Why are some firms capable of innovating again and again?
Innovation isn’t easy – but it is do or die. In this talk from Business of Software Europe 2015, Professor Jaideep Prabhu of Cambridge University takes you on a journey of innovation. He shares his views on what innovation is, how to do it and the challenges it brings, and then closes by commenting on the practical implications for management for fostering innovation.
Expect an hour of practical insight, which could lead to a lifetime of being at the top of your field.
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Prof. Prabhu started with the question- Why are some firms capable of innovating again and again?
He covered 4 key areas:
– What is Innovation?
– The Challenges of Innovation
– What is an Innovation Culture?
– The Role of Leadership in Fostering Innovation
So what is innovation?
1. What is Innovation?
“The successful commercial exploitation of new ideas” – Joseph Schumpeter
1. New Products or Services e.g. The iPod
2. New Processes/ Process Innovation (Improved manufacturing / distribution processes)
3. New Business Models (Innovate your entire business model) e.g. Amazon
“When Amazon came out it was truly radical.. they were able to exploit the long tail on a very different cost structure to bricks and mortar companies”
2. The Challenges of Innovation
Who is better at innovation smaller companies or bigger ones?
The Incumbent’s Curse – Many successful firms seem to stall / fight smaller nimble startups.
Are large firms doomed to fail?
Does their dominance make them arrogant/ incompetent/ stuck in the past?
In recent years: Technologies are more complex, innovation has become more global, and new organizational forms have become popular.
The advantages larger firms have is access to the resources though giving them a distinct advantage.
“Large firms have many advantages (when it comes to innovation)”
Access to Resources
But can be hindered by bureaucracy
In summary, both small and large companies have both advantages and disadvantages when it comes to innovation.
3. Creating a Culture of Innovation
In 2009, he looked at what drove sustained innovation across nations?
He found lots of different factors were given by people ranging from ethnicity to religion to economic incentives to cultural factors.
His thesis : the internal culture of firms (i.e. has distinct from what happens outside).
They surveyed 4000 firms in 17 countries.
“What that found was that the firms culture was the primary driver.”
What do we mean by firm culture?
I/ Attitudes prevalent amongst innovative companies:
Future Market Focus
Willingness to Cannibalize
Tolerance for Risk
II/ Practices found amongst innovative companies:
Internal markets (bring the competitiveness of the market into the company)
He cited the example of Xerox and their focus on innovation (with Joe Wilson as a key player as product manager).
Why Xerox did not leap forward in the ’70’s?
Why did Sony not do the iPod?
Existence of silos?
Unwillingness to cannibalize?
Used the example of Gillette who systematically cannibalize their razors on a consistent basis.
Tolerance for Risk
– Innovation involves tolerance for risk.
– Asymmetric Incentives
Reward success while de-stigmatizing failure (up to a point)
Internal autonomy and competition e.g. HP v IBM
4. The Role of Leadership
Does leadership start at the top?
“Emphasis on future customers and competitors, relative to current customers and competitors.”
Senior management do not spend enough time thinking of the future.
Bill Gates: Think Week
He regularly took time off to think about issues that were coming downstream.
Key Take Away’s
1. Innovation is critical (do or die)
2. Innovation isn’t easy
3. Creating and fostering a culture of innovation can help.
Leaders need to take risks, focus on the future, build a community and you have to be champions.
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Jaideep Prabhu, Cambridge Judge Business School: Thanks, Mark. Good evening everyone. It’s a great pleasure to be here with you. I hope you’re enjoying the conference. Let me say a little bit about myself by way of background, before I get off into my talk. I’m a professor of marketing here at the Judge Business school. I grew up in India where I studied engineering as an undergraduate at Higher New Delhi.
I then went to the States and got a PhD in business at the University of Southern California, where the weather is like every day of the year. I taught at UCLA and then Tougare University in the Netherlands before moving to the UK. I was here at Judge for a few years then at Imperial College in London before returning to Cambridge, to my current position in 2008.
Throughout my career, I have studied innovation. In the first part of my career, I studied innovation in the West, particularly in large corporations. And then in 2008 or so, I began to look at innovation in emerging economies, such as in India, where I had grown up. I then paid my attention to smaller companies, start-ups and new ventures. So, I want to draw on that experience and that research during this talk this evening.
One of the questions that sort of obsessed me throughout my career is this question of, “Why are some firms are full of innovations, not just once, but again and again?” What is it that they possess, but other firms don’t have? What is it that forms their culture? What attitudes and practices are they able to embody through their organisation to be able to innovate continuously over a period of time?
So, what I’d like to do over the next thirty minutes or so, and I’m opening it up to your questions and comments, is to briefly talk about what innovation is, and then get into some of the challenges that companies, small and large face in that quest to be innovative. I’ll then turn to the heart of this talk, which is, “What is the culture of innovation?”. What are attitudes and practices that really separate the most innovative companies from the rest? And I’ll end with some thoughts on what are your roles as leaders in your companies is in terms of creating and fostering such a culture of innovation.
So, what’s innovation?
This gentleman here, Joseph Schumpeter, and Austrian-American economist of the last century, often regarded as the most influential economist of the last hundred years. People in Cambridge may disagree. They may prefer Thames, who was a King’s man. But, it is a close run contest.
And Schumpeter is highly regarded, because he was one of the first to understand the importance of innovation in driving the good of companies, of industries and entire economies. And he gave us the definition of innovation that is still widely used. For Schumpeter, innovation was the successful commercial exploitation of new ideas. It wasn’t just new ideas for the sake of new ideas, it was the successful commercial exploitation and he gave us at least three ways in which companies could do this.
One, was to product or service innovation.
This is where companies will offer some new product and service to consumers, one that has a benefit that they are seeking, one that they are willing to pay for. And in this way, companies generate revenue, and growth.
Another way to innovate is in the processes that lie behind those products and services. The manufacturing processes, the distribution processes, and delivery processes. And his idea was, if you can find new ways to manufacture or distribute or deliver products and services, ways that are efficient, ways that help you do things faster or cheaper, then that gives you an edge over competitors. And that’s how you commercially exploit those ideas.
And the third way
He didn’t use this terms. He talked more about organisational innovation. But this is a term that we now use today. A new way to innovate is to innovate your entire business model, which is in a sense to combine both of these two things, at the same time. While offering benefit to the customers, at the same time, changing the way that you operate and deliver that product or service.
So, let me give us some examples. Let’s start with product or service innovation. This thing, the iPod, when it came out offered new benefits to consumers that they were willing to pay for. So much so, in the year it came out, along with the iTunes, Apples’ market capitalisation tripled. Just that one product for Apple tripled its market value.
It’s also interesting to look at Sony in that year and its market capitalisation, which was more or less flat. And interestingly, Sony at that time was a much bigger company than Apple. It had many more products, it had far more patents and it spent much more on R&D. We’ll come back to the issue of why Sony, which could have introduced an iPad and iTunes, didn’t. It was lot of technical reasons. They had MP3 technology. They had music assets. They even had brands and had done it before. It was more an organisational or cultural issue. And so we come back to that again.
What about process innovation?
This is an example of some of my research in India. It concerns some large construction company, one of India’s best companies, Larsen & Toubro. What they did was to move their project manager, which was done manually on to an electronic platform. That’s a new way of working that gave them cost benefits and speed benefits. By doing all this electronically, they were able to avoid a costly paper trail, and they were also able to deliver projects on time. And thus to avoid penalties. So process innovation can help you do things faster and better and cheaper.
What about business model innovation?
Amazon is a good example of how companies can do product to service innovation and process innovation at the same time. They changed their entire business model. Of course we can take Amazon for granted now, but when it came out it was truly radical. Both in terms of what it was offering consumers and how it was generating revenue. But also its operating model and how it was incurring costs. So in terms of revenues for instance, they were able to exploit the long tail of those consumers whose members would usually buy rare books. Generally speaking, it was only a few books that really sell a lot, but the long tail of books that sell very little. And typically, when bricks and mortar retailers ignore that long tail because it does not make economic sense. But Amazon could pick up all those revenues. Equally you could do that because of its operating structure. Its cost structure was very different from bricks and mortar model of retail. They didn’t have to incur the very high fixed cost of setting up physical locations every high street of a city or a town.
At the same time that they were offering something new to consumers, and generating new revenues, they ad added reorganising their operating structure and did not incur that cost. And that proved disruptive to the existing players in bricks and mortar retailers, who tried to imitate them, but found it very hard to do. Both bricks and mortar retailing and online retailing at the same time.
Now, everybody wants to innovate. Everybody sees the benefits of innovating, but very few are able to do this again and again. What are the challenges faced by huge retailers and who is better at it? The large established companies or the small hungry start-up?
It’s interesting that Schumpeter looked at this question himself and changed his mind over his career. When he first started out writing about innovation he thought it was small companies and those lone inventors who drove innovation. But over time, the world changed and he changed his mind as well. And he began to think that it was really large companies with established corporate R&D that did better at innovation.
This debate has continued to rage in academia and elsewhere. Very recently, for instance, people have argued that incumbent successful dominant firms often seem to fight, stall or ignore new ideas. And it is really small entrepreneurs that champion these new ideas. And there are reports I could give you from time over time that seem to bear this out. So Harry Warner is supposed to have said in 1927, “Who the Hell wants to hear actors talk?” And how wrong he proved to be.
Daryl Zanuck in 1946 was when TV was beginning to take off, said, “TV won’t be able to hold on to any market after the first six months. People will soon get tired of staring at a box every night.” And I know from my own behaviour, that that is not true. So, what is going on? Is they were not capable of seeing the potential, or maybe they didn’t want to see the potential.
Here’s another example. The president of Western Union, who rejected Alexander Bell’s offer to sell the telephone to him for $100,000 said, “What use could my company make of an electrical toy?” And this will be of interest to you as late as 1977, Ken Olsen founder and CEO of Digital Equipment said, “There is no reason for any individual to have a computer in their home.” This is the same time that Bill Gates and his friends at Microsoft and Steve Jobs and his friends at Apple had made it their mission to get a computer into every home.
So, you see a difference in the mind set of the large established layer and the new hungry start-up.
And those of you in start-ups and small companies will probably take some courage from this and you may not be wrong to do so. Often when I talk to large companies and I ask them whether these things are true of them, whether their dominance makes them inertial, whether it makes them arrogant, incompetent or perhaps stuck in the past they often nod their heads to each of these questions.
So, large firms no doubt face some of these organisational and cultural barriers to innovation. With small firms, often don’t face, however the picture is not often cut and dried or black and white. Because in recent years, we know that technologies has become more and more complex. You know that innovation has become more global. And we know that new organisational forms have become more popular. And more importantly, especially for large established companies, is that they have learned from the mistakes of the past predecessors.
Everyone is aware of, for instance, the Kodak story and what happened. And so it would seem that large firms despite their problems, are aware of what those problems are and are finding ways to deal with it. And of course, they have to have the most important thing working in their favour where innovation is concerned which is resources. If technologies are more complex then firms that have technical resources will do better. If innovation is more international than firms with brands will do better. Of course, financial resources will always be important.
So in my own research upon the link between the size of a firm and its ability to innovate, what I’ve found is that on imbalance large firms do have many benefits. In fact, for instance in pharmaceuticals, were more often than not be the ones to introduce new drugs. Often when they introduce a new product, they are able to capture more value from the product.
If we go back to Schumpeter’s definition of commercial exploitation, they are able to get more people to adopt these new products faster, because they have complementary assets like what brands and marketing reach. So, large firms do have a big advantage when it comes to innovation. Resources do matter, but nevertheless as you become more successful, you face significant challenges to be innovative, because of those bureaucratic and cultural challenges that I mentioned.
So, whether you are large or small, I would say innovation has its pitfalls. Small size has benefits, some benefits. But also, some drawbacks. A large size has benefits and drawbacks. Whether you are large or small, you’re playing in a garden of paradoxes. You are trying to manage inconsistencies where these paradoxes are, when you are trying to innovate. You’re trying to profit in the present with your current products, customers, and competition, while you’re trying to pre-empt the future and develop products and services for future customers and competitors.
You’re trying to develop some core competencies, but you don’t want them to end up becoming rigidities that prevent you from doing something new. You want to maintain organisational continuity. Yet you want to be able to adapt and change. You want to have standard processes, but you also want to have some creative chaos. Andy Grove who was the CEO of Intel used to say, that in Intel, they would have these phases when they would let chaos reign and then they would have to reign chaos in. You have to be cross-functional, but you also have to have deep functional expertise. You have to grow, yet you have to stay focussed and lean.
So, how do companies manage these paradoxes and these inconsistencies? I think that in some ways they do it as human societies and economies do is by creating a culture of innovation. So attitudes and practices that help us to manage paradoxes and inconsistencies.
So, let’s look at that culture of innovation.
And let me do this by asking you this question. Does anyone know the answer to this question? Anyone know the answer to this question? IBM? Anyone else? Xerox? That’s very interesting. Not many people know this, but Xerox. In the 1970s in the Palo Alto Research Centre, Xerox came up with all those things. All those things which go into the paperless office that we take for granted these days. And as visual evidence, there is the laser printer. It’s a bit bigger than the one we use today, but it did the job. Look at this. I think this is more interesting. This was their Alto in 1973. Look at that bit. It is very similar to many computers we might see today. It has a keyboard, a mouse, graphical user interface. This stuff is a bit different and went to from that to that. And that stuff is a bit different. But I think you’ll recognise many elements of the Alto among existing current PCs. It was so intuitive to use that even children could play on it and play games. In 1973. But by the 1980s, all that was history for Xerox. Xerox currently does not have its brand on any of those things. Why? So my core goal was to answer that question. And we wanted to see if there was something about companies within the company, whether it was something to do with where they were located. What kind of country they were in?
So, we did a study where we first looked at what had been written about this subject, and lots of people had views on this in many disciplines, not just business. In fact, I am sure just about every man or woman on the street has a view, and I am sure if you just ask people, what makes the Americans innovative?” Or, what makes Japanese commonly attributed to some things specific to Japanese or American culture, perhaps.
Sociologists like Max Weber say it might have to do with religious belief. The Calvinists work ethic differentiate more between Northern Europeans and Southern Europeans. Other like Hoffsteder may say it is more complicated than that. Some countries are hierarchical and it’s not a good idea for innovation. Some are more individualistic, and that is good for innovation. Geographers are very keen on distance from the Equator. The further you are from the Equator, they say, the better.
The logic is the following. In very cool places you have to plan for the future. Thinking about the future helps you to be innovative. It’s an important part of being innovative.
Legal scholars are very keen on intellectual property. In fact, even historians in trying to understand why the Industrial Revolution happened in Europe and not in say, China, which at that time was the most advanced economy technically, they often say it was because in Europe you had this idea of individuals owning the returns to their intellectual properties. Whereas in China, property was still owned by the Emperor. And economists think it is all about spending, how much you spend on R&D, how much you spend on education and the like.
Now business schools for several decades now, people who study organisations would argue that it is something to do with what happens in the firm, not so much what happens outside. And so we ran a test on these theories, and what we did is conduct a very large study. I still think that this is the largest of its kind that has ever been done. We surveyed over 4000 firms from over seventeen countries. And we didn’t just look at the most advanced economies in the world. We also looked at some emerging economies. And we collected a whole bunch of data. We sent out surveys to people within these companies asking a whole bunch of questions about inputs into innovation, outputs from innovation and also attitudes and practices within the company. We then collected secondary data both on the firm and the country and analysed this data. And cutting a very long story short, this was our main finding. We found that what happens within the companies mattered much more than anything else. The firm’s culture was a far bigger driver of their ability to innovate than other things. R& D data was important, but not as important as the firms’ culture.
So let me say a little bit about what we mean by culture.
We drew on a lot of questions asked by respondents. We drew on the whole literature in management, and we found that half the things we threw at them these six seemed to matter most. Three attitudes and three practices. The attitudes are as follows. The innovative companies were more likely to spend time thinking about the future than the non-innovator companies. And this kind of makes sense. There are some things you think about the future more than anyone else, you’re more likely to come up with new products and services for new types of customers and have to deal with new types of competition.
But that’s not enough, because you could come up with products which you don’t actually commercialised. And remember Schumpeter’s point about commercialisation. In order to commercialise, you have to be willing to cannibalise your current products. And that’s a bit hard to do. Because essentially, you are betting on an uncertain thing that hasn’t been tested against the sure thing, which is already a success in the market. In order to do that, you have to be willing to take some calculated risk, so you have to have tolerance for risk.
These are the three attitudes we found that seemed to matter most. And they were supported by three practices.
The process of product champions is well known.
Many companies empower people, not just at the top, but at various levels of organisation to either identifying new ideas, or take them forward to prototype. And then eventually to commercialise them. So, product champions, the practice of using champions like this and empowering people, was an important driver.
Second practice, was the use of incentives.
Now of course, one must recognise and perhaps reward success. And that doesn’t have to be financial, in many cases just the incentive will do. Well what do you do about failure? Can you punish it? What would happen if you punished it or stigmatised it? Well, if you did that, people would become intolerant to risk. They wouldn’t want to take risk. They would take the safe option so the company would not cannibalise its current product for instance. So, incentives are very interesting. There is asymmetry between how you treat success relative to failure.
And the final practice that was important, particularly in large bureaucratic companies, who were slow to respond to market pressures was to bring the competitiveness of the marketplace into the company.
And we did that to create internal markets. You might have divisions that are autonomous enough to be able to compete with each other and that could drive innovation into large slow moving companies.
Let me go now back to the Xerox story and see how all this played out at Xerox. So, Xerox did some things right, for instance they had a product captain in the late ‘60s. It was the CEO Joe Wilson, who actually began to worry about a future that was paperless. Where people instead of printing things and copying things would stare at their computer screens. So he actually said, “Why don’t we at Xerox invent that future and capture it?” And he created Palo Alto Research Centre in California to do that. He gave them resources and he gave them time. He said I have long term projects that you can work on to make this happen. So, they got that right.
But then some things went wrong. Crucially, the product champion Joe Wilson died at a crucial point in the early ‘70s. And then, the other thing that seemed to go wrong was that the company really had two silos. You had the manager, the marketing manager, who were on the East Coast and you had the scientists who were on the West Coast. And while the scientists were coming up with all these great inventions we saw and dreaming of the office of the future, the managers on the East Coast were completely unaware of those things. And they were selling copier machines. And copier machines were selling pretty well. So, when they were told about these new inventions, people couldn’t understand them. And people could not understand why the company would bet on these things that would were completely unproven, when copier machines worked so well.
You might even argue that they feared that these new products would make the existing products obsolete. Cannibalise in other words, and perhaps make even their roles obsolete. Most importantly, they didn’t see the wealth in this electronic office of the future and as a result, they refused to commercialise all those inventions. So, let’s look at each of those attitudes of practices I mentioned. Let’s look at some of the examples of companies that do this well or badly.
So, this is an easy enough question to answer. This is easy enough to answer. The really tough question is why didn’t Sony do the iPod and iTunes? And the reason is to do with some of the things that Xerox faced as well, which is, the silos, the various divisions, for instance, the division of the music assets did not want these assets cannibalised by the product that might be introduced by the new products. And so, a company that had the technology that had the resources that had all the assets and had done it before with the WalkMan and the DiscMan failed to do it and this was the consequence. Apples’ market capitalisation tripled. Sony’s was flat.
Here is a company that systematically cannibalised its products over a sixty-year period to maintain a global average market share at 40% across its various products. As you see every time Gillette introduces a new shaving system for men, it cannibalises the previous system. The sales go up of the new one; the sales go down on the old one. The idea here is that it is better to be your own lunch, than somebody else’s. You want to be able to stay ahead of the competition, even if it’s by a few months. So you do see this in some companies and they have been able to embed it in the organisation.
Tolerance for risk.
Here is a quote from a CEO of Amgen. He says, “For us, innovation means the willingness to bet hundreds of millions of dollars on a new drug. Labour to bring it out over a decade. Fail. And then, be willing to try all over again. That’s just the price of doing business in this industry and you’ve got to be willing to take these risks. Now of course, you can use new techniques that would help you to fail faster, better, cheaper but you have to take risks nevertheless.
Speaking of product champions, there is the lively debate about top-down versus bottom up. Innovation is one of those things you cannot decree, you cannot by fear order people to innovate. You need increasingly to have people throughout the organisation to be empowered to at least have some time and space to be able to come up with new ideas that you can take forward. Nevertheless, you also need people at the top of the organisation to promote and to champion this idea.
Incentives. I mentioned this asymmetry in rewarding success, but also de-stigmatising failure. And you can reward success in a number of ways. It could be financial, but you’ve got to be careful when you use purely financial incentives. Often, just recognition, can help. And equally, you’ve got to tolerate failure up to a point. More importantly, you’ve got to find ways to de-stigmatise failure, so there can be an organisational conversation about what didn’t go right, what went right, and how you would do it differently next time.
A few years ago, I was in Guangzhou in the south of China, talking to a manager of Pepsi, a Chinese manager. And he was so enthusiastic about all these new products different flavours of Crisp that he introduced to the market. He kept giving us samples for us to taste. Some of them tasted really strange to me. I asked how his boss managed him. Did they let him do whatever he wanted? And he said that his boss who was in the US, he thought, managed him through the budget. If his new product for that quarter did well he would get what he asked for and sometimes even more. But if they didn’t do well, they would clip his wings by cutting back on his budget. And I thought that was a clever way, not to dampen, they didn’t dampen his entrepreneurial spirit, but they also made sure he didn’t take excessive risk.
This is where there’s some internal autonomy within the divisions of the company and also some internal competition that helps the company bring in the competition of the marketplace within the organisation.
Two examples we could contrast of HP versus IBM. So HP for instance, if you come up with some new idea for a new kind of printer you could take it to the main division in Boise, Idaho and if they for whatever reason rejected it, you could then go to San Diego and maybe that division would be keener. And if they reject it, you could go to Portland. So you have options within the company. In IBM, they have a similar system. But you have to be able to get the agreement off the division that is likely to be cannibalised. Now that may slow things down, but that also might ensure that you don’t have unhealthy destructive competition within the company.
So, just to summarise inputs or resources are important, like R&D spending but they are more enough. Much more important is the culture that helps you to convert those inputs into products. Otherwise, you will end up like Xerox. So let me just end with some thought about your role in your organisation, as leaders. So innovation, often the belief is that it begins at the top, or at least the top person is a key driver a key championing you the innovation of companies. CEOs matter and some of the other area heads, functional heads, matter.
But, what if the top person is wrong? Here’s An Wang who came up with the word processor but then failed to repeat the trick with the PC. He said, “The PC is the stupidest thing I’ve ever heard of.” And he’s not a dumb guy but clearly he wasn’t able to see the potential of the PC. I mentioned Ken Olsen, who said there is no reason anyone would want a computer in their home in 1977. And more importantly forbade his employees from using the words home computer or personal computer in the firm. Now again, this is not a dumb person. He had a PhD from MIT. He was very successful with digital equipment in one of the biggest firms of its kind in its time. And so it’s a question of, you know of they were not thinking. It was, “What were they thinking about?” And I think really what they were thinking about was the current situation.
They weren’t thinking enough about the future. They weren’t spending much of their time thinking about future customers, future competitors and future technologies. Most of their time was dealing with the present. In fact, this is a common problem in firms, that as you go higher up in the firm, people are so bogged down with the current situation and firefighting that even though they ought to be thinking about the future they have less and less time to do so. In fact, some researchers follow top managers around to assess their time they are spending to think about the future and they came up with a distressingly low three percent of top managers spending time thinking about the future.
Now, someone you recognise well who did think about the future, systematically was Bill Gates. And he would take a week off every six months, and he would shut himself up in a cabin in the mountains somewhere. He would bring reading materials with him: letters, memos books. And he would read eighteen hours a day. And at the end of the week, he would come down a bit like Moses off the mountain. And he would send an email out to people in the company, warning them of something that they should be thinking about in the next immediate period.
And here’s an email he sent in 1995, which was about the tidal wave of Internet breaking in. He saw that there would be a huge increase in the amount of traffic on the Internet and that Microsoft should really be thinking about developing software for those kind of applications.
So in summing up, this is what we’ve talked about. I’d like you to take away three things. I suppose you all agree with that, it’s critical these days, whether you are a large or small firm. I’m sure you also have a sense of how difficult it might be to innovate not just once, but repeatedly. I’d really like for you to take away this idea that it’s important therefore to create and foster a culture of innovation within your companies. And that what that involves is thinking differently, adopting a future market focus, acting differently, be willing to cannibalise and take risk, and organising differently by using product champions, asymmetric incentives, and internal markets.
So, your role really is to be visionaries, who think a little bit about the future, imagine the future. Also your role is to be risk takers, to experiment, to try new things in small ways. Fail faster, better, cheaper. But of course, you can’t do this on your own. You have to take others with you. You have to build a community within your company, but also sometimes networks outside the community, outside the company. And you have to be champions. Technical champions. Market champions, and organisational champions. If you do that, you will be very successful. People will thank you for innovating. Thank you very much.
Audience Question: Can you tell us a little bit about the book which you had written, “Jugaad Innovation.” I heard it on the Internet. I gave it five stars when it came out. I admire it. It was awesome.
Jaideep Prabhu: Oh! Why thank you. Thank so much for that plug! Thanks for the five stars as well. I’ve written, as I have said, I have written academic stuff, but also more shall we say popular managerial work. Particularly two books, one which came out in 2012 which was called, “Jugaad Innovation.” It is a Hindi word, which is often used by people in India to describe the way in which they innovate in India which is, very frugal for one thing. They are very good at taking the cost out of the innovating process and do more with less, and it is very flexible and agile.
They are very good at improvising solutions. And if they have a plan, and it doesn’t work, they are very good at switching to another plan and another plan. And often this form of innovation is also inclusive. It is intended to take people outside the formal economy into the formal economy, because in India it is an eternity there. So, there is a book that came out in 2012 very much about what was happening in emerging markets, like India, various African economies, Latin America, in spaces such as financial services, energy, education health and so forth.
And in particular what large Western Company, the ones that face the kinds of problems that I was talking about could learn from those emerging markets in in order to do things faster, better, cheaper. Since that book came out, we’ve realised that there’s a big interest in frugal innovation in the West for the West. And many of you, particularly those in start-ups are practicing this, even as we speak. Because of not only are Western consumers and governments more cash-constrained and resource constrained after the financial crisis, but I think people are increasingly empowered in the West to do more with less.
Small teams can do now, with limited resources, what only large companies could do ten or fifteen years ago. We have plenty of examples of this kind of frugal innovation right here in Cambridge, such as the Raspberry Pi, and various applications based on the Raspberry Pi. So, thanks for the plug, and that’s a little bit about two books that I’ve written on innovation. Both of them explore implications both for small firms as well as large firms in terms of innovating faster and cheaper.
Audience Question: Simon Kimber from Create. Would you say with people like Olsen, saying they can’t see a computer in every home and Xerox wanting to keep selling copiers, do you think there was an element of deliberateness, in that, in terms of delaying what they knew was inevitable? And if so, did it work, for a while?
Jaideep Prabhu: Well, so you know. Large established companies do face a serious, and it’s not just large companies, any successful company that has a product that’s successful faces a dilemma of what to do when they get a new idea and how to commercialise the new idea. I think that sort of classic example of the dilemma was Kodak. So Kodak created the photographic film industry, it dominated it for 80 years.
It had one of the first patents, if not the first patent on digital photography in the early ‘70s. It took them something like 20 years to work out exactly what they wanted to do with digital photography relative to photographic film. And the big dilemma for them was how aggressively should they go into this new, how aggressively should they commercialise, what business model should they use for this new idea relative to the old idea given that they had huge investment and success and market share.
And it was that inability to manage that dilemma, or perhaps delaying a little too long. And maybe people studied Kodak versus, say Fuji. And Fuji made it through that. And they say the difference was as little as six months. So, that was a very interesting point. And really I think only the individual companies faced with that dilemma and really work out, what is the right point at which to jump ship? I think the important thing to keep in mind is that you have to have at least a toe in in the new market because otherwise you won’t be able to jump ship.
Audience Question: So, I’m a big believer in frugal innovation and I think it works. But the issue is it requires little money and small teams. That’s a big issue because in existing companies what gives you prestige is the money you are managing and the number of direct reports and general people you are managing. So, there’s no sexiness or prestige to innovation if you take those factors that really gives prestige in an existing company.
Jaideep Prabhu: Again, very good point. Maybe the incentives, are misaligned in a large company, where perhaps metrics of success are routinely metrics of the inputs. How much you are spending on R&D, how big are they? How many people are involved with it and so forth? Also, the prestige, often in terms of the technology and pushing the technology boundaries rather than constantly producing something that consumers may value. I completely agree that there are these barriers and that’s what makes it hard for large firms to do things faster, better, cheaper.
Nevertheless, they realised the importance of being able to do that. They realise that they are surrounded by companies who do, do it. That may be very small, today, but may be very large and their competitors’ tomorrow. So, classic example is say, a bank, like Barclay’s Bank. And Barclay’s Bank recognises that there is a world of think tank out there. There are very interesting products and services that people are…People have no connection with financial services. People have connection with software and mobile technology and so forth. There are all these applications in all these companies out there. They would like to do it themselves, but they feel constrained organisationally for many of these reasons, but also that fear of regulation and compliance and so forth.
So, what have they done? They have decided to actually engage with Syntec companies in the following way. They have created an accelerator in London, they have one in Manchester and their opening one in New York. And with tech stars, tech stars select these Syntec start ups from around the world and at any point they have ten start-ups that are housed in this accelerator for thirteen week period. And during the thirteen week period, the small firms, the Syntecs, are developing their own ideas.
They are mentored by bankers from emerging markets. And this helps both parties, the start ups get insight into how banks work. What the regulations are like customers are like. But the bankers are completely freed up in their thinking, because they are in tough with people that don’t know constraints the way they do. And at the end of the thirteen weeks, Barclay’s gets dibs on which one of these they want to buy out, which ones they want to integrate and so forth. I think you see interesting models of partnership, small and large for mutual benefit. I think this is something that I am personally very interested in. How small firms and large firms can work together to nullify their relative weaknesses, but build on their relative strengths.
Large firms have the resources, but often the inability to do things faster and better. Small firms can do that, but they often lack the resources. So, they often compliment ideas of them working together.
Audience Question: Curious about your thoughts about not being first to market, so looking at innovation. So, it’s quite a big graveyard of first markets if we look at MP3 players, if we look at Napster, Spotify and Facebook and so on. Even if we look at companies like Microsoft, they were never first to market. If you look at Windows or Office and now Azure in the chain. It’s seems that you might gain an interesting event in the market by being fast follower. What is your thought on that?
Jaideep Prabhu: I would agree with that, particularly if you are dealing with something that is quite radical in its nature. If your idea of the product or service is really new technically, and really new in terms of the benefits to customers, then there is a high degree of uncertainty, and therefore a high risk of failure. There’s a high risk of technical failure, a high risk of market failure. And you don’t want to be the first person that has to absorb the cost of that failure. But equally, you don’t want to be too slow. You want to have at least a toe in the water of that new marketplace.
You want to be in the position of being able to be a fast follower. Building on the mistakes of the first mover, but being able to catch the wave as it takes you. I work with people who have done extensive and very good work on this question. They have found in a cross sector, that there is a better benefit to the fast follower, relative to first mover, and relative to the light one. Long run market share benefits.
Audience Question: You mentioned about a cross-functional knowledge and then going deep into specifics. And it seems like that’s a very difficult thing to manage because the knowledge explosion and convergence of biotech, whatever internet, technologies and so forth. So it’s a huge knowledge base but you do have to have specific knowledge in certain technology sets. So what would your advice be for the next five to ten years’ outlook? What skill sets should we be looking at to have those complimentary skills?
Jaideep Prabhu: Good question. You may expect this answer for a marketing person, but I really believe that the thing that you need to know to be successful is the problem more than the solution. You really need to understand and therefore you need to understand the customer. What is the customer problem and pain point you are trying to solve?
You’ve got to be an expert on the problem, much more than the possible solutions. Then you got to work backwards from that to be able to find what solutions or what elements you can combine, technical elements, and business elements you can combine to solve that problem.
I’ll just give you an example of start up which I am quite familiar with. It’s a local Cambridge start-up set up by four students, one of which happens to be a PhD student of mine. These are people who don’t have any technical background. They all happen to be Gates scholars, quite smart and they happen to hang out with each other and have the willing wish to make a difference in the world. My student in particular had experience of public health programs to developing countries like Bangladesh and Latin America. He had spent time there.
He knew of a problem that many public health programmes face around the world which is often the doctors will go from the city to the villages and then to the health camps and they will not know the identity of the patient they are dealing with. The name is not enough and they often don’t have written records.
So they knew that problem and they knew it was quite widespread, not just in health programs, also financial services and many other fields. They developed a solution that they call Simprints. It’s a little mouse like product where you run your thumb across it and it reads your fingerprint. Instead of sending a photographic image, it translates that into text and sends a text message, which you can do from remote parts of Africa or Asia to a central server, which could be a smart phone. It pulls up the records and texts them back. So, instantaneously the doctor knows, is this lady in front of me, does her daughter need a vaccination now or things like that.
Now, what’s so amazing about these students is that they had this idea just sitting together and talking about stuff. Then, they worked backwards to try to find out how to solve it. Once they, you know, they won a competition initially, and they got a small amount of money and then took it further. They got people at ARM interested, including the top software programmers, now ARM were giving them their time because they find it such an interesting problem to work on.
And, they got funding from the Gates foundation. They got funding from different interests and now they are going to set up a company. And they did this in the space of three years whilst they were working on their PhDs and without having any of that technical knowledge. But, they spent a lot of time understanding the problem and trying to find a solution for it. Now they are going to be doing field trials and all that kind of stuff.
So, that’s my belief. I think understanding the problem is only going to get more and more important. Then you will find the right people to help you to develop the solution. Thank you.