Failed Corporate Innovation Is About Bad Execution Not Lack Of Insight

My friend and colleague Professor Michael Tushman from Harvard Business School has started his classes with the same chart for twenty-five years. It shows logos of famous brands that have either disappeared into history or survived only after having recovered from a tremendous shock.

Michael lingers over some of the names. EMI, a titan of recorded music; Polaroid, the maker of the first instant photography camera; Siebel Systems, the creator of customer relationship marketing software. Michael observes that “there are many differences across these firms, different sectors, different geographies, different time periods, but despite these many differences, there are several commonalities. What would you say are the most important?”

The audience typically offers three answers. They don’t see a threat coming. They see it but cannot believe it. Or, they see it, believe it, but cannot act.

Don’t see it coming

Why do the companies not see a threat coming; why are they blindsided? This is because instead of focusing on creating the future, they are busy defending an existing franchise, paying more attention to their own product performance than to changes in customer preferences. This is a persuasive argument. Large successful organizations often become forward-looking, selecting information that confirms a positive view of their market situation. This comes out in sentences like, “we have the dominant market share, our position is unassailable” or “we know our customers better than anyone, they expect us to bring them the latest innovations.”

This is an attractive answer as it reflects our experience – large corporates can be this arrogant – but also because we think it’s a problem we can fix. If we invest in startups, engage with universities, run new idea competitions, then we will have the insights that allows us to perceive future opportunity.

These are good, but inadequate activities, because they misunderstand the cause. Kodak and Polaroid were deeply aware of digital photography, the technology that killed them. Kodak made a major push in the mid-1990s to build new digital imaging businesses. Polaroid launched the world’s first mega pixel digital camera in 1993 and commercialized the technology for its use in healthcare. The Swiss were the first to invent the quartz movement that the Japanese later used to redefine the watch industry in the 1970s. And IBM deliberately gave Microsoft responsibility for operating system software in the creation of the personal computer. Firms rarely fail because they lack insight into future technologies and business models. They see it coming.

See it, but don’t believe it

The second explanation is that firms see the threat, but they do not believe it. My colleague Narendra Laljani, with whom I teach an executive education program at Strategic Innovation at Henley Business School, describes this phenomenon as the impact of “toxic assumptions.” The rapid fall of Nokia in mobile telephone handsets is a great example.

Nokia had the first web browser, camera, and touchscreen on a mobile device. They started an App Store and delivered email to the phone on the E90 Communicator. However, they treated the smartphone only as a niche within the overall handset market—and invested accordingly. Nokia saw the emergence of iPhone, six years after they themselves had launched a smartphone, but discounted its significance. “The iPhone is interesting. It’s very much a validation of what we’ve been doing,” said Rick Simonson, Nokia’s CFO in May 2007.

The “see it, but don’t believe it” explanation is a strong one. A company that builds a new venture or capability may still not grasp its implications and so fail to commit when it matters. However, this explanation does not satisfy Michael Tushman, because it does not account for firms that do commit significant resources to exploration of new markets and still fail. They see it, they believe it, but cannot act. This is the largest group in the research.

See it, believe it, but cannot act

GE is a classic example of this phenomenon. In 2012, the CEO of GE, Jeffrey Immelt, announced an ambition to make the company a “top 10 software company.” He believed that the future of industrial firms would be digital, and he wanted to get ahead of the curve. He launched GE Digital, a unit dedicated to building a cloud-based data platform to facilitate adoption of the “industrial internet of things.” 7 years later, Immelt was fired, the strategy defunded, GE dropped out of the Dow Jones and has since been broken up.

There are many reasons for GE’s decline, including bad acquisitions. However, when it comes to the failure of GE Digital, the series of organizational compromises imposed by the existing business was key to its demise. The unit had to operate within a matrix structure that depended on managers with “dotted line” responsibilities to the core business. It used KPIs based on revenues, rather than metrics that could tell the leadership if the new strategy was gaining traction. Besides, with those revenues counted to the core business, the unit had no P&L of its own. Immelt himself later wrote, in his book “Hot Seat,” that “industrial and digital had opposite norms (slow vs. fast, deliberate vs. agile, risk averse vs. risk taking).”

GE Digital’s failure did not have a single cause. It was a system failure. The leadership, capabilities, measurements, organization structure, and culture were aligned to deliver the existing industrial business, not the new digital one. In my book, with Tushman and Charles O’Reilly from Stanford, we call this set of factors the “silent killers” of innovation.(i) They intend to act. They try to commit to the future, but despite their best intentions, cannot do it. They saw it, they believed it, but could not act.

(i) I borrowed the term, Silent Killersfrom an article by Mike Beer and Russ Eisenstat that appeared in the MIT Sloan Management Review in 2000.