Wednesday, April 16, 2014

Risk aversion and the disincentive to innovate

I will stipulate that I think innovation is good.  Why then do so many companies fail to innovate?
The two articles for the week discuss different facets of the same general concept. In the first, the authors suggest that “good management” i.e. catering to your customers and improving within the market that your organization already occupies can be a recipe for declining success, as we saw in the cases of companies like Sears and Xerox.[1] In the second, the author’s central point develops around the device that there are blue oceans and red oceans.  Blue oceans are wide open to success and new opportunity, while red oceans are already thoroughly exhausted from competition. Innovation gets you into a blue ocean while business as usual gets you in the red.[2]

In both cases the authors extoll the virtues of venturing off into new, initially less profitable markets, thereby catching the rising star of the next big thing.  This is difficult to institutionalize in practice however, especially without acknowledging the factor that looms biggest here.  People are often risk averse, especially so under uncertainty.  Managers in Sears and Xerox may have been stuck in their own markets and missed the developments in their industries that became their undoing.  Another possibility is that they simply looked at the expected value of one investment over another with more variability and uncertainty and chose the former.

With Blue Ocean Strategy, a better analogy might be to compare the blue ocean to an olympic pool.  You can participate in the race in the pool, but your rewards will be measured in fractions of a second.  Go swimming in the ocean, and perhaps you’ll catch something new and huge.  You could also drown and never be heard from again.  The core idea in the article is to get above the fray and seek out industries and opportunities in which the share of the economic profits is still large.  Finding those new opportunities can require a lot of luck and some big bets, though.

Asking how an organization can become more innovative somewhat misses the point, then.  The question I see as the better one is how can an organization become risk tolerant enough, and therefore agile enough, to home in on and capitalize on rising innovative trends?   

[1] Why Good Companies Fail to Thrive in Fast Moving Industries. (Christense, Introduction to The innovator’s Dilemma, 1997).
[2] Blue Ocean Strategy (Kim and Mauborgne, Harvard Business Review, Oct ’04)

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