Better, Faster, Cheaper Is Not Innovation: Kodak and Microsoft


There is a big cry for innovation these days. Unfortunately, despite spending a lot of money on it, most innovation simply isn’t. And that’s why companies don’t grow.

The giant consulting firm Booz & Co. just completed its most recent survey on innovation. Like most analysts, they tried using R&D spending as yardstick for measuring innovation. Unfortunately, as a lot of us already knew, there is no correlation:

“There is no statistically significant relationship between financial performance and innovation spending, in terms of either total R&D dollars or R&D as a percentage of revenues. Many companies — notably, Apple — consistently underspend their peers on R&D investments while outperforming them on a broad range of measures of corporate success, such as revenue growth, profit growth, margins, and total shareholder return. Meanwhile, entire industries, such as pharmaceuticals, continue to devote relatively large shares of their resources to innovation, yet end up with much less to show for it than they — and their shareholders — might hope for.”

Far too often, companies spend most of their innovation dollars on making their products cheaper, operate better, faster or do more. Clayton Christensen pointed this out some 15 years ago in his groundbreaking book “The Innovator’s Dilemma” (HBS Press, 1997). Most R&D, in most industries, and for most companies, is spent trying to sustain an existing technology – not identify or develop a disruptive technology that would have far higher rates of return.

While this is easy to conceptualize, it is much harder to understand. Until we look at a storied company like Kodak – which has received a lot of news this last month.

Kodak invented amateur photography, and was rewarded with decades of profitable revenue growth as its string of cheap cameras, film products and photographic papers changed the way people thought about photographs. Kodak was the world leader in photographic film and paper sales, at great margins, and its value grew exponentially!

Of course, we all know what happened. Amateur photography went digital. No more film, and no more film developing. Even camera sales have disappeared as most folks simply use mobile phones.

But what most people don’t know is that Kodak invented digital photography!

Really! They were the first to create the technology, and the first to apply it. But they didn’t really market it, largely because of fears they would cannibalize their film sales. In an effort to defend & extend their old business, Kodak licensed digital photography patents to camera manufacturers, abandoned R&D in the product line and maintained its focus on on its core business. Kodak kept making amateur film better, faster and cheaper – until nobody cared any more.

Of course, Kodak wasn’t the first to fall into this trap. Xerox invented desktop publishing but let that market go to Apple, Wintel suppliers and HP printers as it worked diligently trying to defend & extend its copier business. With no click meter on the desktop publishing equipment, Xerox wasn’t sure how to make money with it. So they licensed it away.

DEC pretty much created and owned the CAD/CAM business before losing it to AutoCad. Sears created at home shopping with its catalogs, a market now dominated by Amazon. What’s your favorite story?

It’s a pattern we see a lot. And nowhere worse than at Microsoft.

Do you remember that Microsoft launched the Zune player at least as early as the iPod, but didn’t bother to develop the technology, or market, letting Apple take the lead in digital music and video devices? Did you remember that the Windows CE smartphone (built by HTC) beat the iPhone to market by years? But Microsoft didn’t really develop an app base, didn’t really invest in the smartphone technology or market – and let first RIM and later Apple run away with that market as well.

Now, several years too late Microsoft hopes its Nokia partnership will help it capture a piece of that market – despite its still rather apparent lack of an app base or breakthrough advantage.

Microsoft is a textbook example of over-investing in existing technology, in an effort to defend & extend an existing product line, to the point of “over-serving” customer needs. What new extensions do you want from your PC or office software?

Do you remember Clippy? That was the little paper clip that came up in Windows applications to help you do your job better. It annoyed everyone, and was disabled by everyone. A product development that nobody wanted, yet was created and marketed anyway. It didn’t sell any additional software products – but it did cost money. That’s defend & extend spending.

How much a company spends on innovation doesn’t matter, because what’s important is what the company spends on real breakthroughs rather than sustaining ideas. Microsoft spends a lot on Windows and Office – it doesn’t spend enough on breakthrough innovation for mobile products or games – non-PC innovations.

We are already well into the back end of the PC lifecycle. Today more bandwidth is consumed from mobile devices than PC laptops and desktops. Purchase rates of mobile devices are growing at double digits, while companies (and individuals) are curtailing PC purchases. But Microsoft missed the boat because it chose to defend & extend PCs years ago, rather than really try to develop the technology and markets for products like Zune and CE.

Just look at where Microsoft spends money today. It’s hottest innovation is Kinect. But that investment is dwarfed by spending on Skype – intended to extend PC life – and ads promoting the use of PC technologies for families this holiday season.

Unfortunately, there are almost no examples of companies that miss the transition to a new technology thriving.

Do you think Microsoft, after this long period of no value increase, is more likely to go up in value, or more likely to follow Kodak? Unfortunately, there are few companies that make the transition. But there have been thousands that have not. Companies that had very high market share, once made a lot of money, but fell into failure because they invested in better, faster, cheaper rather than innovation.

Creative Destruction Is Not A Management Philosophy - It Can Be Avoided Kodak, Hostess, Microsoft


“Creative Destruction” leapt into the popular lexicon last week.

A lot of excitement was generated when Mitt Romney said the words “I like to fire people.” I’m sure he wishes he could rephrase his comment, as he easily could have made his point about changing service providers without those words.

Nonetheless, the aftermath turned to a discussion of why Bain Capital has eliminated jobs while simultaneously creating some. A number of economists popped up saying that firms like Bain Capital are justified eliminating jobs because they are merely implementing “creative destruction.”

Although the leap is not obvious, the argument goes that businesses are made inefficient and unprofitable by new technologies or business processes – new creative solutions – destroying old businesses and the jobs. So buyers (like Bain Capital) of distressed businesses cannot “fix” the situation and have no choice but to close them. Bain Capital, which largely focuses on cost cutting and efficiency improvement to improve profitability, is inevitably stuck with losers it has no choice but to shutter, eliminating the jobs with the company.

Unfortunately, that argument is simply not true.

The only thing that allows “creative destruction” to kill a company is a lack of good leadership. Any company can find a growth path if its leaders are willing to learn from trends and ster in the growing direction.

Look at the current situation with Kodak and Hostess; both quickly heading for Chapter 11. Neither needed to fail. Management made the decisions which steered them into the whirlpool of failure.

Kodak watched the market for amateur photography shrink for 30 years – drying up profits for film and paper. Yet, management consistently – quarter after quarter and year after year – made decisions trying to defend and extend the historical market rather than move the company into faster growing, more profitable opportunities. Kodak invented much of the technology for digital photography, but its leaders chose to license it to others rather than develop the market because they feared cannibalizing existing sales.

Hostess is making a return trip to Chapter 11 this decade. But it’s not like the trend away from highly processed, shelf stable white bread and sugary pastry snacks is anything new. While 1960s parents and youth might have enjoyed the vitamin enriched Wonder Bread “helping grow bodies 12 ways” the trend toward fresher, and healthier, staples has been happening for 40 years.

In the 1980s Hostess was known as Continental Baking, and even then profits were problematic. As the company was “shopped” by investment bankers it was clear that to keep what was then the nation’s largest truck fleet profitable required new products. Consumers were shifting to fresher “bake off” goods in the grocery store as well as brands promising more fiber and taste. But despite these obvious trends, leadership continued trying to defend and extend the business rather than shift it. It wasn’t that people stopped eating bread, or snacks, but rather that tastes shifted and Hostess’ leaders didn’t.

These stories weren’t “creative destruction.” They were simply bad leadership. Decisions were made to do more of the same, when clearly something desperately different was needed! At the Harvard Business School Working Knowledge web site famed strategiest Michael Porter states “the granddaddy of all mistakes is competing to be the best, going down the same path as everybody else and thinking that somehow you can achieve better results.” Failure happened because the leaders were so internally focused they chose to ignore external inputs, trends, which would have driven better decisions!

Successful leaders avoid “creative destruction” by shifting with trends

In the 1980s Singer realized the sewing machine market was destined to decline as women left homemaking for paying jobs, and as textile industry advances made purchased clothing cheaper than self-made. Over a few years the company transitioned out of the traditional, but dying, business and became a very successful defense contractor as President Reagan upped military spending! Rather than letting itself be “creatively destroyed” Singer’s leaders identified the market trends and moved from decline to growth!

Similarly, IBM almost failed as the “core” computer market shifted from mainframes to PCs. But before all was lost (including jobs as well as investor value) leaders changed company focus from hardware to services and vertical market solutions allowing IBM to grow and thrive.

More recently, over the last decade a nearly dead Apple resurrected itself by tying into the trend for mobility, rather than focusing on its niche Mac product sales. Company leaders took the company into consumer electronics (iPod, iPod Touch,) tablet computing and cloud-based solutions (iPad) and mobile telephony with digital apps (iPhone.) Apple had no legacy in any of these markets, but by linking to trends rather than fixating on past businesses “creative destruction” was avoided.

It’s not hard to recognize trends and shift, if you’re willing

There are many businesses today in trouble because leaders simply won’t pay attention to trends. Avon, Sears and Barnes & Noble are three companies with limited futures simply because their leaders are unwilling to pull their heads out of the internal strategic planning sand and look at environmental trends in order to shift.

The next big example is most likely Microsoft. Nobody thinks we will be carrying laptop PCs in 5 years (or maybe 2.) Yet, Microsoft has been unable to recognize the trend away from PCs and do anything effective. Its efforts in music (Zune) and mobile devices have been indifferent, insufficiently supported and mostly dropped. Mr. Ballmer continues to speak about a long future for PC sales even as Q4 volume dropped 1.4% according to IDC and Gartner. Even though everyone knows this trend is due to limited PC innovation and rapidly accelerating mobile-based solutions, Microsoft blamed the problem on, of all things, floods in Thailand that restricted manufacturing output. Really.

We’ll learn soon enough just how many jobs Bain Capital created, and killed. But those lost were not due to “creative destruction.” They were due to leadership decisions to discontinue the business rather than invest in trends and transitioning to new markets. Creative destruction is an easy excuse to avoid blaming leaders for failures caused by their unwillingness to recognize trends and take actions to invest in opportunities for creating winning businesses.

Yeah, I'm sure Bill Gates is crying a river over Microsoft's plummet.

Just wait to whatever replaces the Xbox360. That's gonna make a TON of dough.

Glenn, I'm gonna start calling you Debbie Downer if you keep this up.

And sometimes businesses just fail or outlive their usefullness-- do they expect everycompany to last forever-- if so then there would be no new startups, no american dream-- I mean take hostess-- they make the twinkie-- if everyone in the world stops eating twinkies- what are they supposed to do-- if everyone in america stops eating baked goods what are they supposed to do-- if that business fails it just fails, despite whatever they do-does anyone remember twinkie lights-no - because they failed-- if you are eating a twinkie- you want a twinkie-- not a "healthy twinkie" that sort of tastes like a twinkie...- i

Despite the health nut push on everything- I believe twinkie has just been around so long- every single grocery store has a generic version- at half the price-- so hostess only real option is to drop their price model (I mean their prices at the Wonder Bread thrift store are still higher than the generic options) -- and thats not something you can do without restructuring you company-- its not like they are set up to make somehting other than baked goods---Its not like they are Pringles..

In the immortal words of Mitch Hedberg-- I think Pringles was originally going to make Tennis Balls, but when a truckload of potatoes showed up instead of rubber-- they thought about it a minute then said F--- it, CUT EM UP.

Your copy and paste skills are pretty good. You have to go to 3 pages to get all of one of these.

http://www.forbes.com/sites/adamhartung ... microsoft/

http://www.forbes.com/sites/adamhartung ... microsoft/

I can copy and paste too. Considering we have 13 of the top 25 most valuable companies in the world I think we are doing ok. Prolly do better if we didn't have one of the highest corporate tax rates in the world though.

http://www.forbes.com/sites/scottdecarl ... ow-on-top/

Ian, I could do a link, but when I cut and paste it makes it easier to get to the point for the people interested in what I placed there and for us to discuss the subject.

Thats all. No hidden agenda. Honest.

"What's morally repugnant in one country is accepted business practices in another, and companies take advantage of that."
NICHOLAS ASHFORD, a former chairman of the National Advisory Committee on Occupational Safety and Health, on the often harsh and dangerous conditions that laborers endure in Chinese factories where iPhones, iPads and other high-tech devices are assembled.

But how do you change that?

We have no authority over what other countries do regarding their labor practices. I'm not a fan of China, but I don't want to pay $1000 for a smart phone, either.

We live in a global trade society. The genie is out of the bottle. All tarriffs will do is slow down the economy even more.

You change it, Shell, by NOT buying products from companies that promote unfair practices. You don't have to pay a $1000 for a smart phone, but you may have to pay $25 or $50 more. Is that fair for both the workers there and you here? I happen to think so.

Just because every other jooglejam jumps off the cliff, doesn't mean you and I have to as well.

Ultimately, though, price usually trumps morality.

If people can get a TV cheaper, they're going to buy that TV, regardless of where it's made. You can't change human nature. People LOVE to save money.

Let's bring it back to toys for a moment. Just about all action figure lines are made in Asia. What are the working conditions in THOSE factories? Probably not so great.

And yet, the threads are full of complaints about how expensive all the lines are getting these days.

Can you imagine what an action figure would cost if it had to be made in the USA? Probably double.

I agree that people are greedy. Greed runs the world, for better or worse.

Are the conditions in the toy factories bad? Maybe. Probably. But there are other factors affecting cost besides the actual production itself that most of the toy geeks either completely don't understand or refuse to acknowledge. And, the global economy is all based upon cheap oil. The oil produces the plastic. The oil runs the factories. Oil operates the trucks, planes and ships that transport the toys across the Pacific and to the distribution centers and stores and our cars/trucks to drive to the stores to buy the items of our affection.

You and I both know that oil is a finite resourse and probably in our lifetimes it is going to skyrocket as it becomes harder to find and refine. Will it then be really profitable to make things in far away lands?

I know that what I said really doesn't impact today, but it needs to be kept in mind. We're already seeing some of the problems with this business model today with action figures becoming more expensive.

Finally, some agreement.

So what do we do about that?

I say "Drill, baby, drill!" Expand our oil resources to the Nth degree. Drill on Federal land (like Anwar where NOBODY lives), add more pipelines (like the one Obama just vetoed), add more off shore drilling (Mexico and Cuba are sucking up the Gulf oil as we speak and selling it to the Chinese), etc. etc.

Get us less dependent on foreign oil so we could afford to not give a crap about the Middle East anymore.

In additon, build more nuclear plants so we can save the coal for other purposes rather than electrical generation.

Do you realize we haven't had a nuclear power plant built in this country since the 80's? That's just crazy.

What's your solution?

Besides offering more subsidies to "Green energy" companies that just go bankrupt (a 3rd one just went belly up this week).

Well, here we have to disagree, Shell.

To me, drilling only temporarily sustains our "fix" on oil. There is no neverending supply of oil that we can drill for. After we deplet ANWAR and the tar sand and where ever else the oil companies can find some, it will run out. Probably within the next 75 years. In the short term that sounds okay. In 75 years, I'll be dead and maybe you too. So what? Well, I've got kids and grandkids and I really don't relish the idea of leaving a planet that is significantly worse off that when I lived on it.

By the way, we only get about 25% of our imported oil from the middle east. What our government is doing is using up their oil before we go back to getting it from our own deposits or other sources. I firmly believe that we intend to send the Saudis back to gathering dates and walking behind camels, smelling their farts. But, I digress.

The problem with nuclear energy is NIMBY - Not In My Back Yard. Nobody wants nuclear powerplants near them and nobody wants the waste stored near them for some 10,000 years. Everyone remembers Three Mile Island and the problems in Japan. Nuclear is about as popular as a loud fart in church. My question is why have we still not perfected fusion? We've been throwing money at it for 40 years and we're no closer today than in 1964.

Realistically, if you started construction on a nuclear power plant today, it would be a minimum of 6 years before it was operational.

Sadly, it comes down to the almighty dollar again. Alternative energy sources are unable to compete with oil. I'd like to see an energy consumption tax added to gas, heating oil and natural gas (which I use to heat my home) to help get alternative energy up and running. And, before you blow your top, look at all the times the government has done just that. Commercial aviation, railroads. Hell, we givw subsidies to the damned oild companies right now!

We also need to educate the populace that things are not all roses and lollypops. Americans live in a dmned dream world where they don't pay any attention to anything other than wrestling and the kardasians. Peopel need to get their heads out of their butts and see that they need to be responsible as well.

On this last point, I will agree 100%. And the sad thing is, a lot of them actually vote. Fortunately, even more do not.

I gotta tell you, Shell, I really enjoy are conversations. It is really nice to have someone that is willing to talk about the taboo subjects.