Innovation doesn't have a positive outcome for every business.
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If you think that innovation is the cure for what ails your business, you're not alone. A recent study by management consulting firm Accenture found that more than 90 percent of executives believe that innovation — the process of inventing or introducing something new — is critical to business success. And a January 2013 study by professional services network Deloitte found that 78 percent of millennials worldwide think that innovation is crucial to the success of companies.
But not everyone agrees that innovation is the best thing for business. Ankush Chopra, an associate professor of innovation and strategy at the Fribourg School of Management in Switzerland, believes that innovation is actually the biggest threat facing companies today. He explores the destructive role of emerging technologies and business practices in his new book, "The Dark Side of Innovation" (Raphel Marketing, August 2013).
In an email interview with BusinessNewsDaily, Chopra explains why innovation is not the panacea that some believe it to be and offers useful tips for harnessing the power of innovation within your company.
BusinessNewsDaily: How is the collapse of Kodak an example of the dark side of innovation?
Ankush Chopra: The dark side of innovation refers to innovations that destroy profits and punish incumbents even when they innovate. Due to the nature of these innovations, incumbents are stuck with very difficult options — if they embrace such innovations they cut their profits and if they avoid such innovations they risk becoming obsolete. In the face of such difficult choices, firms often behave as deer in the headlights— they freeze. This often leads to their fall.
Kodak — the biggest camera and film company from the film era — innovated heavily in digital imaging. However, closer to commercialization, the organization resisted this technology due to which Kodak kept falling behind in the digital imaging world. Eventually it filed for bankruptcy.
BND: Why do firms find it hard to deal with the dark side of innovation?
A.C.: The simple reason is that our deep-rooted instincts are from a different era than the one we live in today. While the demands on our thinking have changed, the way we instinctively think hasn’t. This mismatch creates blind spots for us, and this is the reason why firms find it hard to deal with the dark side of innovation.
This is better understood with an analogy. There was an era when knowing that a moving, striped object meant danger and reacting to it quickly meant the difference between life and death. If humans had begun calculating probabilities at that time, we may have become extinct. However, today we are in the age of data and analytics, where hidden meanings and insights give us the edge. Today relying only on instinctive reactions is not appropriate in many situations. If we rely on instincts when the situation demands imagination and higher order thinking, we are prone to making big mistakes.
Let me give you an example of this phenomenon by asking you to choose between the following two options: a) you give me $50; b) you toss a coin and, if you win, you give me nothing, if you lose you give me $100.
If you are like most people, you will want to toss the coin instead of giving me $50. When you do that, you subconsciously estimate that the probability of winning the coin toss is more than 50 percent. This is a mistake and points to a deep-rooted bias within our psyche. When faced with the dark side of innovation, firms also face such decision-making traps.
BND: What are some other examples of companies that have faced "profit- destroying innovations?"
A.C.: Index funds for mutual funds industry, quartz watches for Swiss watchmakers and voice-over-IP for telecom makers are some examples of profit- destroying innovations. A more recent example is the lighting industry. LED bulbs have a life 25 to 50 times longer than that of incandescent bulbs. However, their costs are rapidly declining to less than eight times the cost of incandescent bulbs.
Thus, for every LED bulb sold by a lighting company they gain eight units of revenue (from selling LED) but lose 25 units of revenue (from not selling incandescent bulbs). This implies a revenue reduction of around 70 percent. When you lose 70 percent revenue, it is very hard to maintain profits. These firms will voluntarily reduce their profits if they embrace LED but may become irrelevant if they avoid LED.
We may see the same happen in the alkaline battery industry, too. Once wireless electricity becomes common, the need for alkaline batteries will reduce significantly. The scariest part is that this can happen in any industry without much notice.
BND: Is there a bright side to all this?
A.C.: The bright side to this is that incumbents can prevent a fate similar to that of Kodak. By doing so they can prevent the devastating consequences for the thousands of employees, investors and communities that depend on large firms. The key is to match the thinking process with the thinking tasks that managers face today.
For many years I have been teaching classes and workshops on modern ways of thinking that allow managers to prevent these errors in judgment. Each time I conduct the workshop, participants are amazed to realize that the way they naturally think needs a major upgrade.
I developed a methodology that firms can follow to survive and thrive in the face of the dark side of innovation. It works like a corporate tsunami alert that not only warns managers about such threats on the horizon but also enables them to deal with such threats.
If firms can be prevented from making the same mistakes in the future, I see that as the bright side of all this.
BND: What are some strategies that businesses can use to assess the danger of innovation in their industry?
A.C.: The paradox of corporate success is that the firms have to be very focused to stay ahead of competition. However, this focus also makes them develop a tunnel vision, which makes them fail.
As an analogy, a race car moving at over 200 miles per hour needs intense driver focus. Without a narrow tunnel vision, such a driver will find it hard to win the race. If suddenly the car race moves from a racetrack to city streets, the same tunnel vision that was useful earlier will become a liability for the driver. The problem is that while a driver can shift between tunnel vision and a broad vision, companies find it very hard to do so.
To avoid such a fate, firms need to build mechanisms to enable them to systematically look out for and understand the myriad changes taking place in their environment. Such mechanisms should force firms to view the future states of the world objectively and should enable managers to leverage the ever changing competitor and consumer landscape around them.
BND: How can businesses best take advantage of emerging opportunities for innovation?
A.C.: To best take advantage of emerging opportunities for innovation, businesses need a well thought through innovation strategy. Such a strategy will ensure that businesses leverage emerging opportunities that are in line with their innovation objectives.
It is almost like having a route plan charted for going from place A to place B. Without such a route plan you may get derailed due to various opportunities and challenges on the way. With a plan, you can leverage those opportunities to get to your destination faster and avoid the traps that slow you down.
BND: In Chapter 4 of your book, you talk about developing a "value resurrection strategy." What is this and does every business need one?
A.C.: A value resurrection strategy is a method to recreate profits in the industry when profits are under pressure. There are two instances when you need a value resurrection strategy: first, when you face the dark side of innovation and second, when your business strategy is reaching its limits.
When the entire Swiss watch industry was facing extinction due to quartz watches, Swatch used this strategy to resurrect value. It changed the meaning and purpose of a watch from being a time keeper to a fashion accessory. Since the dark side of innovation threatens profits in a major way, such a strategy is the essential tool that firms need to recreate profits.
Look at Microsoft Office and how much pressure it is facing at the moment. Due to emerging alternatives to office suite, it will find it difficult to use its upgrade strategy in future. In effect, its strategy is reaching a limit. At this point, Microsoft Office needs a value resurrection strategy. Any business facing commoditization of its products also needs this strategy.
Originally published on BusinessNewsDaily.