Why Even Market Leaders Fail Eventually

In 2000, I stated that within 10 years Dell would lose the just captured world’s PC leader title. Asked to justify, I explained: “There is a factor that severely undermines any organization’s competitiveness. Dell’s unawareness of this issue and its destructive impact makes the company’s fall a matter of time.” In 6 years, Dell lost to HP, then to Acer, and never came back… Today, the problem remains unseen and unsolved, so the same result awaits any company – big or small, be it Google, Uber, Apple, or any startup unless… This article presents why the failure happens, and what must be changed to attain sustainable success.

Background Facts

Lifespan of the companyAccording to a study [1] by Innosight, the average lifespan of an S&P-500 member (Fig.1) shrank from 65 years in 1958 to 18 years in 2012. Wharton [2], Royal Dutch Shell [3], Corporate Executive Board [4], and other organizations’ studies report the same trend of decreasing span of leadership and growth stall. This global failure to sustain success made W. Chan Kim and Renee Mauborgne conclude [5] that “…permanently excellent industries and companies do not exist.

Innovation as a Solution

In this situation, innovation has become recognized as the engine of growth. Indeed, the analysis shows that innovative companies enjoy growth (Fig. 2); sometimes, even during tough economic times.

Unsurprisingly, an Accenture’s study [6] shows that 93% of the surveyed executives indicated that their companies’ long-term success depends on innovation. However, this betting has not changed the results, as innovation is risky!

According to Clayton Christensen (Harvard) and Michael Raynor (Deloitte), only 24% of innovation projects (Fig. 3) lead to profit [7], and just 1% of innovations create financial growth – Frost & Sullivan [8].

This universal failure to sustain success/growth has an unsettling aspect. Why do the corporate leaders and experts who know what success is continuously failing to replicate it? This ubiquitous phenomenon must have a fundamental root cause. Without defining it, the failure risk is unacceptably high, so no company is immune, no executive/investor / stakeholder is safe…

The Root Cause of the Failure to Sustain Success

Why is innovation so risky? Why are the success odds so low?

Most people agree that innovation is an activity or, to define it more precisely, a process that consists of numerous stages (Figure 4); namely,

  1. Discovering market’s needs
  2. Formulating and selecting the problems that need to be solved to meet the needs
  3. Analyzing and solving the selected problems
  4. Evaluating the potential solutions, including revealing negative consequences emerging due to planned changes and solving them
  5. Forming the value proposition concept, the foundation for further development

This, of course, is followed by design (or development), manufacturing (or production), marketing and sales (or deployment), etc. These later phases present little interest for us, as we understand them well. Let’s focus only on what is known as the fuzzy front end because it is the essence of what innovation is all about – Value Proposition, a promise of Value that Customers either buy or reject.

The fact that innovation is a process provides us with an important insight. Based on the factual variability of results (i.e. alternating wins and failures), we can logically conclude that the process is poorly controlled. Indeed, just consider the very first step in this process. As the journey from the discovery of needs until a new product (service) launch takes time, what we truly need to know today (before we start design) is knowing the Customers’ future needs. Then, we have a high likelihood to achieve success. However, the Customers don’t (and can’t) know what they will want in the future, so talking to them does work, and nobody has the “crystal” ball…

With no University teaching a course on forecasting the Customers’ future needs (there is no such a discipline), let me be blunt, we guess… Similarly, no University teaches how to identify and choose the problems to solve, how to solve the chosen problems, how to foresee the consequences of our solutions, and how to form a Great Value Proposition. This proves that Innovation is not controlled.

Therefore, here is the key question: “What is the probability of creating the Right Value Proposition that will advantageously position our company to attain market success?

To stay on the “safe” side, let’s arbitrarily assign an unreasonably high 50% probability of success to identify the Customers’ future needs (by guessing), and the same 50% probability of success to each remaining stage of the innovation process. We have not yet accounted for development, production, marketing, sales… We have not even considered the rivals who also will come up with new offerings, but our probability of success is already .5*.5*.5*.5*.5 ≈ 3%! If we assign 40% to each stage (also unrealistic number), the probability of winning is 1%, which is consistent with the Frost & Sullivan’s data [8].

When one bets on a color playing roulette in a casino, the probability of winning is about 48%, and the player still loses eventually, as the power of mathematics always prevails. Having the probability of fostering growth under 1%, which is 4,800% lower than during gambling against a casino (Figure 6), why are we surprised that we cannot replicate success? It is virtually impossible to win the “lottery” sequentially under these prohibitive odds; e.g. successively creating five winning generations of a product has the odds of 1 out of 10,000,000,000. That is why my “illogical” prediction worked in 2000, works today, and will ever work in the future regardless of which company it relates to as long as the overall process (the “game rules”) remains the same. Today, based on the factual data, the process is designed to produce … a failure, and it is a robust and effective “machine”, with success being an aberration!

Key ‘Take-Away’ Thoughts

  1. Since the results that we seek are not guaranteed, the true nature of competitive advantage is in having a greater probability of success than the competitors do. Achieving the reversal of success odds (above 50%), thereby becoming the proverbial “House” (casino) while leaving the role of “Players” to the rivals who bet against the House, constitutes the decisive competitive advantage!
  2. Conversely, today’s inability to control the phase of innovation leads to the prohibitively low (<1%) probability of growth creation. Under these odds, no company can repeat its success year after year. The inability to control the process of innovation is the ROOT CAUSE behind the universal phenomenon of growth stall, financial losses, and eventual demise of most companies.
  3. Gaining control over the phase of innovation is impossible without solving the key challenge of reliable prediction of the Customers’ future needs, which is the first and most important step in the process of competition.

In the next issues of the newsletter, we will present a reliable and proven solution to the key problem responsible for the failure to sustain success – our inability to predict the future trends, including the Customers’ future needs.

I sincerely appreciate your thoughts and comments!

Thank you for reading!

References:

  1. Innosight, Creative Destruction Whips through Corporate America, 2012; https://www.innosight.com/wp-content/uploads/2016/08/creative-destruction-whips-through-corporate-america_final2015.pdf – Retrieved on 02/18/2017
  2. Knowledge at Wharton, Running Faster, Falling Behind: John Hagel III on How American Business Can Catch Up, 2010; http://knowledge.wharton.upenn.edu/article/running-faster-falling-behind-john-hagel-iii-on-how-american-business-can-catch-up/ – Retrieved on 02/18/2017
  3. Arie de Geus, The Living Company, published by Harvard Business School Press, April 2002; ISBN: 978-1578518203
  4. Matthew S. Olson, Derek van Bever, The Stall Points, published by Yale University Press, April 2008, ISBN: 978-0300136876
  5. W. Chan Kim, Renee Mauborgne, Blue Ocean Strategy, published by Harvard Business School Press, Boston, 2005), ISBN 1-59139-619-0.
  6. Accenture, Why “Low Risk” Innovation Is Costly, 2012, http://www.innovacion.cl/wp-content/uploads/2013/05/Accenture-Why-Low-Risk-Innovation-Costly.pdf – Retrieved on 02/19/2017
  7. Clayton M. Christensen, Michael E. Raynor, The Innovator’s Solution: Creating and Sustaining Successful Growth, Harvard Business Review Press, 2013, ISBN-13: 978-1422196571
  8. Frost & Sullivan, Growth Process Toolkit, 2010, www.frost.com/prod/servlet/cpo/178024303 – Retrieved on 02/19/2017

 

Greg Yezersky is the creator of the General Theory of Innovation (GTI) . Greg has been in the business of innovation since 1983 providing consulting services for many Fortune 500 companies. He has taught GTI and its applications globally in both commercial and academic settings. Mr. Yezersky is also a renowned TRIZ expert (certified in 1988 by Genrich Altshuller, the creator of TRIZ) with more than 25 years of experience. He has also created and led the Institute of Professional Innovators.

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