Unrelenting Innovation

How to Create a Culture for Market Dominance

Gerard J. Tellis

• Publisher: Jossey-Bass
• Year: 2012
• Print ISBN: 9781118352403
• eBook ISBN: 9781118416907
• Edition: 1
• Topic: Business
• Subtopic: Leadership
• Index: Business

The hands-on guide for fostering relentless innovation within your company

Gerard Tellis, a noted expert on innovation, advertising, and global markets, makes the compelling case that the culture of a firm is the crucial driver of an organization's innovativeness. In this groundbreaking book he describes the three traits and three practices necessary to create a culture of relentless innovation. Organizations must be willing to cannibalize successful products, embrace risk, and focus on the future. Organizations build these traits by providing incentives for enterprise, empowering product champions, and encouraging internal markets.

Spelling out the critical role of culture, the author provides illustrative examples of organizations with winning cultures and explores the theory and evidence for each of the six components of culture. The book concludes with a discussion of why culture is superior to alternate theories for fostering innovation.

• Offers a groundbreaking take on innovation that is driven by a company's culture
• Shows what it takes to create a culture of innovation within any organization
• Based on a study of 770 companies across 15 countries, the origin of 90 radical innovations spanning over 100 years, and the evolution of 66 markets spanning over a 100 years
• Provides numerous mini cases to illustrate the workings of culture
• Written by Gerard Tellis director of the Center for Global Innovation

This must-have resource clearly shows the role of culture in driving relentless innovation and how to foster it within any organization.

Chapter 1

Why Incumbents Fail

Success is empowering. But success is also enthralling and embeds the seeds of failure.

INCUMBENT FIRMS that dominate their markets often fail to maintain that domination for long, despite all the advantages they enjoy of market leadership. For example, Sony created the market for mobile music with the introduction of the Walkman. Yet, Apple's iPod now dominates that market. Kodak dominated the market for film photography but declined and ultimately went bankrupt as digital photography took off. Barnes and Noble dominated the book market for decades, but Amazon is now the biggest force in book retailing. Intel dominated the market for PC chips, yet is a minor player in the fast-growing market for cell phone and tablet chips. Research in Motion dominated the market for smartphones with their once popular Blackberry. Yet Apple now dominates that market.

Indeed, market leadership frequently passes from firm to firm in many markets. In the market for Internet search engines, leadership passed from Wandex to AltaVista to Overture to Yahoo! to Google. In the microcomputer market, leadership passed from Altair, to Tandy, to Apple, to IBM, to Compaq, to Dell, to HP. Now tablets are threatening HP's leadership. In retailing, market dominance has passed from Sears to Wal-Mart and is now moving toward Amazon. A review of the evolution of markets shows that many firms often do not stay as market leaders for long (see Table 1.1). Moreover, recent research suggests that the duration of market leadership is dropping by as much as half a year, every year!¹

Table 1.1 Examples of Multiple Changes in Market Leadership

Category	Sequential Leaders Separated by Commas
Mobile music	Sony, Apple
Internet search	Gray's Wandex, AltaVista, Overture, Yahoo!, Google
Video games	Magnavox, Atari, Nintendo, Sega, Sony, Microsoft, Nintendo
Microcomputers	Altair, Tandy, Apple, IBM, Compaq, Dell, HP
Browser	Mosaic, Netscape, Internet Explorer
Word processing	IBM, Wang, Easy Writer, WordStar, WordPerfect, Word
Light beer	Trommer's, Gablinger's, Brau, Miller, Bud

Source: Adapted from Tellis and Golder, Will and Vision: How Latecomers Grow to Dominate Markets, New York: McGraw Hill, 2001.

Sometimes, firms not only fall from leadership but completely fail and exit the market. For example, three one-time leaders of the microcomputer market, MITS (owner of Altair), Tandy, and IBM, have since quit the market.

Why do great incumbents stumble, decline, or fail? Professor Peter Golder of Dartmouth College and I studied the origin, growth, and evolution of sixty-six markets spanning up to 150 years.² Our research strongly suggests that the primary reason for firm failure is a failure to innovate unrelentingly. No barrier to competitive entry provides a permanent protection against the force of innovation. Innovation regularly breaks down barriers, be they in economies of scale, patents, business models, or relationships with buyers and sellers. As a result, there are no permanently dominant firms or permanent market leaders. Perennial success belongs to those firms that innovate unrelentingly.

Then, why do incumbent firms, especially market leaders, fail to innovate unrelentingly?

Why Incumbents Fail to Innovate Unrelentingly

A firm requires a great deal of resources to stay unrelentingly innovative. Incumbent firms have at their disposal more resources, experience, expertise, talent, and cash for innovation than lesser rivals or new entrants. Thus, incumbents are in the best position to stay innovative and dominate their markets. So, a lack of resources is not the reason that incumbents fail. On the contrary, many incumbents fail to innovate even though they are blessed with abundant resources. Ironically, market incumbents fail to innovate unrelentingly even though many, if not all, rose to that position of market dominance by introducing a radical innovation.³ Nonetheless, some incumbents do maintain their leadership for decades.

Why do so some incumbents maintain their dominance while others fail? Professor Rajesh Chandy of London Business School and I sought to address this issue with an in-depth study of ninety-three innovations together with interviews of executives and a survey of about two hundred firms.⁴ Our research suggests that incumbents fail because they fall victim to the “incumbent's curse”: a self-destructive culture that results from their prior success.

Paradox of the Incumbent's Curse

Many incumbents are at the top of their game because they market a superior product that emerged from a radical innovation. Because of their dominant position, they enjoy high prices, large market share, and strong cash flows. This position imbues them with market power and prestige.

Market dominance does not come easily. It is the fruit of innovation, clever strategies, and effective management over many years—if not decades. But market dominance, power, and success contain the seeds of self-destruction. They lead to three traits that hamper continued innovation and hinder continued leadership.

First, incumbents fear cannibalizing their current successful products. Cannibalizing means letting a new product replace a current product in sales to customers. Incumbents are reluctant to change the status quo and endanger their successful products. When innovations threaten their successful products, market incumbents' immediate reaction is to protect those products that have brought them strength and success. Even though they themselves develop some radical innovations, incumbents are reluctant to commercialize them for fear of jeopardizing their cash flows from successful products. This reluctance arises from some economic and psychological principles. Chapter 2 explains the economics and psychology of this trait.

Second, incumbents are risk averse. They tend to overweight their current successful products relative to risky, uncertain innovations for the future. Leaders measure all new innovations by the speed with which they can yield returns that match up with those from their hugely successful products. This weighting is not illogical. Innovations that create new markets involve huge investments, take a long time to bear fruit, and encounter many failures. Thus, innovations are risky. Incumbents are averse due to three biases in their perception of risks and dealing with failures: the reflection effect, the hot-stove effect, and the expectations effect. Chapter 3 explains these causes of risk aversion.

Third, incumbents focus too much on the present. They channel their efforts to carefully market their current successful products to satisfy current customers. Because of their involvement with the current problems and crises, the present looms large while the future seems distant. Thus, incumbents develop a bias that focuses on the present at the cost of the future, even though the future belongs to innovations rather than to present successful products. The legacy of the past and present becomes a hindrance to embrace the innovations of the future. Chapter 4 explains the psychological biases that cause this emphasis of the present over the future.

Fear of cannibalizing successful products, risk aversion, and focus on the present constitute three roadblocks for commercializing innovations. The strength and success of incumbents, especially market leaders, engender these traits that hamper future innovation and success. Though incumbents ascended by embracing radical innovations, their success creates a self-defeating culture of inertia that hampers commercializing future innovations. We call this the incumbent's curse. It explains the epigram at the start of this chapter, “Success …embeds the seeds of failure.”

Lou Gerstner, the former CEO of IBM who transformed the culture of IBM between 1994 and 2003 and prevented impending demise, comments on this problem: “This codification, this rigor mortis that sets in around values and behaviors, is a problem that is unique to—and often devastating for—successful enterprises …What I think hurt the most was their [successful enterprises'] inability to change highly structured, sophisticated cultures.”⁵

The following particular examples illustrate this paradox.

Telling Examples

In the late 1970s, Sony created the mobile music market with the launch of the Walkman. Sony's CEO had to push the Walkman to market against intense internal opposition from Sony's engineers and managers (see Chapter 7). Once introduced, the Walkman took off quickly, exceeded the expectations of all its managers, and created a whole new category. Yet when MP3 technology came along, Sony failed to retain dominance of the mobile music market with an easy-to-use MP3 player. Instead, it ceded that market to Apple and its iPod. Ironically, Sony did have an MP3 player before the iPod. However, Sony's MP3 player was not user-friendly partly due to its anti-piracy software. Such software was included in deference to the music business that wanted to protect royalties (see Chapter 2).⁶ Here again, fear of cannibalizing royalties, a focus on the present, and risk aversion crippled Sony's MP3 player. Sony's huge music library could have been an asset in marketing its MP3 player, but instead became a handicap.

A similar story occurred at Xerox, though on a much larger scale. In the mid-1970s, Xerox had developed in its PARC labs most of the innovations of the modern personal computer generation. These innovations include the Ethernet, the personal computer, the laser printer, PC networking, e-mail, the mouse, graphical user interface (GUI), word processing, the WYSIWYG editor, and object-oriented programming. Xerox was ahead of all competitors in these technologies and was ready to launch the “paperless office,” as envisaged by its late CEO, Joseph Wilson. However, we do not see Xerox's name on any of these products today. The reason is that Xerox's senior managers were too focused on the copying business. They did not see the value in the paperless office and were afraid that these new technologies would cannibalize its copying business.

Though unwilling to put forth newer technologies, Xerox itself sprang up from a radical innovation that incumbents at the time ignored and belittled. In 1935, the lone researcher Chester Carlson developed xerography, or dry copying, in his garage after being dissatisfied with existing alternatives for copying. However, none of the giant firms, including 3M, Kodak, RCA, or IBM, were interested in investing in xerography. In 1944, a small firm called Haloid took up the challenge of developing a copying machine from Carlson's innovation. That quest involved extensive research and development, extreme hardships, great risks, and fifteen years. Haloid's CEO, Wilson, championed the technology and steered Haloid through those tough times. By the end of that road, Haloid had developed the Xerox 914. When commercialized in 1959, the Xerox 914 was a huge success and propelled tiny Haloid to leadership of the copying market, ahead of all the incumbents of its time. Haloid changed its name to Xerox. However, its great success in xerography rendered Xerox short-sighted, risk averse, and fearful of cannibalizing its then successful copying business. Thus, it did not embrace and aggressively commercialize the next frontier of radical innovations in the form of the paperless office, which its own labs developed.

The examples of Sony and Xerox are not isolated but typical examples of roadblocks facing successful companies. Some CEOs of successful companies realize that their own success and indeed their own companies are the greatest threat to future innovations and success. For example, when Google CEO Larry Page was asked what was the greatest threat to Google, he replied in one word, “Google.”⁷ He had realized the paradox of the incumbent's curse. Ex-CEO Eric Schmidt elabo...

Table of contents

• Cover
• Dedication
• Series Page
• Title Page
• Copyright
• Figures and Tables
• Foreword
• Chapter 1: Why Incumbents Fail
• Chapter 2: Willingness to Cannibalize Successful Products
• Chapter 3: Embracing Risk
• Chapter 4: Focusing on the Future
• Chapter 5: Incentives for Enterprise
• Chapter 6: Fostering Internal Markets
• Chapter 7: Empowering Innovation Champions
• Chapter 8: Culture Versus Alternate Theories: Arguments and Evidence
• Bibliography
• Acknowledgments
• The Author
• Index