Obstacles to Innovation, Or, The Recumbent Incumbent

When fighting a rear-guard action to protect the status quo is worse than embracing innovations like new technology that may disrupt the current - but establish a base for the future.

Just ask entertainment, music, retail, energy...JL


Andrew Hill comments in the Financial Times:

Incumbent companies become prone to inertia. Complacency is bad. But some of the methods that established companies use to protect themselves are worse: spending as much on lobbying and public relations as on research and development; fighting to prolong patent cover to the detriment of legitimate new entrants, and destroying potential competitors by undercutting them or buying them out, only to kill off their innovative alternative products.
A colleague recently minted a new word by accident — “incumbation”. It won’t catch on but its fleeting appearance made me wonder what such a term, if it existed, might define: the opposite of innovation.As grimy layers of admin accrete on the original bright ideals of their founders, incumbent companies become prone to inertia and what Gary Hamel, the management thinker, has called “bureausclerosis”. Such complacency is bad. But some of the methods that established companies use to protect themselves are worse. My list would include: spending as much on lobbying and public relations as on research and development; fighting to prolong patent cover to the detriment of legitimate new entrants, and destroying potential competitors by undercutting them or buying them out, only to kill off their innovative alternative products.
Leaders of incumbents also defend the status quo internally. They suffocate diversity or hold back change at the top, ramp up executive pay and construct hierarchies that blight creativity and encourage barons to build fief-like mini-incumbents inside the bigger company.
At the extreme, a dominant company may shore up its position through anti-competitive acts, such as dumping, predatory pricing or the massage or misstatement of earnings.

Tesco’s mistreatment of suppliers between 2013 and 2015 following an accounting scandal is typical of such behaviour. According to its regulator, the dominant UK supermarket deliberately delayed payment as it sought to meet targets. Tesco, which is still under investigation from the Serious Fraud Office for accounting irregularities, has said it is now “a very different company”. The fine imposed last week on GlaxoSmithKIine for illegally stifling the launch of a cheap rival antidepressant is another example. (The UK pharmaceuticals group may appeal against the ruling.)

No company wants to give up a profitable position in its market. Leadership is often hard-won. But maintaining it without adopting the dark arts of incumbation is difficult.

Google illuminates an alternative route. Larry Page set up Alphabet, its new holding company, to make the “moonshot” subsidiaries that sit alongside the core search business more transparent. Mr Page believes most ventures fail because they keep doing the same thing. They need to cultivate “zero billion dollar companies” — radically innovative enterprises that could eventually command unicorn-sized valuations.

Alphabet aspires to a balanced approach, as outlined by Vijay Govindarajan of Dartmouth’s Tuck business school in a new book, The Three Box Solution . Inspired by the Hindu gods Vishnu, Shiva and Brahma, who stand respectively for preservation, destruction and creation, he says companies must assign core operations to box one, put stuff they need to forget, sell or close in box two, and develop the future in box three.

Google, for instance, still generates 99.4 per cent of Alphabet revenues and the profits from internet search can easily fuel its moonshots. “They’ve created teams around virtual reality, self-driving cars and so on, which are separate from box one, allowing box three [activities] to take root,” Prof Govindarajan says.

A box one obsession, however, can lead to short-termism, barge aside other strategic priorities and tempt companies into time-consuming defensive battles. Technology groups are not immune. Anti-poaching deals between Silicon Valley companies, including Google and Apple, were rife before the US Department of Justice clamped down on them in 2010. Uber and Amazon have armed up in recent years by hiring political lobbyists to deal with regulatory pressure.

Meanwhile, they neglect Shiva’s appetite for destruction at their peril: if Mr Page does not have the self-discipline to ditch underperforming ventures, they will clutter the route to the launch pad for his more promising projects.

Recumbent incumbents are almost always doomed. The good news is that technology and transparency have already cut away at the distribution and information monopolies that used to shelter large, lazy companies. The bad news is that survivors will continue to use foul means as well as fair to protect themselves. Their misguided attempts at self-preservation can hobble the advance of more original, more innovative competitors.