Why huge success can be a company's worst enemyFebruary 5, 2013: 1:00 PM ET
The business landscape is littered with former market leaders that once seemed invincible. A new book explains where they went wrong -- and how others can avoid the same fate.
FORTUNE -- Here's a quick quiz: No matter whose brand name is on the smartphone or digital camera you're using now, do you know who invented almost all of the technology in it? This outfit's scientists came up with digital cameras way back in 1975, and then went on to produce more than 1,000 digital innovations, including the first megapixel sensor of more than 1.4 million pixels, the first color filter tray, and the first method of image compression up to JPEG standards. What company was it?
If you said Sony (SNE), Samsung, Apple (AAPL), Nokia (NOK), Research in Motion (now known as BlackBerry), or any other present-day tech giant, guess again. Give up? It was Kodak. Reluctant to cannibalize its traditional products (at one point, Kodak had a lock on 90% of the U.S. film market), the company sat on its hands while smaller digital-photography innovators zoomed in and ate its lunch. As a result, Kodak lost 87% of its value in just over a decade and declared bankruptcy last year.
"Organizations are in greatest danger of failing when they're at the peak of their success," observes Gerard J. Tellis, who teaches management at the University of Southern California's Marshall School of Business and directs the Center for Global Innovation there. "Market dominance can be a curse that blinds companies to the next big innovation on the horizon."
His new book, Unrelenting Innovation, looks at exactly how that happens. Tellis and his colleagues studied 770 companies across 15 countries, including many -- like Hewlett-Packard (HPQ), Sony, and General Motors (GM) -- whose struggles have made headlines. The researchers found that success over the long haul isn't a matter of size, number of patents, or the dollar amount of R&D investments. Instead, staying on top requires a "culture of innovation," including an appetite for risk, an eagerness to reward fresh thinking, and a focus on the future, not the past.
That's easier said than done, of course, and Tellis examines all the obstacles in detail. But the book makes clear why creating a culture designed to cannibalize currently successful products is the only way to go. Trying to buy that kind of culture usually doesn't work because by the time a company decides on a strategic acquisition, the target is "either overpriced, past its peak, or too different to integrate profitably," Tellis notes.
Tellis and his team of researchers scrutinized the share prices of acquirers -- like eBay (EBAY), for example, whose ill-fated $2.6 billion acquisition of Skype in 2005 led to a $1.4 billion write-down two years later -- and discovered that "[buying] firms for their innovations leads to a consistently negative spike in the stock price of the acquiring firm," while the opposite was true for shares of companies that grew their own innovations in-house: "The market rewards internal organic innovation and punishes external acquisitions."
What makes Unrelenting Innovation a fascinating read is the dozens of short, vivid case studies Tellis has woven into his book. To take just one example among many: The "culture of stagnation" at Kodak in its heyday "fueled the growth of a nightmarish bureaucracy so entrenched it could have passed for a government agency…. There was an emphasis on doing everything by the company rulebooks…. Meetings were held prior to meetings to discuss issues and avoid confrontations, which were considered un-Kodaklike."
By Tellis' lights, if that sounds at all familiar, your company is already in trouble -- even, or especially, if everything's going great right now.