What Traditional Companies Can Learn from Technology Companies
Robin D. Rusch
Today’s companies need to make innovation a higher priority, or more ingenious minds will capture tomorrow’s wealth. Time and again we’ve seen it happen — particularly in the tech sector where brilliant startups and breakthrough ideas routinely shake up the field, and fortunes are made seemingly overnight. Tech companies know they’ve got to stay at the cutting edge, or get left behind. But now, as markets and expectations continue to change, traditional brick-and mortar businesses would do well to follow in their footsteps and systematically redirect a percentage of their profits toward innovation.
In the continuing quest for business growth, many companies have come to rely too heavily on cost cutting. In the past few decades, for example, outsourcing has become increasingly common: Headquarters plays the role of architect, while lower-cost markets execute or replicate, performing what is generally lower-skilled work. In basic principle, this arrangement is not dissimilar to the age-old hometown business model, with management upstairs and workers on the factory floor. These days the factory floor is a lot farther away — and that, as the news frequently reminds us, can be problematic. Outsourcing not only poses supply chain risks that can damage a brand, but it’s also making the strategic differentiation between companies narrower and narrower.
This lower-cost work base generates more profit for the company, of course — but where is that money going? Ideally, this could be re-invested to secure against the future. However, most public businesses are not putting these savings into new ideas, innovations, R&D, or other kinds of competitive planning. Instead savings go to activities aimed in part at increasing share price. There is nothing inherently wrong with wanting to increase share price, but when this becomes the primary focus, the longterm health and sustainability of a brand are put at risk.
While stockholders are sometimes referred to as owners of the company, their intent and priorities are not the same as an owner’s. Stockholders also aren’t in it for the long haul. Fifty years ago, shareholders were content with earnings that were slightly higher than the cost of the capital, and they tended to hold on to stock for an average of eight years. But changing times and changing market conditions sparked a thirst for higher returns. Now, investors demand higher growth targets and, on average, sit on stock for a mere four months. Further, most managers of public companies are compensated by stock. This means they also have an incentive to see the stock price rise, as opposed to laying down a cogent long-term plan for steady, sustainable growth. All this focus on stock price reduces the likelihood of spending money on anything risky, as generating consistently high margins takes priority over investment going back into the company. R&D, new product development or idea generation, can be expensive and there’s no guarantee of success. Yet, the irony is, it’s practically impossible to meet the rising expectations of shareholders and create wealth unless companies innovate.
That’s why technology companies champion innovation. Google’s 20% program is a good example. The 20% time is really the key to innovation at Google. They’ve hired the best people they can find (arguably some of the best available), and said “follow your passions, and make cool stuff .” Does it yield brilliant solutions? Not always. Google’s had its share of duds. But this method of (micro) crowdsourced innovation has been extremely effective for Google. Think Google News, Google Reader, Google Trends, and Google Maps, and you’ll get a sense of what that 20% did for Google. As of now, these applications only generate about 1.5% of Google’s total revenue (about USD $50 million), but we must consider the magnitude of the growth opportunity, especially in the long term.
Since its stock market launch in 1997, Amazon has also doggedly adhered to a long-term vision and resisted bowing to shareholders’ quarterly demands. “It’s all about the long term,” CEO Jeff Bezos said then. He also warned shareholders that the company might “make decisions and weigh tradeoff s differently than some companies.” Amazon’s management and employees, he insisted, are “working to build something important, something that matters to our customers, something that we can tell our grandchildren about.”
The company takes a beating from investors during earnings reports, and Bezos’ outlier position baffles many mainstream managers, but economists tend to laud the strategy, which off ers economies of scale and weakens (or eliminates) competitors. Borders has been pushed out of business, Barnes & Noble is struggling, and Best Buy has taken a hit. “If everything you do needs to work on a three year time horizon, then you’re competing against a lot of people,” Bezos said in an interview in Wired last year. “But if you’re willing to invest on a seven-year time horizon, you’re now competing against a fraction of those people, because very few companies are willing to do that. Just by lengthening the time horizon, you can engage in endeavors that you could never otherwise pursue. At Amazon, we like things to work in five to seven years. We’re willing to plant seeds, let them grow — and we’re very stubborn.”
Amazon’s patience, commitment to innovation, and customer focus may explain why its growth is double that of e-commerce rates overall. Of course, one could argue that Amazon can afford to protect its vision and defend innovation because it’s so large, but there are plenty of other large companies that are far more focused on short-term gains than vision and long-term growth. Tech companies thrive because they are bucking the short-term growth trend and proving that the long-term good of their organization and brand is more important than satisfying investors on a quarterly basis.
When companies institutionalize innovation as Google and Amazon have, they’re more likely to generate new products, services, and customer experiences. They’re also more likely to improve performance, invent new business processes and models, lower cost structure, and open up new business opportunities. Interestingly, whenever (usually ex-) employees say Google’s 20% program is being threatened or is a sham, the discussion always returns to how important it is to protect and defend innovation and R&D at a tech company if it is to survive the future. And indeed, innovation is probably the best way to futureproof any company.
If that’s the case, why do we think innovation is more important for tech companies than offline businesses? Sure, technology changes rapidly, but so can competitors and consumer interests. Therefore, all companies should be evaluating their products, services, and methodologies to ensure everything from workplace practice to business methodology, and product relevance is still competitive and in line with the targeted customer. Also, rather than constantly trying to return money to shareholders or investing large sums to position themselves against competitors, companies could invest in ideas and longterm strategy that would help them. In time, shareholders would be richly rewarded too.
The alternative is to chase short-term stock price growth, run the company into the ground, regroup, and start over. Some organizations like construction companies actually specialize in this. However, there are numerous problems with this strategy. In fact, one of the areas impacted most is brand. Brands are costly and often time-consuming to build. Any gains acquired by turning around your company under a new name would be off set by the time and money spent rebuilding the brand identity every other year. It’s far better in the long term to innovate and create something the world actually needs or desires.
Many companies fall behind the innovation curve not for failing to keep up with competitors, but because they’ve failed to embrace the future. Going forward, companies will fare better that undertake the challenge of innovation instead of focusing myopically on unsustainable growth strategies. These “radical innovators” may not always win, but when they do, they win big — and they’ll triumph over the long haul.