Corporate America - Designed to Fail? (Part 1)
Posted on October 26, 2008
Filed Under Innovation
Recently, I was honored with the opportunity to give a talk to Chuck House’s class, The Secret Sauce of Innovation, at Stanford. Although a small class, Chuck has a very dynamic class - I enjoyed the interaction very much.
Chuck talked about how the innovation model at HP has changed over the years. The discussion turned to whether large industrial research labs are still relevant in today’s Corporate America where most companies do not have the patience to invest in long term research, but rather rely on acquisitions or the so called “Fast Follower” tactic. Companies like Cisco and Apple succeeded not because of their abilities to invent, but their abilities to innovate - packaging existing technologies invented elsewhere into products that their customer wants - faster and better than their competitors.
The question then is: Is there something wrong with this? Well, I think there is! First, let’s look at some troubling signs…
Lifespan of Large Companies
In his book Innovation: Five Disciplines for Creating What Customer Wants, Dr. Carlson presented interesting statistics about the lifespan of large companies. In the beginning of the century, the average lifespan of a S&P 500 company was between 60-100 years. Today, the average lifespan has dropped to less than 20!
The statistics is not more encouraging in the rest of the world. In a recent study by Ellen de Rooij of the Stratix Group in Amesterdam, the avergae lifespan of companies in Japan and Europe is only 12.5 years! (See this Business Week article: The Living Company)
Rate of Technology Adoptions
Just as the lifespan for large companies is shortening dramatically, so is the rate of technology adoption. Is this a coincident? Here is a chart I got form my friend Moses Ma of Next Gen Ventures:
This chart clearly shows that technologies introduced in the beginning of this century, such as automobile and telephone, took well over 75 years to gain 50% penetration. But newer technologies such as PCs and Cellulars phones are reaching the same penetration point in 1/3 the time.
If you look at the “Digital Economy”, the statistics is even more startling. Computing power is doubling about every 18 months, communications bandwidth doubles every 9 months, and storage power doubles every 12 months. This exponential growth of technology results in a 95-97% reduction of computing and networking cost every ten years!
Serendipitous Nature of Breakthrough Invention (And the decline of Corporate Research Labs)
One thing I noticed when studying various case studies of technology disruptions, is that breakthrough inventions tend to happen unexpectedly and is not something you can easily plan. In fact, the more planning or more directed your research efforts are, the more incremental the results tend to be. Directed Researches tend to be very good at solving specific problems, while the Autonomous Research tend to produce the big breakthroughs.
In the old days, say half a century ago, it was probably OK for a company to come up with one or two breakthrough inventions say every 10-20 years, and it should be enough to provide enough “cash cows” for a company to thrive in the long run. Take a phone company as an example, just look at how long that industry transition from analog to digital, and from digital to IP.
Now with the technology change rate mentioned above, that would mean that a company now needs to have a breakthrough invention every 1-2 years in order to survive!
So, when the world become much more competitive and the pressure mounts for companies to keep producing disruptive technologies faster, what do the CEOs do? The natural tendency is to put much more pressure to the research labs to produce more breakthroughs faster. And what we already learned is that the more prescriptive you are to research efforts, the more incremental the results are. In other words, the harder you push research teams to produce short term results, the less breakthroughs they are going to produce. That’s logical, right? And then the next logical cause-and-effect, is that CEOs become less and less patience with long term research, and begin to rely on acquisitions or use “Fast Follower” tactics.
The more competitive a market, the less incline are the CEOs to spend money on organic research. This is evidence in the decline of classical research labs. Just look at the continuous scaling down of Bell Labs, spinning off of Xerox’s PARC, etc.
What’s Wrong with being “Fast Followers”?
Let’s look at the US Telecom industry as an example. The Telecom Act of 1996 was supposed to introduce competition in Local Exchange. With disruptive technologies such as Internet Protocols, DSL, Fiber & Ethernet to the Permise, a new crop of Competitive Local Exchange Carriers (CLECs) emerged to compete with the Incubant Carriers (ILECs). The CLECs were supposed to bring exciting broadband services to the mass, cheaper, faster, better, and with a whole slew of exciting value added services such as IP voice and TVs. We all thought that the ILECs were going the way of dinosaurs. Well, it turned out that the ILECs played the perfect “Follower” game. In fact, in most cases, they didn’t even have to be Fast Followers. The ILECs played the legal and political games perfectly. Remembered that the CLECs had to hire army of lawyers to negotiate with the ILECs for CO access? Remembered the ILECs lobbying federal and local governments, and even threatened to withhold fiber network upgrades if the government support the CLECs? Anyone remember the Utah Utopia Fiber-To-The-Home project?In short, the ILECs got really good at making life difficult for the CLECs, and at the same time offering “look-alike” service to their customers. And when the “Telecom Winter” set in and the CLECs started dropping like flies, many of the innovative broadband service deployments promied by the CLEC actually got slowed down or canceled, since the competitive pressure is not there anymore.
Long story short, what is the NET IMPACT of this to the USA? Despite the USA inventing the Internet and most of its related technologies, we now rank 16th in the world in the latest Broadband Quality Score!
Fast Follower strategy is a Cop Out!
In short, I think the “Fast Followers” strategy is a “cop out”. It is about how large companies preserve themselves by stymieing innovation and competition, rather than creating genuine long term values to the world and to their customers. And in the end, if you are not creating values for your customers, you might win the day, but it will always comeback and bite you in your ass.
And from a country perspective, if we do not think through the right policies to encourage Corporate America to engage in genuine, long term value creation, then what we will see is that key industry segments will evolve to oligopolies. This is not only bad for the economy but ultimately severely decrease USA’s overall competitiveness in world standing.
I’d stop my “soap box” here. I think I’ll continue in Part 2 to discuss what’s wrong with relying on acquisition for growth, and why the Wall Street system is causing systematic failure in America corporations (and not just due to the credit crunch).
Comments
2 Responses to “Corporate America - Designed to Fail? (Part 1)”
Leave a Reply
-
About Paul
Paul is in charge of Nortel's Incubator and it's Open Innovation Labs. Before Nortel, Paul played leadership roles in large companies like HP, Bank of Montreal, a Silicon Valley 2001 IPO called Riverstone Networks, and ran his own $1M+ consulting business. Paul's current passion is in studying and practicing open innovation models, and unleashing hidden power of innovation that is embedded within many large and complex organizations.
I assume that you realize that what you have described is consistent with the expected consequences of approaching a technological singulariy? http://en.wikipedia.org/wiki/Technological_singularity
Roger:
Thanks for the Wiki link. I actually had the chart and was going to use it, but couldn’t find the source of it. Now you have found it for me.
Paul