GUEST AUTHOR BLOG by Gerard J. Tellis, author of "Unrelenting Innovation: How to Build a Culture for Market Dominance."
Today's companies face a paradox.
The creation of a radical innovation brings with it success, market dominance, and profits. But that very success generates complacency and arrogance, which blind the firm to the next big innovation.
Indeed, firms are in greatest danger of failing when they are at the peak of their success.
My coauthors and I call this the incumbent's curse – cursed by one's own success.
For example, consider Kodak, Sony, Hewlett Packard , or Research in Motion . These firms recently lost a massive fraction of their market cap by ignoring radical innovations, in digital photography, digital music, tablets, and smartphones, respectively. Ironically, these innovations were not merely external; they emerged deep within the firms' very own organizations.
What causes the incumbent's curse?
We have put it down to three related factors.
"To succeed, firms need a culture of unrelenting innovation; such a culture embraces risk, focuses on the future, and is willing to cannibalize its successful products."
First, a focus on the present: Kodak developed most of the patents of the digital age, yet went bankrupt when digital photography took off. It was immersed in its old technology of analog photography (film).
Second, a reluctance to cannibalize successful products: Sony developed an MP3 player before the iPod but tied that product in all sorts of wraps for fear it would cannibalize royalties from its music and movie business.
Third, an aversion to risky innovations: HP had an e-book five years before the iPad, yet failed to commercialize it. E-books evolved into tablets that have eroded HPs computer and laptop businesses. At the time, e-books seemed a small risky innovation compared to the huge, secure computer and laptop businesses. In these and many other examples, focus on the present, reluctance to cannibalize successful products or risk aversion blinded a company to the promise of innovations.
How can a company break the incumbent's curse? We have identified three simple but challenging practices to do so.
First, offer incentives for enterprise. Research suggests that many firms have perverse incentives: small rewards for success with big penalties for failure. In contrast incentives for enterprise must consist of generous rewards for success and weak penalties for failure. Many innovations fail. The trick is to learn from failures in order to hit on the successful innovation that creates the next big mass market. So a culture of forgiving and learning from failures is essential.
Second, empower innovation champions. Often employees have great ideas for innovations from their deep experience with research, manufacturing, or customers. The innovator is within. One of the great tragedies that can befall a firm is to lose its innovators who go elsewhere to introduce radical innovations. Recent examples include Tony Fadell who left Philips to co-champion the iPod at Apple and Roger Newton who left Pfizer after co-developing one of the most profitable drugs ever, Lipitor. To stem such losses, firms need to empower the talent within by offering incentives for enterprise and fostering internal competition.
Third, foster internal competition to bring the external market inside. The market has thousands of individuals who are hungry to develop the next big innovation. Firms need to bring that energy within. A good starting point is its own employees. Normally, employees love security. However, innovators love adventure, which comes with competition for new ideas, products, or processes. The firm needs to transform its employees into innovators. It needs to create a culture where individuals or teams compete with each other in developing ideas, contesting research funds, bringing out prototypes, testing innovations, or commercializing innovations. This culture enables innovations to percolate up from all part of the organization. Such a large number and high variance of innovations is more likely to generate a successful hit.
(Read More: 10 Most Stressful Jobs of 2013)
Like Icarus of Greek mythology, a firm's worst enemy is itself: success with past innovations leads it to ignore, stifle, or ridicule the next big innovation.
To succeed, firms need a culture of unrelenting innovation; such a culture embraces risk, focuses on the future, and is willing to cannibalize its successful products. This culture can be engendered by three practices: offering incentives for enterprise, empowering innovation champions, and fostering internal competition.
Both enemy and power are within.
(Read More: Publishers Launch Online Site, Bookish )
Gerard J. Tellis is Professor and Neely Chair of American Enterprise, and Director of the Center for Global Innovation at the USC Marshall School of Business. He is the author of "Unrelenting Innovation: How to Build a Culture for Market Dominance," part of the Warren-Bennis Leadership Series.