The Innovation Process:
Learning From Success and Failure

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




1.                Innovation Imperative
2.                Learning from Failure
3.                Innovation P...
We tend to overestimate technology in the
 short term and underestimate it in the long
                   term.

         ...
Change

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

                                          ...
Text




© 2008 Chunka Mui | http://www.BillionDollarLessons.com
Economics
                                                                        Search costs – buyers and
              ...
A Killer App that feeds on Transaction Costs




                                                          Text




© 2008...
Traditional                           Online

300                                                                         ...
Raising the Benchmarks
                                                          for the Offline World

                   ...
Smart Products, Connected Customers and
       a Closed Information Loop




© 2008 Chunka Mui | http://www.BillionDollarL...
Social Networks

                                        MySpace                 Facebook


       February 2008
         ...
Mass Collaboration


•   75K active
    contributors

•   2.4M+ articles in
    English

•   10.7M+ articles in
    250+ l...
Communities of Doctors: Sermo




© 2008 Chunka Mui | http://www.BillionDollarLessons.com
Communities of Patients:
                                 PatientsLikeMe.com

                                            ...
Changing Service Models




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




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

    •        Under what scenarios might the nature of
             competition change dramatically? For the bet...
Outline




1.                Innovation Imperative
2.                Learning from Failure
3.                Innovation P...
An Exercise in Focus




© 2008 Chunka Mui | http://www.BillionDollarLessons.com
An Exercise in Change Perception




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




            46%                              of failures could have been avoided

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

                                         ...
Misjudged Adjacencies

Example                                                   Strategy
Laidlaw’s move into             ...
“Laidlaw realized too late that ambulances
     are a health-care business, with complex
   regulatory issues, not a trans...
Adjacencies: Red Flags



    1. Fleeing from the core
    2. Lack of expertise
    3. Overestimating the core’s strengths...
Seven Failure Patterns

    1. Illusions of Synergy
    2. Faulty Financial Engineering: Taking a shortcut through the
   ...
Synergy Mirage

Example                                                   Strategy
Unum’s merger with                     ...
Faulty Financial Engineering

Example                                                   Strategy
Green Tree Financial     ...
Deflated Rollups

Example                                                   Strategy
Medpartners’ massive                  ...
Stubbornly Staying the Course

Example                                                   Strategy
Eastman Kodak           ...
“But it was filmless
                                                           photography, so
                           ...
Outline




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

    Contrary to popular belief, “flashes of
  genius” are uncommonly rare. Innovation
begins with the a...
The Challenge of Too Many Ideas

                                                                                         ...
Underperformer

                          Advantage
   Competitive Impact




                              Parity




   ...
Commodity

                          Advantage
   Competitive Impact




                              Parity




        ...
Retooling

                          Advantage
   Competitive Impact




                              Parity




        ...
Frenzy

                          Advantage
   Competitive Impact




                              Parity




           ...
Market Leader

                          Advantage
   Competitive Impact




                              Parity




    ...
Decisions of the kind the executive has to
      make ... are made well only if based on
       conflicting views, the dial...
© The New Yorker Collection 1979 Henry Martin from cartoonbank.com. All Rights Reserved.
© 2008 Chunka Mui | http://www.BillionDollarLessons.com
© 2008 Chunka Mui | http://www.BillionDollarLessons.com
Three Models




Alfred P. Sloan                                           Ancient Persians   Catholic Church




© 2008 C...
Avoiding the Same Mistakes
Empower Internal Devil’s Advocates to Ask
the Tough Questions


                              •...
The Best Defense

                                                            •   Transparent, even to
An independent devi...
Epilogue


    • Looking for the best option, not perfection
    • There is no win to guarantee success
    • Business is ...
The Future

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

         ...
Biography
                                          Chunka Mui’s perspectives have been shaped by
                        ...
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Innovation: Learning from Success and Failure

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Innovation: Learning from Success and Failure

  1. 1. The Innovation Process: Learning From Success and Failure Chunka Mui BillionDollarLessons.com
  2. 2. © 2008 Chunka Mui | http://www.chunkamui.com
  3. 3. © 2008 Chunka Mui | http://www.chunkamui.com
  4. 4. Outline 1. Innovation Imperative 2. Learning from Failure 3. Innovation Process © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  5. 5. We tend to overestimate technology in the short term and underestimate it in the long term. – Roy Amara © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  6. 6. Change Technology improves exponentially Killer App opportunities Organizations change incrementally Time See “Unleashing the Killer App” (Harvard Business School Press, 1998) © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  7. 7. The future is here, it’s just not evenly distributed. – William Gibson © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  8. 8. Text © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  9. 9. 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) © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  10. 10. A Killer App that feeds on Transaction Costs Text © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  11. 11. 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 © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  12. 12. 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. © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  13. 13. Smart Products, Connected Customers and a Closed Information Loop © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  14. 14. 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 © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  15. 15. 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 © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  16. 16. Communities of Doctors: Sermo © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  17. 17. Communities of Patients: PatientsLikeMe.com “an incendiary force in the health-care industry.” --The New York Times © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  18. 18. Changing Service Models © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  19. 19. Personalized Medicine © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  20. 20. 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? © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  21. 21. Outline 1. Innovation Imperative 2. Learning from Failure 3. Innovation Process © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  22. 22. An Exercise in Focus © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  23. 23. An Exercise in Change Perception © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  24. 24. 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 © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  25. 25. 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. © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  26. 26. 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 © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  27. 27. “Laidlaw realized too late that ambulances are a health-care business, with complex regulatory issues, not a transport business.” – John Grainger, Laidlaw CEO © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  28. 28. Adjacencies: Red Flags 1. Fleeing from the core 2. Lack of expertise 3. Overestimating the core’s strengths 4. The fickle customer © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  29. 29. 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 © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  30. 30. 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 © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  31. 31. 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) © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  32. 32. 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 © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  33. 33. 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 © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  34. 34. “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 © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  35. 35. Outline 1. Innovation Imperative 2. Learning from Failure 3. Innovation Process © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  36. 36. 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 © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  37. 37. 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 © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  38. 38. Underperformer Advantage Competitive Impact Parity Disadvantage Note: Size of circle is proportional to amount Stay In Business Return on Investment Option Creating of investment Investment Categories © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  39. 39. Commodity Advantage Competitive Impact Parity Disadvantage Note: Size of circle is proportional to amount Stay In Business Return on Investment Option Creating of investment Investment Categories © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  40. 40. Retooling Advantage Competitive Impact Parity Disadvantage Note: Size of circle is proportional to amount Stay In Business Return on Investment Option Creating of investment Investment Categories © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  41. 41. Frenzy Advantage Competitive Impact Parity Disadvantage Note: Size of circle is proportional to amount Stay In Business Return on Investment Option Creating of investment Investment Categories © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  42. 42. Market Leader Advantage Competitive Impact Parity Disadvantage Note: Size of circle is proportional to amount Stay In Business Return on Investment Option Creating of investment Investment Categories © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  43. 43. 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 © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  44. 44. © The New Yorker Collection 1979 Henry Martin from cartoonbank.com. All Rights Reserved.
  45. 45. © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  46. 46. © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  47. 47. Three Models Alfred P. Sloan Ancient Persians Catholic Church © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  48. 48. 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? © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  49. 49. 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 © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  50. 50. 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 © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  51. 51. The Future The best way to predict the future is to invent it. – Alan Kay © 2008 Chunka Mui | http://www.BillionDollarLessons.com
  52. 52. 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. © 2008 Chunka Mui | http://www.BillionDollarLessons.com
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