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Innovation and Corporations – An unchartered journey

“You can’t solve a problem on the same level that it was created. You have to rise above it to the next level” – Albert Einstein

· Innovation,Failure,Corporates

Every single, large corporations were once small outfits, seeking their own route to success. While some do succeed and grew to a size with sufficient clout and reached the “top”, many failed to do so. Those that succeed know of the importance of innovation and they continuously try to create value to stay relevant amidst the tough competition on a daily basis.

It is easier said than done.

While there are remarkable examples of companies like Amazon, Apple, and Google that continue to innovate even while being a market leader, there are those (Blockbuster, Myspace, Kodax. ToyRus) that failed, dwindle, and got forgotten over time. Let us look at a few reasons for this phenomenon.

Structural-inertia

After establishing a proven business model and scaling it into a profitable enterprise, there is a lack of incentive to change that particular model/process. “Maintain the status quo” is a common theme in businesses. After all, why change when it is so profitable? Even in the occasion when change happens, it is most commonly limited to only optimizing operations and increasing efficiency.

Secondly, while being in a parochialistic view, companies often fail to notice (or refuse to notice) that something new is displacing it. They fall into a psychological “trap” where they are fixated on what made them successful.

The problem then lies in the fact that there is a limit in which a corporation can grow with its current business model, and to break through that limit requires a different approach and “creative thinking” to grow otherwise.

A classic example is that of Kodak – they were the premier in film photography and were highly regarded both by professionals and the general public alike. During most of the 20th century, Kodak dominates the market and is the leader in photographic film. As technology progresses, Kodak began innovating into digital photography but decided to drop it as it might encroach on its businesses in the film market. Losses start to creep in and Kodak went into bankruptcy and subsequently lost most of its intellectual property and businesses to liquidate themselves.

Loss aversion + management

Loss aversion refers to people’s tendency to prefer avoiding losses to acquiring equivalent gains; they tend to place a higher value on what they own rather than an identical good that they do not have. For example, it is better to not lose $5 than to find $5.

This leads to most people being more risk-adverse than what is statistically correct, where the outcome is technically at 50% chance of finding $5 and 50% chance of losing $5.

This is an issue that is usually seen in the middle management of the company, whom, have a misguided (but well meant) belief that they are to protect the interest of the companies (and their jobs) from risky decisions that could end up failing and cost money and damaging the company and their reputation. While well-intentioned at times, this has led to a greater problem by stifling much-needed ideas and risky endeavors.

Interestingly, said middle management usually have a penchant to suffer from myopic loss aversion whereby there is an unusual concentrated focus on short-term gains/losses instead of focusing on a long-term strategic goal, leading them to react too negatively to recent losses. This runs contrary to a “lifespan” of innovation where it takes months, or even years to achieve enough traction before success is even remotely achievable, which results in most projects to fail after a few short months.

As Drew Boyd, co-author of Inside the Box would put it, “So I tell companies, they don’t have an innovation problem. They (companies) have an employee perception problem. My best guess is that employees get frustrated when they see their company kill a viable project in favor of other priorities. It wears them down.” Source: Ideatovalue

Strategic Failure

Even when drafting a plan on change and innovation, there can be failures as well. One common fault due to bad strategic planning is to draft “innovation” concept based on the marketplace of today. To rehash the quote by Albert Einstein, you cannot solve a problem based on the same level where it is created. To innovate is to think ahead, and it is critical to strategize and predict future market trends and conditions.

An extremely famous example would be that of Borders. Borders at one point in time was the largest retailer and sale of books. Yet they made many strategic mistakes where the most glaring of all is the failure of anticipating the power of the Internet. After failing to launch its own website and jumping on to the e-book bandwagon in 1998, Borders instead outsourced to this distribution channel to rival Amazon and the deal continued from 2001 to 2007. It was a wasted 7 years lagging behind its major rival in the book business.

Another noteworthy point to note was the diversification towards CD and DVDs when the market at the time was already moving towards the Internet-era. Borders lost hundreds of millions of dollars when popular file-sharing networks, iTunes and Netflix took over and sealed Border’s fate.

Charting the path ahead

Companies that fail to embrace change and re-organize themselves with new market innovation will sink eventually, no matter how successful the company once was. While learning from successes is inspiring and valuable insights can be gained, dangerous long-term thoughts such as forming a prejudice set of biases towards a certain “framework” or “step-by-step guide to success” might set in. Studying from failures, therefore, allow us to see the reason why certain businesses sink and to learn, avoid, improvise and overcome them.

By the XNode Team, (Nathaniel Oh)

contact@thexnode.com

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