by Adam Hartung | Oct 27, 2011 | Current Affairs, Defend & Extend, In the Whirlpool, Innovation, Leadership, Web/Tech
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.
(Chart 10/27/11)
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?
by Adam Hartung | May 26, 2010 | Defend & Extend, In the Swamp, Leadership, Lock-in, Web/Tech
In theory, Sustaining Innovations that help a company Defend & Extend its products are supposed to be cheap. The breakthrough is done, and the investments on variations, derivatives and enhancements are "engineering" as opposed to "science" so the development is supposedly more easily planned, the costs better understood and the returns more predictable. That's the theory, anyway, and as a result most managers constantly defend their decision to keep investing more in Defending & Extending past products rather than investing in new things which would develop new markets and new revenue streams.
But, like a lot of business myths, there's really no proof for this theory. It just sounds good. It seems "to make sense", and the big issue is that "it simply has to be less risky to spend on what you know rather than what you don't know." And "after all, this is investing in our own market and what could have a higher rate of return than defending our mother ship?" I'm sure everyone has heard these kind of comments when it comes time to allocate resources. Management supports doing more of what's been done, reinforcing Defend & Extend behavior. It just HAS to make sense to do more of what we know rather than invest in something new that we don't know as well – right?
But look at this chart from Business Insider:
Microsoft has spent billions of dollars in R&D Defending its desktop PC near-monopoly with enhancements to Office (Office 2007 and now Office 2010) and the operating System (Vista and System 7). It has spent heavily on other things as well, but in the end its entertainment division and mobile O/S products as well as others have not successfully grown revenues. As a result, Microsoft's value has not risen and Apple is about to eclipse Microsoft's value despite being a smaller company (see yesterday's blog for a more thorough review of valuation issues).
Now we can see that all this spending on R&D to Defend & Extend is in no way cheap. In dollars, Microsoft spent 3.5 times as much as Google and 8 times as much as Apple in 2009 – companies which as a result of their spending generated considerably more growth than Microsoft. Microsoft even spent more dollars, and more money as a percent of revenue, than IBM and Cisco (companies that rely heavily on hardware as well as software sales)! By any measure, Microsoft's efforts to Defend & Extend its "base," or its "core" has come at a very, very high price – in dollars or as a percent of revenue.
Consider that a good measure of R&D should be its ability to generate incremental revenue. Using that yardstick, Microsoft is a disaster, while Apple is a star.
Far too many companies Lock-in R&D and New Product Development to the existing business. The decision-making systems are geared to invest more in what is known. New investments are tagged with "risk adjustments" and "cannibalization charges" and a host of other costs to make them look less positive than doing more of what has historically been done. Lock-in to the Success Formula means that the financial review system, along with the technology assessments, are designed to give a major benefit to doing more of the same, while dramatically penalizing anything new!
In almost all companiess decision-making systems are designed to reinforce the Success Formula, not give an "independent" answer based upon markets. The processes are designed to do more, not do something new. And in the case of Microsoft, we can see how that has led to huge investments in simply defending the PC business while the technology marketplace is now rapidly shifting to new platforms – like mobile devices (smartphones and tablets), cloud-based applications and data access, and even gaming consoles. Competitors are developing a huge advantage by investing R&D and New Product Development dollars in new markets which provide greater growth opportunities – and higher rates of return over any time period other than the very short term.
Even if you're not in the computer/tech business, you don't want to end up like Microsoft. You don't want to over-invest in yesterday's solution trying to Defend it in the face of market shifts. That did not work out well for Polaroid, Kodak or Xerox which lost their luster as customers switched to new solutions and new competitors. Be sure to look not just at how much you spend, but that your spending is linked to markets and their growth, not simply doing more of what you already know!
by Adam Hartung | Sep 16, 2009 | Current Affairs, Defend & Extend, In the Rapids, Innovation, Leadership, Openness
Is Google a company who's growth and innovation worry you? Not me. Which is why I was disturbed by a recent blog at Harvard Business School Publishing's web site "Google Grows Up." In this article Scott Anthony, a consultant and writer for HBS, says that he thinks Google has been immature about its innovation management, and he thinks the company needs to change it's approach to innovation. Unfortunately, his comments replay the core of outdated management approaches which lead companies into lower returns.
No doubt Google's revenues are highly skewed toward on-line ad placement. But with the market growing at more than 2x/year, and Google maintaining (or growing) share it's not surprising that such high revenues would dwarf other projects. Google created, and has remained, in the Rapids of growth by leading the market. From its Disruptive innovation, offering advertising through products like Google AdWords to people who previously couldn't afford it or manage it, allowed Google to lead a market shift for advertising. And ever since Google has implemented sustaining innovations to maintain its leadership position. That's great management. No reason to worry about a lot of revenue in ad placement today, with the market growing. Not as long as Google keeps breeding lots of new, big ideas to help grow in the future.
But Mr. Anthony flogs Google for its "unrestrained" approach to innovation. He recommends the company push hard to implement a process for innovation management – and he uses Proctor & Gamble as his role model – in order to curtail so many innovations and funnel resources to "the right" innovations. Even though he's obviously flogging his consulting, and pushing that all "good management" requires some significant stage gate management of innovation – he couldn't be more wrong.
Firstly, P&G is far from a role model for innovation. As recently discussed in this blog, the company recently said one of its major innovations was cutting prices on Tide while introducing less a less-good formulation. As commenters said loudly, this is not innovation. It's merely price cutting – taking another step on the demand/supply curve of price vs. performance. It doesn't change the shape of the curve – it doesn't help people get a far superior return – nor does it bring in new customers who's needs were not previously met.
In a Wall Street Journal article "P&G Plots Course To Turn Lackluster Tide," the CEO freely admits the company has had insufficient organic growth. Additionally, his big future opportunities are to "reposition Tide," to cut the price of Cheer by another 13% and to use Defend & Extend practices to try pushing the P&G Success Formula into other countries. Like people in China, India and elsewhere are in need of 1.5 gallon containers of laundry detergent sold through enormous stores which have big parking lots for all those cars to lug stuff home. None of these ideas have helped P&G grow, nor helped the company achieve above-average returns, nor demonstrate the company is going to be a leader for the next 10 years in new products, new distribution systems or new business models for the developed or developing world.
This urge to "grow up" is a huge downfall of business thinking. It smacks of arrogance and superiority by those who say it – like they somehow are "in the know" while everyone else is incapable of making smart resource allocation decisions. In "Create Marketplace Disruption" I provide a long discussion about how introducing "professional management' causes companies to enter growth stalls. The very act of saying "gee, we could be more efficient about how we manage innovation" immediately applies braking power well beyond what was imagined. If Mr. Anthony were worried about Google managers leaving to start new companies in the past (like Twitter) he should be apoplectic at the rate they'll now leave – when it's harder to get management attention and funding for new potentially disruptive innovations.
Google is doing a great job of innovating. Largely because it doesn't try to manage innovation. It maintains robust pipelines of both disruptive, and sustaining, innovations. Google allows everybody in the company to work at innovation – providing wide permission to try new things and ample resources to test ideas. Then Google lets the market determine what goes forward. It lets the innovators use supply chain partners, customers, emerging customers, lost customers and anybody who can provide market input guide where the innovation processes go. As a result, the company has developed several new products — such as new network applications that replace over-sized desktop apps, and a new, slimmer mobile operating system that expands the capabilities of mobile devices —- and we can well imagine that it may be coming close to additional revenue breakthroughs.
Unfortunately, Mr. Anthony would like readers, and his clients, to believe they are better at managing innovation than the marketplace. However, all research points in the opposite direction. When managers start guessing at the future their Lock-ins to historical processes, products and market views consistently causes them to guess wrong. They over-invest in things that don't work out well, and investing for really good ideas dries up. All resource allocation approaches use things like technology risk, market risk, cost risk and revenue risk to downplay breakthrough ideas. Management cannot help but "extend the past" and in doing so over-invest in what's known, rather than let ideas get to market so real customers can say what is valuable.
Google is doing great. In a recession that has put several companies out of business (Silicon Graphics and Sun Microsystems are two neighbors) and challenged the returns of several stalwarts (Microsoft and Dell just 2 examples) Google has grown and seen its value rise dramatically. To think that hierarchy and managers can apply better decision-making about innovation is – well – absurd. It's always best to get the idea surfaced, push for permission to do things that might appear crazy at first, and get them to market as fast as possible so the real decision-makers can react, and give input, to innovation.
