A Formula for Innovation
Michael II. Shamos
Shamos, Ph
Ph.D.,
D JJ.D.
D
Institute for Software Research
Carnegie Mellon University
HONG KONG UNIVERSITY
JANUARY 29, 2008
COPYRIGHT © 2008 MICHAEL I. SHAMOS
JUNE 10, 2007
American Express v. Dow Jones Average
Google Two-Year Stock Performance
GOOGLE
+74%
DOW
+30%
S&P 500
+29%
29%
NASDAQ
+26%
Sometimes innovation is not rewarded
AXP Market Cap: $68B
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Sometimes innovation wins big
GOOG Market Cap:
p $201B
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Death from Failure to Innovate
Eastman Kodak 2000–2005
Are innovation
and stock price
connected?
DOW-JONES
KODAK
• DOW DOWN
~ 3%
• KODAK DOWN ~ 50%
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HONG KONG UNIVERSITY
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KODAK DROPPED FROM
DOW AFTER 74 YEARS
COPYRIGHT © 2008 MICHAEL I. SHAMOS
Kodak Loss Continues 2005
2005-2007
2007
“The purpose of consulting
DOW JONES
i to
is
t help
h l dinosaurs
di
die more slowly
slowly.”
KODAK
>
A
Anonymous
accenture executive
i
• DOW UP
~ 25%
• KODAK DOWN ~ 25%
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Iridium
• 1985: Motorola engineer envisoned a constellation of
77 satellites to provide global phone service
Sometimes
innovations
die fast
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– Element 77 in the periodic table is Iridium
• 1991: Motorola established Iridium separately
• Investment: $6.6 billion, enough for 66 satellites
– Element 66 is Dysprosium
y p
•
•
•
•
•
1998: Service begins. $3K handset, $3-8 per minute
Disaster obvious by
y April
p 1999
CEO quits before first quarter report
Bankruptcy filed Friday, August 13, 1999
Assets sold for $25M
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Life
etime in Yearrs
Death Rate for S&P 500 Companies
p
From Creative Destruction by Foster and Kaplan
Lifetimes shortening because:
1. Shortened technology cycles
2. Emphasis on short-term gains
What is innovation?
Year
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Most Innovation Talks
are Not Innovative
What is Innovation?
One of the most overused words
in the business lexicon
lexicon.
• To prepare, I examined about 100 innovation
presentations
• Highly repetitive
• Offered advice easier said than done
– “Encourage entrepreneurial thinking”
• Message often not clear
– Over 125 million “innovation” pages on
Google
– Over 187,000
187 000 books returned by
Amazon.com for ‘Innovation’
“Innovation” is used for everything
y
g
from incremental improvements to
fundamental, society-changing
creations
creations.
… it is customers and clients – not innovators – who determine
how great ideas become successful innovations
innovations…
nothing happens until something gets bought ….
Michael Schrage – Harvard Business School
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COPYRIGHT © 2008 MICHAEL I. SHAMOS
SOURCE: INNOVO
Innovation Talks
Does this have any meaning at all?
Rand Blazer was fired the same year
(
)
as his innovation talk (2004).
BearingPoint stock was down
50% since its IPO in 2001
2001.
The stock is still down 50% today.
It hasn
hasn’tt moved in 3 years
years.
Summary of 100 Innovation Talks
(on one slide)
• Promote and reward innovation
g
• Empower creative thinking
• Be open to new ideas; don’t dump on other
p p
people’s
• Let employees spend time innovating
• Encourage entrepreneurial thinking
• Institute a “process” for innovating
• Listen to your customers for product ideas
• Get lots of patents
HONG KONG UNIVERSITY
SOURCE: “LEADING THROUGH INNOVATION,” RAND BLAZER, FORMER CEO, BEARINGPOINT
JANUARY 29, 2008
COPYRIGHT © 2008 MICHAEL I. SHAMOS
Innovation is Darwinian
Darwinian Innovation
• Self-replication/Inheritance:
–Entities
Entities must be able to reproduce; offspring inherit
traits of their parents.
• Variation:
–Must be a range of different traits in the entities,
and a mechanism for introducing new variations
into the population (mutation = innovation).
Se ect o
• Selection:
–Inherited traits must affect the ability of the entities
to reproduce
p
themselves, e.g.
g by
y survival or ability
y
to produce offspring.
Darwin says to innovate you must:
prerequisites
q
for evolution
These are the p
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Types of Mutation
• Generate
G
t mutations
t ti
–
–
–
–
Some are minor (“improvements”)
Some are deliberate (“developments”)
( developments )
Some are lucky (“discoveries”)
Some are radical (“innovations”)
• Recognize which ones will succeed
– In nature, some species are losers
• Can’t let the company be one of those!
– Monitor innovation for success
• Lik
Like N
Nature,
t
it’
it’s a numbers
b
game
• Good recognition helps reduce the numbers
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Outcomes of Innovation
Differentiation
Mutation
COPYRIGHT © 2008 MICHAEL I. SHAMOS
Neutralization
Example
p
Product Innovation
New or improved product
Process Innovation
New or improved production process
Organizational Innovation
New organizational arrangement: a
new venture division, a new internal
communication system
Management Innovation
New managerial practice: TQM, BPR
(business process re
re-engineering)
engineering)
Marketing Innovation
New marketing practices: New
financing arrangement, new sales
approach
Service Innovation
New service concepts: online financial
services
Failed
Attempts
Productivity
Waste
Waste: Innovation projects that even when they succeed
fail to create sustainable competitive advantage
SOURCE: TCG ADVISORS
HONG KONG UNIVERSITY
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COPYRIGHT © 2008 MICHAEL I. SHAMOS
Does
oes tthe
e First
st Mover
o e Win?
Why Companies Fail
• Kodak: no innovation. No company
p y left.
• Iridium: BAD evaluation function. No company left.
Why Companies Succeed
• HP: lots of innovation. Great company left.
• Procter & Gamble: GOOD evaluation function
function.
– Beat Dow over 35 years 3500% to 1700%
– Great company left
left.
•
•
•
•
•
•
•
•
•
•
•
Personal computers
Video recorders
Disposable diapers
Light beer
Safety razors
Soft drinks
Copiers
Word processing software
Online bookseller
Commercial search engine
Microprocessor
•
•
•
•
•
•
•
•
•
•
•
•
Common Answers
Apple
Sony
Pampers
Miller Lite
Gillette
Coca-Cola
Xerox
WordPerfect
Amazon
Google
Intel
•
•
•
•
•
•
•
•
•
•
•
•
Correct Answers
MITS (Altair)
Ampex
J&J (1949)
Piels Trommer’s (1961)
Star (1875)
Vernor’s ((1896))
3M
IBM
Books com
Books.com
Lycos
Intel
Sometimes. But he might just cause spillover.
SOURCE: PETER GOLDER
HONG KONG UNIVERSITY
JANUARY 29, 2008
COPYRIGHT © 2008 MICHAEL I. SHAMOS
Failure rate
Market share
Market leadership
Median years of leadership
64%
6%
9%
5 years
• Since 1974,
1974 current leaders have entered 5
years after pioneers
SOURCE: PETER GOLDER
HONG KONG UNIVERSITY
JANUARY 29, 2008
JANUARY 29, 2008
COPYRIGHT © 2008 MICHAEL I. SHAMOS
What Happens When “Innovative”
P bli Companies
Public
C
i Innovate?
I
t ?
Pioneers in 66 Markets
•
•
•
•
HONG KONG UNIVERSITY
•
•
•
•
•
•
•
•
•
•
•
In the past 5 years the Dow has gained 42%
Apple (+1000%)
CEMEX (+175%)
Coca-Cola (DOWN 3%)
Dell (+4%)
eBay (+130%)
I t l (DOWN 20%)
Intel
Merck (DOWN 5%)
( 20%)
M t l (+20%)
Motorola
NetFlix (+190%)
P
Pepsico
i (slightly below Dow)
COPYRIGHT © 2008 MICHAEL I. SHAMOS
ALL LISTED IN “101 INNOVATION BREAKTHROUGHS”
What Happens When “Innovative”
P bli Companies
Public
C
i Innovate?
I
t ?
•
•
•
•
•
•
•
•
•
•
Pfizer (DOWN 20%)
Pfi
PNC Financial Services (tracked Dow)
(t k d D
Dow))
Procter & Gamble (tracked
Research In Motion (+2000%)
( O
20%)
%)
Sirius Satellite Radio (DOWN
What Happens When Public
Companies Innovate?
• Note: the losers range from –20% to +20%
• Winners range from +130% to +2000%
• When they beat the Dow, they beat it by a lot
• Very little connection between a reputation for
innovativeness and stock price
• Possible confusion over what is “innovative”
• Innovativeness and longevity are related
• You have to be innovative just to match the Dow
Southwest Airlines (DOWN 10%)
Starbucks (+150%)
Teva Pharma (+130%)
3M (tracked Dow)
TiVo (tracked Dow)
ALL LISTED IN “101
101 INNOVATION BREAKTHROUGHS”
BREAKTHROUGHS
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3M 37-Year Stock Performance
Innovation
o at o at 3M
3
• Technical people encouraged to develop their own ideas
in environment of innovation and creativity
• Corporate
p
Innovation Council
• Failure an accepted and essential part of progress
• 3M is open, informal, and on a first-name
first name basis
NASDAQ
+2000%
S&P 500
+1500%
DOW
+1500%
3M
+1000%
Because of its product mix,
3M can’t beat the Dow
• 3M has grown mostly through evolutionary spin-off
• Diversified technology base - a strength & a challenge
• “Synergy is one of our greatest strengths”
3M shareholders would be better
off investing in stock indexes
• Technology exchange a essential part of success
• Requires 30% of sales each year in new products
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SOURCE: GEOFF NICHOLSON, 3M
HONG KONG UNIVERSITY
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COPYRIGHT © 2008 MICHAEL I. SHAMOS
Starbucks Innovations
(All mutant – very Darwin)
• Differentiated business concept
– Expensive coffee in a social environment,
I t
Internet,
t music
i
• Contrarian real estate strategy: clustering
• Partnerships
– Barnes & Noble, Pepsi
• Almost no advertising (1% of revenue, 3% of profit)
– At Verizon, it’s 2.5% of revenue, 37% of profit
• Mine the wallet
– Diverse products
– Internet increases time-in-store, more coffee
How Does Google Innovate?
• 20% time: 1 day a week free to innovate
• Brainstorming every 6 weeks with 100 engineers
– 6 concepts pitched for 10 minutes each
• Big Think
– Ideas that can have major impact
• Googlettes: internal, baby Googles
– Google understands its toughest
competition may come from within
• Collaborative tools
• Research lab on Carnegie Mellon
Campus: 150 employees
• Innovation by acquisition
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Population in Developed Countries
Age
“You’ve got to go out on a
limb sometimes because
80
+
70
60
50
that’s where the fruit is.”
Males
40
F
Females
l
30
20
Will Rogers
10
0
400
300
200
100
0
100
200
300
400
Population (in millions)
SOURCE JOE PANNETIERI
SOURCE:
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HONG KONG UNIVERSITY
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COPYRIGHT © 2008 MICHAEL I. SHAMOS
Purpose of Innovation
Population in Developing Countries
Age
80
+
•
•
•
•
70
60
50
Males
40
F
Females
l
30
20
Ultimately
y the company
p y is the creation
The company is the innovation
Products themselves are not the objective
j
The innovative company follows Darwin, tries many
products and services
• Function of innovation: build an unassailable
company
10
0
400
300
200
100
0
100
200
300
400
Population (in millions)
SOURCE JOE PANNETIERI
SOURCE:
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HONG KONG UNIVERSITY
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COPYRIGHT © 2008 MICHAEL I. SHAMOS
“The difficulty lies not in the
new ideas,, but in escaping
p g
from the old ones.”
&
John Maynard Keynes (1936)
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R&D Investment as Percentage of GDP
% GDP
5.0
Israel
Sweden
FINLAND
Japan
Iceland
USA
Korea
Denmark
Germany
A ti
Austria
OECD
France
Singapore
Great Britain
Canada
Norway
China
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
90
91
92
93
94
95
96
97
98
99
00
01
02
03
The Trend is Not Good
I 2004,
In
2004
China graduated over 600,000 engineers
India 350,000
U S about 70
U.S.
70,000
000
04
Estimate
Source: OECD, Main Science and Technology Indicators Database
HONG KONG UNIVERSITY
JANUARY 29, 2008
SOURCE: GEOFF NICHOLSON,
NICHOLSON 3M
COPYRIGHT © 2008 MICHAEL I. SHAMOS
HONG KONG UNIVERSITY
JANUARY 29, 2008
COPYRIGHT © 2008 MICHAEL I. SHAMOS
The Bubble Expanded
The Internet Bubble
NASDAQ
PEAK 3/00
WEBMETHODS
IPO 2/00
NASDAQ 34
34-YR
YR CHART
BOO.COM BKRPT 5/00
WEBVAN
IPO 11/99
BUBBLE
ETOYS BKRPT 3/01
ETOYS IPO 5/99
INTEGRATED
WEB BROWSER
6/98
GOVERNMENT
INTERNET
SPONSORSHIP
ENDS 5/95
WEBVAN BKRPT 7/01
EBAY IPO
5/98
SEPT. 11, 2001
AMAZON IPO
5/97
BLODGET AMAZON
PREDICTION 12/98
PAINE WEBBER
QUALCOMM
PREDICTION 12/99
NORMAL GROWTH
NASDAQ 9
9-YR
YR CHART
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NORMAL
GROWTH
The Internet Bubble
U.S. DOLLAR
IN EUROS
“Even
Even if you are on the right
track, you’ll get run over if
U.S.
U
S DOLLAR
IN MARKS
you just sit there.”
Will Rogers
NASDAQ 9-YR CHART
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