into failure because they invested in better, faster, cheaper rather than innovation.
If you are still holding Kodak, why? If you're still holding Microsoft, Abbott, Kraft, Sara Lee, Sears or Wal-Mart — why?