Innovation: Key to Organic Growth

Jay RaoProfessor

Babson

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Setting Expectations

• I will not discuss every slide / bullet point.

• You will receive all presentations in digital format

• I am not an expert in any one industry

• You have to be ready for……

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One proposed solution

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Today’s Agenda

• Are firms good at innovation?

• What mistakes do firms make when it comes to innovation?

• Stepping into the future: Predictive vs. Emergent Strategies

• Creating a Culture of Innovation

• Developing Innovation Capabilities – The Journey

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Innovation: Key to Organic Growth

The structure of a mature industry

Source: Moore

35%

35%

10%

10%

4%3% 3%

GORILLA

MONKEY

CHIMP

All Firms Die!

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1900 1910 1920 1930 1940 1950 19600

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49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70

Number of Firms in the U.S. Picture Tube Producers

Num

ber

of

Firm

s

Years (1949 to 1970)

Entry

Exit

Total

Number of Firms in the U.S. Typewriter Industry

Num

ber

of

Firm

s

Years (1874 to 1936)

Entry

Exit

Total

Entry

Exit

Total

50% of U.S. products in all-steel closed body

80% of U.S. products in all-steel closed body

Source: Mastering the Dynamics of Innovation, Uttberback

Number of Firms in the U.S. Automobile Industry

Num

ber

of

Firm

s

Years (1900 to 1960)

Kodak Moments…

1975 Invents first digital camera, but does not bring to market. Fears cannibalizing film. Has 95% market share in U.S. film.

1984 Declines to sponsor LA Olympics. Low cost Fuji wins contract.

1994 Introduces QuickTake digital camera. Sold through Apple

1997 Fuji has 17% market share of U.S. film

2005 Kodak ranks #1 in U.S. digital camera sales $5.7 B. But, loses $60 on every camera sold. Severe undercutting by Asian low cost manufacturers and several new entrants.

2006 Kodak outsources manufacturing of digital cameras to Asia. Outsources first time in its history.

2007 #4 in U.S. digital camera sales.

2010 #5 in U.S. with 7% market share

2012 Files for bankruptcy

Music

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Which company should have owned the iPod space?

SONY

2004Jukebox – SonicStageConnect – Music Store

At its peak: 2.5 million songs from all labels,but Windows only

2008Kills Connect

17 | BAP | 2007 | ©

Acer

Toshiba

Dell

HP

Lenovo

Apple

Asus

RIM Blackberry

Nokia Symbian

Palm (HP)

Apple iPhone

Google Android

19 | BAP | 2007 | ©

Abbott is among the companies paving the way for the newest generation of stents, ones that dissolve away after their product life runs its course. In January, Abbott received approval in Europe for its bio-absorbable drug-eluting stent, called Absorb. The company plans a limited distribution on the continent later this year. By contrast, J&J encountered problems developing a follow-up to its Cypher stent, called Nevo. Last October, the company said it was suspending patient enrollment in a study of the stent due to a problem with the catheter that surgeons use to deliver the device. Nevo was based on technology that J&J bought as part of a $1.4 billion takeover of Conor MedSystems in 2007.

Industry leadership does not last

• Typewriters• Manual Electric Word Processors PCs

• Computers• Mainframe Minicomputers PCs

• Hard Disk Drives• 14” 8” 5 ¼” 3 ½”

Leadership in Retail Services didn’t last either

• General Purpose

• Bookstores

• Toys

• Electronics

Corporate mortality is very high!

Source: Fortune, S&P, and others

The average life span of a Multinational Fortune 500 firm is around 45 years

1/3rd of the Fortune 500 listed in 1970, had disappeared by 1983 – acquired, merged or broken to pieces.

Out of the top Fortune 25 in 2010, only 18 remained from the year 2000 and only 6 from the year 1980.

Average life expectancy of all firms, regardless of size, in Japan and much of Europe, is only 12.5 years

Only 16% of firms listedon the 1957 S&P 500 remained on the 2007 list

Of the top 500 firms in the U.S. in 1980, only 202 had survived by the year 2000.

The firms on the original 1920s U.S. S&P 90 list stayed there for an average of 65 years. By 1998, the average tenure of a firm on the expanded S&P 500 was 10 years.

Only 5% of EU firms created from scratch since 1980 made it to the 1000 biggest EU firms by market cap. The equivalent number in U.S. in 22%.

Average Age of Global 1000 since 1980

Source: Factset, 2011

Average Age of Global 1000 since 1990

Source: Factset, 2011

Global 1000Percentage of Survivors Year to Year

18 years

12 years

14 years

12 years

Source: Factset, 2011

Global 1000 by country

Source: Factset, 2011

New Entrants into the Global 1000

Source: Factset, 2011

“Every organization – not just business – needs one core competence: …..”

- Peter Drucker

Innovation(in Innovation & Entrepreneurship, 1985)

Some empirical findings about Innovations…

Sources: Innosight; Amar Bhide; Barton

75% of all new products launched by established firms fail to make profit. Most are yanked/killed without shaping & developing them

More than 90% of allInnovations that weresuccessful started off inthe wrong direction

Given more money & time,firms are known to pursuethe wrong strategies for alonger period of time.

Most new innovations are started with access to no credit in good times and in bad

Most of the great businesses today started without a lot of VC funding or any bank lending until 5-6 years after they were up and running

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, 2005

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2010 Data of Spend vs. Performance

2008 McKinsey Study Highlights

Unanimous agreement (94%) that people and corporate culture are the most important drivers of innovation

Overall dissatisfaction with dismal outcomes

ofInnovation programs

CEOs and Executives are frustrated with their

efforts to jumpstart Innovation initiatives

Mimicking and Benchmarking bestpractices have been

ineffective

Resources and Processes that are applied are either

underutilized or not achieving scale to have a financial impact

Source: Leadership and Innovation, The McKinsey Quarterly, 2008 no. 1

Source: Booz Allen Hamilton Global Innovation 1000

Why is it so hard? Why are firms struggling?

What is Innovation?

Innovation = Left + Right

Error #1

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Scissor orEastern Cut-off

Straddle

Western Roll

Fosbury Flop

Radical Innovation

Process

Burton

(1920)

Original Fluid

(1936)

Current Fluid

(1940)

Raw Materials (gallons)

396 238 170

Capital (1939 $) 3.6 0.82 0.52

Labor (man hours)

1.61 0.09 0.02

Energy (million BTUs)

8.4 3.2 1.1

Inputs

Source: Mastering the Dynamics of Innovation, Uttberback

Performance Gains in Petroleum Cracking(inputs per 100 gallons of gasoline)

Innovation = Radical + Incremental

Time

Performance

RADICAL - unknown(Continuous

Experimentation)

INCREMENTAL - known(Continuous Improvement)

DO NOTHINGError #2

Innovation: New to the Industry

Source: Michelle Rogan, INSEAD, 2009

EXPLOIT

SAME OLD CATCH UP

New to Firm?

Newto

Industry?

No

Yes

No Yes

CREATE

Error #3

Innovation: Is a Choice & Overvalued

Source: Oded Shenkar

Error #4

We are our words!

I + D + i

Error #5

i = I + D

Innovation is a Discipline.

Unconscious Incompetence

Conscious Incompetence

Conscious Competence

Unconscious Competence

Knowledge

Practice

Discipline

Error #6

Innovation = Long + Long

• Alice: – Would you tell me, please, which

way I ought to go from here? • Cheshire Cat:

– "That depends a good deal on where you want to get to.”

• Alice:– "I don't much care where…”

• Cheshire Cat: – "Then it doesn't matter which

way you go.”• Alice:

– “…so long as I get somewhere.”• Cheshire Cat:

– “Oh, you’re sure to do that, if you only walk long enough.”

46 Source: Prof. Thornberry

Lewis Carroll’s Alice in Wonderland

Error #7

Questions & Issues