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Wednesday, February 29, 2012

The Death Knell of Success in Business

The film “The Artist” describes the waning career of a megastar of the era of silent movies when he refuses to make the transition into the epoch of “talkies” (films with sound.) He mocks the innovation and then challenges it by producing a lavish production of yet another silent epic. His inevitable downfall follows. He is reduced to pawning and auctioning off his few remaining belongings.

In the biological realms, genetic mutations ensure that the repertory of responses to constantly varying circumstances is always fresh and never depleted. Not so in the world of business where success often spells death and doom and it is failure that spurs innovation. Indeed, the successful firms of yesteryear are often forgotten: no one can name the three dominant horse whip manufacturers in the 19th century, for instance. Silent era film stars are also not household names.

Business success is due to an appealing or groundbreaking product (which generates its own market and demand), an efficient process, or a fortuitous and serendipitous set of events coupled with emerging needs. The overwhelming advantage of the first-mover guarantees that competitors (mostly imitators) are left far behind. Brand recognition, customer loyalty and intellectual property protections pose often insurmountable barriers to entry. This forces newcomers to innovate or perish.

Faced with challengers, monopolies and duopolies, or even oligopolies retrench. Why don’t these companies counter-innovate? Because they are emotionally-invested in their cash cows, their current best-selling offerings, and the managerial-organizational structures and processes they gave rise to. Fears of rocking the boat and of the unknown mingle with the haughtiness of the well-to-do and the inertia and anti-entrepreneurial culture that are the hallmarks of big business. Finally, the institutional knowledge of successful firms and their skills set are skewed in favour of existing products and processes. Lurking in the back of everyone’s mind, from the upper echelons of management to the lowliest menial labourer is the question: “As long as the money keeps pouring in – why bother to innovate? Why take chances?”

Indeed, innovation is an entirely modern concept. Up to the 19th century, innovators were penalized for daring to upset the proverbial applecart. Imitators, conservatives, and traditionalists were richly rewarded. The culture of successful companies tends to resemble this period of pre-Industrial Revolution.