Selling At Retail: 3 Things That Can Stall Innovation (And How To Overcome Them)
Posted by Edgar Davis on March 14, 2015. 0 Comments
Everyone wants to innovate these days, but it wasn’t always that way. Google’s Ngram shows that, although the term was commonly used in the 19th century, it didn’t become popular in the 20th century until the early 1970’s. Before that, managers valued tradition over novelty.
Now, however, things move way too fast to stand still. Globalization and technology have abolished barriers to entry in most industries and, since 1960, the average lifespan on the S&P 500 has fallen from 60 years to less than 20. If you don’t innovate, somebody else will.
Yet creating real change takes more than happy talk. Mantras and buzzwords are no substitute for solving real problems. All too often, we become so enamored with a new idea that we don’t do the hard work of making real change happen and nascent innovations fail to make an impact. Here are three barriers to innovation and how you can overcome them.
Innovation Barrier #1: New Innovations Require New Strategies
In War Made New, historian Max Boot makes the point that first movers often fail to capitalize on their innovations. In the American Civil War, for example, the Union didn’t make use of repeating rifles because Lincoln’s Chief of Ordnance, General James Ripley, feared that they would encourage soldiers to waste bullets.
In a similar vein, Great Britain was the first country to use tanks and airplanes in World War I, but it was the Germans that perfected them in the Blitzkrieg of 1939. The British also built the first digital computer, but destroyed it after the war. Today, the US dominates the computer industry, while only one major information technology company is based in the UK.
The problem, as Brynjolfsson and McAfee explain in The Second Machine Age, is that new technologies require us to do things differently. When electricity was first installed in factories, it provided little benefit. In a steam driven plant, machines had to be organized around the power source, but electricity allowed managers to design around workflow. Until they understood that shift (about 30 years later), the new technology did them little good.
Generals not equipping their soldiers in order to save bullets. Destroying advanced technology in order to keep it secret. Not realizing that your factory no longer has a steam turbine in the center of it. It all seems ridiculous now, but it didn’t then. Just like how in a decade from now we’ll laugh that nobody knew what to do with Google Glass.
Innovation Barrier #2: Your Network Is Embedded In An Older Model
At this point, most people are aware of the power of network effects. Everybody uses Microsoft Office because everyone else uses it. If you want to sell something, you put it on eBay because that’s where the buyers are (and they’re there because that’s where the sellers are). Apple’s iOS is popular, in part, because everyone wants to develop for it.
However, although network effects can propel a product forward, they can also hold a new innovation back. Networks are inherently stable, more so in fact, than hierarchies. Leaders can’t just mandate change and instantly shift gears, because a mass of interdependent relationships tend to support the status quo.
Consider the case of Blockbuster. Faced with a growing threat from Netflix and Redbox, CEO John Antioco developed a strategy to meet it. He recruited a top notch digital team, dropped late fees and introduced a hybrid offer that combined the greater selection that the Internet made possible with the convenience of retail locations.
Yet internally, his organization balked. Franchisees were invested in the old model and suspicious of the online initiative. Operations people were wedded to legacy systems, customers liked being able to run to the store and rent movies on a whim and investors were wary of the massive investments being funneled to the new model.
In the end, Antioco was fired, his successor reinstated late fees and abandoned the online initiative. Blockbuster went bankrupt in 2010.
Barrier #3: The Need To Maintain Margins
Investors today talk a lot about the “reach for yield.” With interest rates low, there is significant pressure to search for riskier investments that provide a better return. Yet taking on more risk can be dangerous and one significant default can wipe out years worth of profits. So the reach for yield can be self defeating.
Managers face a similar dilemma in maintaining margins. They delay investment to maintain cash flow, rush into sexy new markets that offer greater yield (usually at the same time that everyone else is doing the same thing) and focus on established markets with predictable returns.
That’s the essence of the profit paradox. An excessive focus on profits is almost guaranteed to reduce profitability over the long haul. As Tim Kastelle points out, financial analysis is necessarily backward looking. It can take into account certain assumptions about the future, but it doesn’t really tell you how things will change.
Let Your Mission Drive Your Strategy
The truth is that innovation can only succeed when it’s focused on a particular mission. You don’t win a war by saving bullets, just like you can’t convince your organization to adopt change for change’s sake. Every business needs to earn a profit, but that’s not the purpose of the enterprise.
And that’s why much of the happy talk about innovation is all for naught. True innovators are not looking just to create new things, they are trying to solve real problems. If you know where you want to go, then it’s that much easier to figure out how you’re going to get there.
As Mark Zuckerberg put it, “We don’t build services to make money; we make money to build better services.” In much the same way, Sam Walton forsook profits for years to invest heavily in logistics systems, because he believed that was the best way to attain his mission of offering his customers the lowest price.
So maybe we should be talking less about innovation and more about getting the job done.