Innovation: Learning from Success and Failure

The Innovation Process:Learning From Success and Failure

Chunka MuiBillionDollarLessons.com

mailto:[email protected]

mailto:[email protected]

© 2008 Chunka Mui | http://www.chunkamui.com

© 2008 Chunka Mui | http://www.chunkamui.com

© 2008 Chunka Mui | http://www.BillionDollarLessons.com

Outline

1. Innovation Imperative

2. Learning from Failure

3. Innovation Process

http://www.BillionDollarLessons.com


We tend to overestimate technology in the short term and underestimate it in the long

term.

– Roy Amara





Technology improvesexponentially

Organizations changeincrementally

Killer Appopportunities

Change

Time

See “Unleashing the Killer App” (Harvard Business School Press, 1998)



The future is here,it’s just not evenly distributed.

– William Gibson





Text




Total Cost

PriceTransaction Costs

Search costs – buyers and sellers finding each otherInformation costs – Understanding capabilities and needsBargaining costs – Setting terms of a sale or contractDecision costs – Evaluating terms, quality, worthinessPolicing costs – Ensuring terms of sale are metEnforcement costs – Ensuring unsatisfactory terms are remedied, including litigation

See “Unleashing the Killer App” (Harvard Business School Press, 1998)

Economics




Text

A Killer App that feeds on Transaction Costs




0

75

150

225

300

Advertising Dollars

Traditional Online

GoogleNews Corp

NY Times

2007 Revenue $16.6 B $ 28.7 B $3.2 B

EBITD margin 36.5% 19.0% 13.7%

P/EMultiple

41.2 10.6 13.6

Market Value $184 B $46.7 B $2.5 B

Sources: Advertising Age, Google Finance




Raising the Benchmarks for the Offline World

Lessons1. Use “search” as the

springboard2. Personalize and target with

recommendations3. Enhance confidence with

customer reviews4. Cement satisfaction with

flawless fulfillment5. Build buzz by sharing the love6. Enlist customers as sales force7. Expand selection through

partnerships

AMZN

2007 Revenue $14.8 B

EBITD margin 6.2%

P/EMultiple

68.8

Market Value $34.1 B

See “Amazon Raises the Benchmarks for the Off-line World.” Amazon e-Doc. March 2005.




Smart Products, Connected Customers and a Closed Information Loop




Social Networks

MySpace Facebook

February 2008Unique Visitors (M)

68 32.4

Ave. Daily Visitors (M) 17.7 8.6

Minutes per Visitor 242 161

Sources: Comscore Networks




Mass Collaboration

• 75K active contributors

• 2.4M+ articles in English

• 10.7M+ articles in 250+ languages

• 50M+ unique visitors per month

• Top 10 web site




Communities of Doctors: Sermo




Communities of Patients: PatientsLikeMe.com

“an incendiary force in the health-care industry.”

--The New York Times




Changing Service Models




Personalized Medicine




Questions

• Under what scenarios might the nature of competition change dramatically? For the better? For the worse?

• How might you radically redesign your core product?

• How might you “close the loop” with partners and patients to enhance satisfaction and build a lasting, valuable relationship?

• How might you leverage mass collaboration and user generated content to strengthen your brand, enhance customer experience, and build market share?




Outline







An Exercise in Focus


An Exercise in Change Perception

THE FINDINGS:

46% of failures could have been avoided

Most were caused by flawed strategies,not inept execution or exogenous factors

THE DATA: STUDY OF 750 MAJOR U.S. BUSINESS FAILURES, INVOLVING BILLIONS IN LOSSES FROM WRITE-OFFS, DISCONTINUED OPERATIONS, AND

BANKRUPTCIES, 1981-2005




Expanding into adjacent markets is the easiest way to grow.*

– Jack Welch

* For example, by selling new products to existing customers or existing products to new customers, or via new channels.





Misjudged Adjacencies

ExampleLaidlaw’s move into ambulance services

StrategyApply logistics expertise from school-bus operations to health care transport

Stumbling pointsLacked expertise in regulation and negotiating health-care payments

Result$1.8B writeoff



“Laidlaw realized too late that ambulances are a health-care business, with complex

regulatory issues, not a transport business.”

– John Grainger,Laidlaw CEO





Adjacencies: Red Flags

1. Fleeing from the core

2. Lack of expertise

3. Overestimating the core’s strengths

4. The fickle customer




Seven Failure Patterns

1. Illusions of Synergy

2. Faulty Financial Engineering: Taking a shortcut through the numbers

3. Deflated Rollups: Buying a string of rock bands to form an orchestra

4. Staying the misguided course: Threat? What threat?

5. Misjudged Adjacencies: The grass isn’t always greater.

6. Fumbling technology: Riding the wrong technology curve

7. Consolidation blues: Doubling down on a bad hand




Synergy Mirage

ExampleUnum’s merger with Provident

StrategyCombine two disability insurers and cross-sell to each other’s customers

Stumbling pointsIncompatible customers, sales models, and information systems

Result50%+ drop in market value




Faulty Financial Engineering

ExampleGreen Tree Financial

StrategyGrow by aggressively selling long-term mortgages on trailer homes

Stumbling pointsNo incentive to qualify buyers because profits came from origination and securitization; accounting used unrealistic assumptions about defaults

Result$3B in write-offs and bankruptcy for parent company (Conseco Financial)




Deflated Rollups

ExampleMedpartners’ massive rollup of small physician practices in 1990s

StrategyTake administrative load off doctors, gain efficiency through scale and better processes

Stumbling pointsDisparate IT systems; physician resistance to common practices

Result$2B+ in losses in 1997-98; exited practice management business




Stubbornly Staying the Course

ExampleEastman Kodak

StrategyStick with high-margin traditional photo film and processes

Stumbling pointsLow-margin digital technology replaced film and prints

Result75% drop in market value and two-thirds reduction in company workforce




“But it was filmless photography, so management’s reaction was, ‘that’s cute — but don’t tell anyone about it.’ ”

Steve Sasson, Kodak Engineer Inventor of the Digital Camera

Source: New York Times, 5/2/2008




Outline






Innovation Process

Contrary to popular belief, “flashes of genius” are uncommonly rare. Innovation

begins with the analysis of opportunities. The search must be organized, and must be done

on a regular, systematic basis.

– Peter Drucker




Investment Categories

Stay In Business Return on Investment Option Creating

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Parity

Disadvantage

RequiredROI

OptionsEnabling

The Challenge of Too Many Ideas






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Parity

Disadvantage

Note: Size of circle is proportional to amount

of investment

Underperformer




Commodity



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Parity

Disadvantage


of investment




Retooling



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Disadvantage


of investment




Frenzy



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Market Leader



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Decisions of the kind the executive has to make ... are made well only if based on conflicting views, the dialogue between

different points of view, the choice between different judgements.

– Peter Drucker




© The New Yorker Collection 1979 Henry Martin from cartoonbank.com. All Rights Reserved.




Three Models

Alfred P. Sloan Catholic ChurchAncient Persians




Avoiding the Same Mistakes

• Is it a realistic strategy for long term success?

• What can we learn from history?

• Have vital information and divergent viewpoints reached decision makers?

• Have we assessed the true advantages--and liabilities--that come with scale?

• Have we considered all our options?

• Would you personally bet on it?

Empower Internal Devil’s Advocates to Ask the Tough Questions




The Best Defense

• Transparent, even to the Board

• Led by a trusted outsider

• Offers fresh perspectives

• Focuses on facts, not emotion or intuition

• Delivers questions, not answers

An independent devil’s advocate review




Epilogue

• Looking for the best option, not perfection

• There is no win to guarantee success

• Business is a contact sport

• Ask the tough questions

• Make the strategy stronger or identify fatal flaws, whichever needs to be the case



The Future

The best way to predict the future is to invent it.

– Alan Kay





Chunka Mui’s perspectives have been shaped by more than 25 years of research, consulting, management and entrepreneurship. He is the co-author of the best-selling Unleashing the Killer App, Digital Strategies for Market Dominance (Harvard Business School Press, 1998). The Wall Street Journal recently named the book one of the five best books on business and the Internet. His new book, Billion-Dollar Lessons, What You Can Learn from the Most Inexcusable Business Failures of the Last 25 Years will be released in September 2008 by Portfolio, an imprint of Penguin USA. A companion article, Seven Ways to Fail Big, will be published in the September 2008 issue of the Harvard Business Review.

Chunka is an independent business advisor. He is also a fellow with Diamond Management and Technology Consultants, a global consulting firm headquartered in Chicago. He holds a B.S. in electrical engineering and computer science from MIT.

Biography

