Innovation: Learning from Success and Failure

The Innovation Process:
Learning From Success and Failure

Chunka Mui
BillionDollarLessons.com

Outline

1. Innovation Imperative
2. Learning from Failure
3. Innovation Process

© 2008 Chunka Mui | http://www.BillionDollarLessons.com

We tend to overestimate technology in the
short term and underestimate it in the long
term.

– Roy Amara


Change

Technology improves
exponentially

Killer App
opportunities

Organizations change
incrementally

Time

See “Unleashing the Killer App”
(Harvard Business School Press, 1998)

The future is here,
it’s just not evenly distributed.

– William Gibson


Text


Economics
Search costs – buyers and
Transaction Costs sellers ﬁnding each other
Price Information costs –
Understanding capabilities and
needs
Bargaining costs – Setting
terms of a sale or contract
Decision costs – Evaluating
terms, quality, worthiness
Policing costs – Ensuring terms
of sale are met
Enforcement costs – Ensuring
unsatisfactory terms are remedied,
including litigation

Total Cost
See “Unleashing the Killer App”
(Harvard Business School Press, 1998)

A Killer App that feeds on Transaction Costs

Text


Traditional Online

300 News NY
Google
Corp Times

225 2007 Revenue $16.6 B $ 28.7 B $3.2 B

EBITD margin 36.5% 19.0% 13.7%
150
P/E
41.2 10.6 13.6
Multiple
75
Market Value $184 B $46.7 B $2.5 B

0
Advertising Dollars

Sources: Advertising Age, Google Finance


Raising the Benchmarks
for the Offline World

AMZN
Lessons
1. Use “search” as the
2007 Revenue $14.8 B
springboard
2. Personalize and target with
EBITD margin
recommendations 6.2%
3. Enhance confidence with
customer reviews P/E
68.8
4. Cement satisfaction with Multiple
flawless fulfillment
5. Build buzz by sharing the love
Market Value $34.1 B
6. Enlist customers as sales force
7. Expand selection through
partnerships
See “Amazon Raises the Benchmarks for the Off-
line World.” Amazon e-Doc. March 2005.

Smart Products, Connected Customers and
a Closed Information Loop


Social Networks

MySpace Facebook

February 2008
68 32.4
Unique Visitors (M)

Ave. Daily Visitors (M) 17.7 8.6

Minutes per Visitor 242 161

Sources: Comscore Networks


Mass Collaboration

• 75K active
contributors

• 2.4M+ articles in
English

• 10.7M+ articles in
250+ languages

• 50M+ unique
visitors per
month

• Top 10 web site


Communities of Doctors: Sermo


Communities of Patients:
PatientsLikeMe.com

“an incendiary
force in the
health-care
industry.”

--The New York Times


Changing Service Models


Personalized Medicine


Questions

• Under what scenarios might the nature of
competition change dramatically? For the better?
For the worse?

• How might you radically redesign your core product?

• How might you “close the loop” with partners and
patients to enhance satisfaction and build a lasting,
valuable relationship?

• How might you leverage mass collaboration and user
generated content to strengthen your brand,
enhance customer experience, and build market
share?

An Exercise in Focus


An Exercise in Change Perception


THE FINDINGS:

46% of failures could have been avoided

Most were caused by ﬂawed strategies,
not inept execution or exogenous factors

THE DATA: STUDY OF 750 MAJOR U.S. BUSINESS FAILURES, INVOLVING
BILLIONS IN LOSSES FROM WRITE-OFFS, DISCONTINUED OPERATIONS, AND
BANKRUPTCIES, 1981-2005


Expanding into adjacent markets is the
easiest way to grow.*

– Jack Welch

* For example, by selling new products to existing
customers or existing products to new
customers, or via new channels.


Misjudged Adjacencies

Example Strategy
Laidlaw’s move into Apply logistics expertise
ambulance services from school-bus operations
to health care transport

Stumbling points
Lacked expertise in
regulation and negotiating
health-care payments

Result
$1.8B writeoff

“Laidlaw realized too late that ambulances
are a health-care business, with complex
regulatory issues, not a transport business.”

– John Grainger,
Laidlaw CEO


Adjacencies: Red Flags

1. Fleeing from the core
2. Lack of expertise
3. Overestimating the core’s strengths
4. The ﬁckle customer


Seven Failure Patterns

1. Illusions of Synergy
2. Faulty Financial Engineering: Taking a shortcut through the
numbers
3. Deﬂated Rollups: Buying a string of rock bands to form an
orchestra
4. Staying the misguided course: Threat? What threat?
5. Misjudged Adjacencies: The grass isn’t always greater.
6. Fumbling technology: Riding the wrong technology curve
7. Consolidation blues: Doubling down on a bad hand


Synergy Mirage

Example Strategy
Unum’s merger with Combine two disability
Provident insurers and cross-sell to
each other’s customers

Stumbling points
Incompatible customers,
sales models, and
information systems

Result
50%+ drop in market value

Faulty Financial Engineering

Example Strategy
Green Tree Financial Grow by aggressively selling long-term
mortgages on trailer homes

Stumbling points
No incentive to qualify buyers because
proﬁts came from origination and
securitization; accounting used
unrealistic assumptions about defaults

Result
$3B in write-offs and bankruptcy for
parent company (Conseco Financial)


Deﬂated Rollups

Example Strategy
Medpartners’ massive Take administrative load off
rollup of small physician doctors, gain efﬁciency through
practices in 1990s scale and better processes

Stumbling points
Disparate IT systems; physician
resistance to common practices

Result
$2B+ in losses in 1997-98;
exited practice management
business

Stubbornly Staying the Course

Example Strategy
Eastman Kodak Stick with high-margin traditional
photo ﬁlm and processes

Stumbling points
Low-margin digital technology
replaced ﬁlm and prints

Result
75% drop in market value and
two-thirds reduction in company
workforce

“But it was ﬁlmless
photography, so
management’s
reaction was, ‘that’s
cute — but don’t tell
anyone about it.’ ”

Steve Sasson, Kodak Engineer
Inventor of the Digital Camera

Source: New York Times, 5/2/2008


Innovation Process

Contrary to popular belief, “ﬂashes of
genius” are uncommonly rare. Innovation
begins with the analysis of opportunities. The
search must be organized, and must be done
on a regular, systematic basis.

– Peter Drucker

The Challenge of Too Many Ideas

Options
Enabling
Advantage
Competitive Impact

ROI
Required
Parity

Disadvantage

Stay In Business Return on Investment Option Creating

Investment Categories


Underperformer

Advantage
Competitive Impact

Parity

Disadvantage

Note: Size of circle is
proportional to amount Stay In Business Return on Investment Option Creating
of investment


Commodity

Advantage
Competitive Impact

Parity

Disadvantage

of investment


Retooling

Advantage
Competitive Impact

Parity

Disadvantage

of investment


Frenzy

Advantage
Competitive Impact

Parity

Disadvantage

of investment


Market Leader

Advantage
Competitive Impact

Parity

Disadvantage

of investment


Decisions of the kind the executive has to
make ... are made well only if based on
conﬂicting views, the dialogue between
different points of view, the choice between
different judgements.

– Peter Drucker


Three Models

Alfred P. Sloan Ancient Persians Catholic Church


Avoiding the Same Mistakes
Empower Internal Devil’s Advocates to Ask
the Tough Questions

• Is it a realistic strategy for long term success?

• What can we learn from history?

• Have vital information and divergent viewpoints
reached decision makers?

• Have we assessed the true advantages--and
liabilities--that come with scale?

• Have we considered all our options?

• Would you personally bet on it?


The Best Defense

• Transparent, even to
An independent devil’s
the Board
advocate review

• Led by a trusted
outsider

• Offers fresh
perspectives

• Focuses on facts, not
emotion or intuition

• Delivers questions,
not answers

Epilogue

• Looking for the best option, not perfection
• There is no win to guarantee success
• Business is a contact sport
• Ask the tough questions
• Make the strategy stronger or identify fatal
ﬂaws, whichever needs to be the case


The Future

The best way to predict the future
is to invent it.

– Alan Kay


Biography
Chunka Mui’s perspectives have been shaped by
more than 25 years of research, consulting,
management and entrepreneurship. He is the co-
author of the best-selling Unleashing the Killer
App, Digital Strategies for Market Dominance
(Harvard Business School Press, 1998). The Wall
Street Journal recently named the book one of
the ﬁve best books on business and the
Internet. His new book, Billion-Dollar Lessons,
What You Can Learn from the Most Inexcusable
Business Failures of the Last 25 Years will be
released in September 2008 by Portfolio, an
imprint of Penguin USA. A companion article,
Seven Ways to Fail Big, will be published in the
September 2008 issue of the Harvard Business
Review.

Chunka is an independent business advisor. He
is also a fellow with Diamond Management and
Technology Consultants, a global consulting ﬁrm
headquartered in Chicago. He holds a B.S. in
electrical engineering and computer science
from MIT.


Innovation: Learning from Success and Failure

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