Innovation can be viewed as a process involving a series of discrete break-through inventions followed by incremental improvements which eventually leverage the full potential of the initial invention. It goes like this: Entrepreneurial start-ups experiment with their energy, time and capital, they take risks until they’ve cracked the profit code. Once the entrepreneur has done the risky innovative work, the industrial model muscles in to take over, normally in the form of an acquisition or copying the idea; whichever is cheapest. The innovation is then either squashed through mismanagement, or because it threatens to disrupt and cannibalise existing profits. Those innovations that survive then run the gauntlet of being stripped of costs ““ jobs losses etc. ““ risks removed and efficiencies improved.
Innovation-through-acquisition has become the preferred industrialist model for discovering new areas for revenue and profit growth and, while this model has served well in the past, two emerging trends suggest that this approach will not work for much longer in the 21st century.
The first trend is the emergence of a new breed of Generation Y entrepreneurs and innovators who do not want to be bought-out by an older, more established business. Facebook, a relative corporate newcomer, but an old hat in terms of social media, discovered exactly this when they attempted to gobble up Snapchat for a sizeable sum of $3billion. Founding partners Evan Spiegel and Bobby Murphy rejected Mark Zuckerberg’s offer outright. “There are very few people in the world who get to build a business like this,” Spiegel told Forbes in 2014:
“I think trading that for some short-term gain isn’t very interesting.”
Money doesn’t motivate Millennials; making a meaningful difference does.
The second trend is an outcome of technological convergence resulting in three incredible developments: The first is our unprecedented access to affordable, mobile disruptive and breakthrough technology. The second is the power of social media at the fingertip of billions of people. The third is the democratisation of knowledge and immensely cheap storage costs in the cloud. Combined, these three consequences of our digital age mean that start-ups can reach a global audience for the fraction of the investment it used to take, and they can reach critical mass and become the market leaders very quickly.
Imagine you are Brian Chesky, the founder and CEO of Airbnb, when he approached venture capitalists for a first round of funding. Chesky was looking for $150,000 for a ten per cent stake in his business. Of the seven venture capitalists he approached, five rejected the opportunity as crazy and two never even had the decency to respond with an answer. But then let’s be fair to these venture capitalists, who in their right mind would invest in a business model that, as legendary investor Fred Wilson now remorsefully says, “We couldn’t wrap our heads around air mattresses on the living room floors as the next hotel room and did not chase the deal.” Today a disheartened Wilson âˆ’ his team passed on Airbnb’s early financing round ““ knows that the ten per cent that was on offer is valued at $3 billion. Airbnb have rocketed to the position of largest hospitality company in the world, with over 1.5 million listings in over 34,000 cities in 192 countries, in only eight years.
No hospitality company can buy Airbnb now and, even if they could, why would Brian Chesky want to sell? We are seeing this time and time again: Uber, Snapchat, Google, Facebook, Amazon and a number of Unicorn businesses became, or have so much potential to become, market leaders, that no established business could seriously entertain acquiring them. The ability of start-ups to become market leaders seemingly overnight is not an aberration, it is now the new normal.
As attractive as the innovation-through-acquisition model may seem to C-Suite executives, its impact on company culture means that it is now its Achilles Heel. Teresa Amabile, professor of entrepreneurial management at Harvard Business School, points out that this approach to innovation now means that: “Creativity gets killed much more often than it gets supported. For the most part, this isn’t because managers have a vendetta against creativity. On the contrary, most believe in the value of new and useful ideas. However, creativity is undermined unintentionally every day, in work environments that were established””for entirely good reasons””to maximize business imperatives such as coordination, productivity, and control.”
The dilemma for the C-Suite at the helm is this: Seek out promising new space to escape ever crowded markets, or face ever tighter margins and get replaced. But new is unproven and numerous experiments can bleed cash for years. Running risky projects is an unaffordable luxury when operating on a quarter-to-quarter income statement basis. CEOs have learnt, many the hard way, that in a short-term shareholder-driven world, there is little real incentive to pursue true innovation, or even risk innovation through acquisition. Executives know this – it makes no sense to risk career and reputation when there is an easier route.
According to Bloomberg, a financial data and media company, by late 2015 global corporations held over $15 trillion in cash and cash equivalents – a staggering fourfold increase over the previous ten years. “The Cannibalised Company”, a special report by Reuters news agency, profiled how S&P 500 companies as a group gave almost all their 2014 profits back to shareholders. For the venture capital and shareholder-driven CEO, buybacks have a double amplifying effect of increasing not only share price by decreasing the number of shares available, but of also increasing earnings per share even if total net income remains flat.
Clever financial massaging has ensured happier shareholders for the past decade, but when these buybacks come at the expense of innovation and jobs, well then competitiveness suffers, and this strategic financial management madness begins to bite back. American and European businesses have not become less competitive because of immigrants or outsourcing and trade deals, but because they have systematically neglected to invest in their future. According to Gary Pisano, a professor at Harvard Business School: “The U.S. is behind on production of everything from flat-panel TVs to semiconductors and solar photovoltaic cells.” Annual data compiled by the US Commerce Department supports his view. Their studies show that the reluctance of the C-Suite to raise capital investment and invest in new innovations have left companies with the oldest plants and equipment in 60 years. The same is true of almost every developed nation.
This is an alarming negative trend and there is growing evidence that since the 1970’s meaningful innovations ““ those that generate step change improvements, economic growth, prosperity and wealth ““ have been on the decline. Economists like Robert Gordon argue that the innovation fruits of the past have been snapped up, and the economic growth we’ve become accustomed to is gone. We may think we are living in a fast pace d, technological age but even the platform that has fuelled the digital and mobile revolution, the Internet, was invented in 1969. It’s not that organisations have stopped innovating, it’s just that, on the whole over the past forty years, these innovations have been evolutionary rather than revolutionary.
The conundrum: If the low hanging innovation fruits have already been picked and growth is on the decline, then a growing and uncomfortable realisation is that the world is staring down a new economic era characterised by decades of shifting demographics, subdued growth, lower profits, higher inflation, and dwindling global trade. This goes some way to explaining why productivity gains and wages have been flat in the US and Europe for the past thirty-five years. Over the past two-hundred years every generation has realised a doubling in lifestyle and wealth over the previous generation, but this is no longer a guarantee.
While Robert Gordon makes a provocative point, I do not agree that the world has run out of meaningful innovation fruit. Humans have achieved a lot but we are not done developing. We are not living sustainable, happy and fulfilled lives. We are not living in ecologically sustainable ways and there is still far too much inequality. There remains heaps still to do before we run out of meaningful innovative opportunities.
The problem is that most organisations have given up on being remarkable. They are too motivated by cost savings, incrementalisation, avoiding risk and financially massaging share price rather than investing and inspiring their people to dream big and deliver meaningful innovations.
There are a few notable exceptions such as GSK, IBM, GE, Alphabet (Google) and Tesla, but on the whole over the past three decades there has been a dearth in meaningful innovations. This represents a huge problem staring down the face of capitalism in the form of rising populism, growing competition and activist consumerism. But it also offers up new opportunities, because it’s not too late to make a significant difference.
A group of vanguard companies have recognised this and started focusing on the longer-term future, and investing in remarkable projects that build meaningfulness for the communities they service. Recognising this strategic shift, Fortune magazine launched their Change the World List, a list of 50 mega-corporations that have placed delivering meaningful societal benefits at the heart of their organisation’s purpose and strategy. This is an important nascent development in capitalism history because it represents a shift in the mind-sets of CEO’s and Boards in recognising the role business plays in positively taking society to higher levels.
Even Jack Welch, whom many regard as the father of the “shareholder value” movement, admitted to the Financial Times that: “On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy,” he said. “Your main constituencies are your employees, your customers and your products.”
A growing chorus of CEOs are joining Mr Welch. These astute business leaders have recognised how damaging the strategy of shareholder maximisation has become to the competitiveness of businesses in developed nations over the last thirty years, since the strategy of shareholder maximisation became popular. Alibaba CEO Jack Ma has stated that “customers are number one; employees are number two and shareholders are number three.” Paul Polman, CEO of Unilever ““ a client of TomorrowToday – has decried “the cult of shareholder value.” Whole Foods founder John Mackey has condemned businesses that “view their purpose as profit maximization and treat all participants in the system as means to that end.”
The recognition that the business of business isn’t just about creating profits for shareholders, but also about delivering meaningful benefits within their communities and the world they influence, is gaining momentum. As a result, an exciting wave of remarkable business innovation is beginning to take-off.
The question is, are you ready to catch this wave?