How many successful companies miss out on ultra gigantic opportunities in their industry?
ATT had developed some early technology for mobile communications in the 1940s. (Yes, the 1940s).
It was difficult to bring to market because of technical hurdles.
Rather than continue to research and innovate to overcome these difficulties, ATT gave up and other companies took the market later.
Motorola developed some of the first cell phones but also was slow to innovate. They played catch up, succeded with some innovation with the RAZR yet completely lost the market on the death of an influential marketing leader.
Xerox was a world leader in copier technology. Their PARC division in what is now called Silicon Valley invented the first personal computer. Including the mouse and point-and-click software interface. Steve Jobs and Bill Gates took what Xerox started and the rest is history.
Kodak used to be the world leader in film. They invented a 1.4-megapixel camera sensor in 1986. But the company viewed itself as a chemical technology company. And selling all that film was so profitable! How could you market anything threatening the cash cow?
Some of the greatest fortunes and business enterprises ever created emerged out of the technologies that other companies developed. How did they lose their first-mover advantage? How did they blow it?
There are two basic problems that large companies must overcome to successfully commercialize earth-changing products in the same industry. They are the Cannibalization and the Competency Trap.
Cannibalization is where the sales of one product take away sales and profits of another product in the same company. If you are the world leader in selling chemical film then digital photography is a mortal danger. Developing and funding a product that takes away sales from the core business – the cash cow – may seem suicidal.
Most senior managers in corporations are compensated based on short-term earnings/sales. The length of time they remain in a particular company is not long. Maybe a few years. These managers are therefore incentivized to do whatever it takes to maximize earnings/sales during their time at the company so they can leave with a larger bank balance.
Any person in that circumstance will avoid anything that will possibly reduce sales of the sure-thing cash cow. Such as the chemical film situation at Kodak.
The result is an under-investment in innovation and a focus on cost-cutting. I’ve seen this many times in my career. Perhaps the best example of that is Kraft, where I worked for a number of years. By the way, Kraft doesn’t really exist in the same way and with the same market power it had when I was there. The remaining parts are a shell of its former self after numerous management teams that had somewhat short tenures dissected and reorganized the company.
The Competency Trap is a little harder to understand. This is when a company’s entrenched expertise in a technology or a market destroys its ability to innovate in an evolving market the is characterized by much uncertainty.
A company can be blinded by its past success. This blindness can not only be in the newly evolving market but also its processes and operating systems. Instead of innovating and adapting, they begin to slowly rot away.
Every company has two directives – innovate to find new opportunities and exploit the successful innovation of the past. Successful firms are able to do both. There aren’t many of those.
Another way to put it is that the Competency Trap occurs when past successes dominate a company’s innovation and are considered more important. The company loses its ability to innovate.
You can tell when this is happening and why. Not only are innovation efforts defunded, but also it is less ‘cool’ to be part of the innovation effort. It can even be quite risky to an employee’s career to work on these new products. I saw that repeatedly at Kraft and in other companies.
Corporate politics all play a role here too – no one wants to see the product or business they are working on diminished or even fail. It is harming to the employee’s internal reputation. Job security is a fear.
Rigid corporate cultures and hierarchy are another red flag that may also contribute to the problem. Efficient systems allow companies to cut costs which is a good thing. But when adherence to these cost-cutting systems is more important than new revenue streams – consider that a huge red flag.
Company cultures are a weird thing. The ways of thinking and doing things can become so ingrained that employees don’t realize they have been indoctrinated. Yet they have been. Stagnation often follows.
These two negative biases can also apply to individuals in their careers and even their personal lives.
How to overcome all this and be able to exploit previous success while remaining innovative? Each situation is different and there are several possible strategies. Recognizing the problem and cultural/political landscape within your own company is the first step.
