Gerard J. Tellis on “Several of the Major Business Challenges to Be Faced in 2013”

TellisGerard J. Tellis (PhD Michigan) is Professor Marketing, Management, and Organization, Neely Chair of American Enterprise, and Director of the Center for Global Innovation, at the USC Marshall School of Business.

He is an expert in innovation, advertising, new product growth, emerging markets, and global market entry. He has published five books and over 100 papers ( ) that have won over 20 awards, including the Long Term Marketing Science, Frank M. Bass, William F. Odell, Harold D. Maynard (twice), and Converse award for lifetime contributions to research. His Google Scholar cites number over 8000.

Dr. Tellis is a Distinguished Professor of Marketing Research, Erasmus University, Rotterdam, a Senior Research Associate at the Judge Business School, and a Fellow of Sidney Sussex College, Cambridge University, UK.

He has graciously allowed me to share a Q&A he recently completed. Soon I will po
st my interview of him.

What was the most surprising finding from your research?

Organizations are in greatest danger of failing when they are at the peak of their success. Market dominance can be a curse that blinds organization to the next big innovation on the horizon. Often these innovations arise deep in the bowels of the organization but are drowned out by the hoopla of profits from the company’s current products. Kodak, HP, Nokia, Research in Motion, General Motors, Xerox, all suffered from this Incumbent’s Curse. It led them to reject their own path breaking innovations, allowing competitors to bring them to market first and race ahead.

Why do established companies have a much harder time at unrelenting innovation than startups?

Established companies suffer from three biases that blind them to game changing innovations: First, a focus on current products instead of the future; second, a resistance to cannibalizing current successful products; and third, an aversion to risky innovations. Startups, without a stream of successful products, have not much to lose. So they are more willing to gamble on innovations than established firms.

What’s the difference between a business culture that can produce one hit innovation vs. one that has a culture of unrelenting innovation?

Lots of companies can have what it takes to create one big hit innovation. But unrelenting innovation requires companies to willingly embrace risky innovations of the future that routinely cannibalize their current successful products.

We’ve seen several high profile acquisitions in the news: HP buying Autonomy, Avis buying Zipcar. Can such moves help an acquiring company build or integrate a culture of innovation?

By the time a firm decides to acquire a target it is either over-priced, past its peak, or too different to integrate profitably (e.g. HP’s acquisition of Autonomy and Palm, or eBay’s acquisition of Skype). The real tragedy is to lust after apparently flashy targets while overlooking one’s promising humbler innovations. A classic is HPs reckless gamble on acquiring Autonomy to counter the decline in PCs, when the solution was sitting in its labs seven years earlier.

Does RIM have any hope of building a culture of unrelenting innovation before it’s too late?

It depends on whether the current leadership realizes that the firm’s own past was its worst enemy: overconfidence in its market leadership from the obsolete Blackberry, painfully slow decision making, failure to look ahead to constantly changing technologies and consumer behavior. Change requires radical house cleaning that many senior managers do not realize or cannot execute (e.g., RIM, HP, Sony).

Why has Samsung recently marched so far ahead of Sony in the innovation game?

About a decade ago, the CEO of Samsung realized that the firm was falling behind growth companies around the world because of its slow embrace of game changing innovations. He instilled in his organization “a culture of impending doom” based on a fear that it “would disappear in an instant if it misjudged the next big trend.” He gambled by investing hugely on developing “new businesses, new products, new technologies” looking at “failure as an opportunity” not a disaster.

Why did HP fail in the tablet market?

By the mid-1990s, HP developed a nifty e-reader, a forerunner to today’s tablet. However, in the face of its then sales and profits that passed $ 100 billion, even a $1 billion tablet seemed a like a rounding error. HP failed to see that innovations make obsolete current hugely successful products. That’s what happened when Apple introduced the iPad. In desperation, HP recklessly spent $11 billion on an acquisition. A fraction of this amount may have been enough to commercialize a tablet in the mid to late 1990s.

Toyota is a respected company but not always known for innovation. How did they manage to make such a risky and successful gamble on the Prius?

Shocked by the US government’s mandate for fuel efficiency, Toyota’s top leadership entrusted a champion with the task of coming up with an electric car from scratch. He was given a budget, a team, and independence from the organization. As such he led a culture of focusing on the future, embracing risk, and cannibalizing Toyota’s current products: a mini startup within the giant organization.

Shouldn’t companies be worried about creating innovations that cannibalize their own products?

Even the hottest current products are doomed to obsolescence with the relentless advance of technological evolution. Better to cannibalize oneself than let the competition do that.

If not, how can they do so without threatening their profits?

The easy way to protect profits is to make sure the price of the innovation is higher than that of the current product. When that is not true, the tough challenge is to ensure that the innovation is delivered at lower cost than the current product, so that the margin is higher. Typically, a big successful innovation opens up a whole new mass market. So, economies of scale ensure lower costs and higher margins from the innovation.

Which innovation should the company back?

Innovations frequently start as niche products in the current mass market. But as technology improves, some of them become the mass markets of the future. Many innovations fail. The trick is to learn from failures in order to hit on the successful innovation that creates the next big mass market.

So can managers just follow a few rules and create a culture of innovation?

No single person can see the future or have a hit every time. Innovations are more likely to arise from the many at the bottom than a few at the top. An organization can survive only if it empowers many champions to innovate relentlessly, fosters competition among teams of innovators, generously rewards success, but does not penalize the many failures it will suffer.

How can companies create the right incentives to nurture a culture of innovation?

Most companies are stingy in rewarding success but harsh in punishing failures. Incentives for unrelenting innovation need to be asymmetric but in reverse: generous rewards for success with weak penalties for failure. Failure is an opportunity to learn not grounds for punishment.

How do you empower innovation champions and why is this so important?

Often employees have the best ideas for innovations from their deep experience of lab research or experience with manufacturing or knowledge of customer response. The innovator is often within. Firms can unleash the power of innovation by recognizing and empowering the talent within. They can do so by ideas fairs, funding contests, prototype races, and competing commercializations. In all of these, it fosters bottom up innovation from the crowd instead of top down innovation from a fallible few.

What are some examples of companies that hit upon great innovations that were never brought to market due to fears of cannibalizing current products?

Research in Motion had a forerunner for touch screen smartphones, HP had a forerunner of the tablet, Kodak had most of the patents for digital photography, Sony had an MP3 player before the iPod, Microsoft had a search engine before Google took off, Xerox had most of the innovations of the personal computer before it took off.

What research findings that you uncovered about innovation culture had more to do with human psychology than business logic?

Some of the many include the reflection effect, the hot-stove effect, a misunderstanding of the loss function. The reflection effect is an individual’s preference for a sure though small current gain rather than a uncertain but huge future payoff. The hot stove effect is an individual’s learning to shun future experimentation when experiencing the first failure. Innovation ’s loss function suggests that a huge number of losses must be borne to reach one success: companies must start with thousands of ideas but through a process of screening, developing, prototyping, testing, and commercializing may end up with only one market success.

What has Google gotten right about its culture to foster innovation?

Most importantly, Google’s co-founder and CEO seems to understand the Incumbent’s Curse in that he once said, Google’s worst enemy is Google itself. Google empowers innovation champions through its policy of the Advanced Program Manager. It also empowers innovation through freeing 20% of employees’ time to work on individually chosen innovations. It generously rewards success. It emphasizes learning from rather than penalizing failure.

What can marketers learn from your research?

One cannot put marketing bandages on innovation wounds. The starting point of good marketing is innovation. To get to these innovations, one must focus on future rather than current mass markets, embrace risk, and search ceaselessly for innovations that will cannibalize today’s successful products.

As we start the New Year, what’s the most effective way for companies to focus on the future?

New Year resolutions often attempt to tidy up small failings of yesteryear: More cost cutting, higher efficiency, better scheduling, higher targets. Yet the big rewards are in focusing on the untidy markets many years ahead, where risky gambles fraught with many failures hide huge payoffs from radical innovation. Instead of small New Year resolutions, sponsor big idea fairs. Challenge managers to predict the path of rival technologies 5 years out. Host retreats to define mass markets ten years ahead.

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Gerard J. Tellis is Director of the Center for Global Innovation, Neely Chair of American Enterprise, and Professor of Marketing, Management & Organization at the Marshall School of Business, the University of Southern California, Los Angeles, CA. He specializes in innovation, advertising, global market entry, new product growth, and pricing. He has published over 100 papers and five books on these topics. His latest book is Unrelenting Innovation: How to Build a Culture for Market Dominance, published by Jossey-Bass/A Wiley Imprint (2013). His papers have appeared in leading scholarly journals. His articles and books have won over 20 awards, including four of the most prestigious awards in the field: the Frank M. Bass, William F. Odell, Harold D. Maynard (twice), and the Marketing Science Long Term Impact Award.

Tellis is a Senior Research Associate of the Judge Business School, Cambridge University, UK; and a Distinguished Professor of Marketing Research, Erasmus University, Rotterdam. He has also been a Visiting Fellow of Sidney Sussex College, a Visiting Chair of Innovation, Marketing, and Strategy at Cambridge University, a Trustee of the Marketing Science Institute and a Treasurer of Informs Society of Marketing Science. He is an Associate Editor of Marketing Science and the Journal of Marketing Research and has been on the editorial review boards of the Journal of Marketing Research, Journal of Marketing, and Marketing Science for several years. Previously he worked as a Sales Development Manager for Johnson & Johnson. He earned a Ph.D. degree at the University of Michigan.

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