Wharton’s Karl Ulrich Analyzes the Strategies of Today’s Most Successfully Innovative Companies

Why has Apple succeeded while Kodak has declared bankruptcy? Is it simply a question of technologies, or of business strategy as well?

Providing insight into the strategies of today’s most innovative companies is Karl T. Ulrich, Vice Dean of Innovation and CIBC Professor of Entrepreneurship and e-Commerce at the Wharton School. He has authored several books, his most recent is Innovation Tournaments (Harvard Business Press, 2009) and in addition to his academic work, Ulrich has led dozens of innovation efforts for medical devices, tools, computer peripherals, food products, web-based services, and sporting goods.

He discusses with Arabic Knowledge@Wharton the strategies providing companies such as Apple, IBM and Hewlett Packard with a competitive edge, how innovation tournaments are valuable to companies, where the next wave of disruption will surface, and how job creation is evolving in a post-Arab Spring environment.

An edited version of the conversation follows.

Arabic Knowledge@Wharton: Why are innovation tournaments valuable to companies?

Karl Ulrich: The main idea behind an innovation tournament is to generate or identify a large number of innovation opportunities, and then to use one or more development steps and filters in order to identify those few that are really exceptional. Now the only reason you do that is if you don’t know already what the exceptional opportunities are. You do it to manage the uncertainty around innovation. If a prophet like Steve Jobs runs your company, you don’t want to use an innovation tournament, you want to just ask what to do. So an innovation tournament is a way to deal with the inherent uncertainty that most organizations face about what the most exceptional opportunities they could pursue are.

Apple is an example of a company that was pretty good at using an alternative approach, since they had someone in Steve Jobs who was extremely good at predicting or forecasting what was going to work in the market. That approach is not easily replicated and I don’t see it common in many other organizations. So the second best way is to deal with the uncertainty you face in deciding which opportunities to pursue, in the hopes that that uncertainty will be resolved and you can identify which opportunities are exceptional. The innovation tournament approach is used in virtually every organization. The question is, is it used effectively and is it used in a way that doesn’t consume more resources than the value it delivers?

Arabic Knowledge@Wharton: What’s an example of a company that has done that well?

Ulrich: Another Jobs affiliated company, Pixar [Animation Studios], now a unit within Disney. Pixar to the outside world looks like an organization that periodically produces a brilliant film because of their creative genius. Pixar has plenty of creative genius but they are quite disciplined on evaluating several hundred story lines for movies before they decide what to do. So for every feature film Pixar releases, they looked at three to four hundred alternatives. So what we see as consumers at the end of the process is really the result of very careful and structured process of evaluating ideas and developing ideas in order to identify those that are really going to work well.

Arabic Knowledge@Wharton: What are common mistakes people have made resulting in innovation tournaments not going well?

Ulrich: A common defect in innovation tournaments is simply not considering enough ideas. That’s common in new ventures where you get an entrepreneur that really gets fixated on a particular approach, and that fixation is quite useful because the passion that’s associated with it often results in persistence in making something work. But in a new venture context, the entrepreneurs who are most successful are those who are good about running experiments, testing carefully the assumptions they’ve made, can figure out what they know and what they don’t know, and being quite judicious with the investment they make. That discipline is rare in entrepreneurs but I think is associated with those that are most successful. You also see that same kind of behavior in large companies where you get a single executive fixated on a particular opportunity. If that executive is Steve jobs, it can work because he was right more often than he was wrong. But more typically, the opinion of any one executive is going to be wrong on average.

Arabic Knowledge@Wharton: Kodak was a long-standing company, but recently went bankrupt. What are some companies that have managed to make the right transition in their business model?

Ulrich: A company that I think has done a better job of making the transition over time would be IBM, which has changed fundamentally from where they were. IBM was driven by a visionary, Louis Gerstner, who decided they were going to get into services. That turned out to be a good strategy and they were able to make it work.

A second example would be Hewlett Packard, which I think is more a story of having a portfolio of interesting possibilities that they played out to see what would work. It turned out that printers really worked, personal computers, and few other very distinct lines of business that actually did pay off. They made hundreds of bets and few paid off. Hewlett Packard’s entire corporate system was set up to facilitate experimentation in new markets with largely autonomous units, so if one of those things took root, they could build a whole business around it. Hewlett Packard is currently struggling, but that strategy of placing a hundred bets, hoping a few of them pay off and then building your business around them, is one they played pretty well.

Arabic Knowledge@Wharton: What are other companies that have used a portfolio approach?

Ulrich: To some extent that’s also an Apple strategy. Apple in some ways is a hybrid of that approach and the IBM Gerstner approach, in that Apple takes relatively few bets and they tend to be really well vetted opportunities. For instance, I don’t think in 1999 Steve Jobs was thinking, ‘If we make a music player, it’s going to lead us to be the dominant mobile cell phone provider in 2012.’ The investment in the iPod was a first step for Apple towards this mobile computing future and gave them experience in making such devices, and consumers a familiarity with Apple as a kind of a personal device manufacturer. That’s what led them to be able to make the subsequent bets in the iPhone and iPad. So Apple has definitely made some bets and then basically doubled down on those that really looked very promising, but again those bets were well-vetted. They were less like, ‘Let’s let a thousand flowers bloom and hope that one of them pays off,’ the way I would characterize the Hewlett Packard strategy.

Arabic Knowledge@Wharton: Why has it been so hard for companies to compete with Apple devices?

Ulrich: I don’t think it’s quite fair to say that no one has been able to compete with them. With cell phones, the open architecture Android platform will give the iPhone a run for its money. I even think the new Windows operating system and the Nokia phones are a viable third entry. I think RIM and the Blackberry are probably dead, at least for the consumer market. So I can easily see it being a three-horse race at this point. I think it’s probably a stretch to say 10 years from now there will be one player there, it won’t just be Apple. There are very distinct strategies that are likely to work and likely to coexist.

By the way, a similar story will play out in tablets. It’s quite likely that there will be three dominant approaches there. Apple’s approach has been to create a device that integrates hardware and software, which offers some tremendous advantages in terms of being able to provide a seamless user experience. Usually it’s a more elegant device that is smaller and lighter with a more seamless user experience, at higher costs. That kind of device is going to do really well in the market but it still leaves openings [for companies] to come in with devices that exploit open standards and the common availability components and they’re going to be able to provide devices at lower prices.

Arabic Knowledge@Wharton: It’s been written that Steve Jobs was interested in disrupting television, where do you see innovation in that realm?

Ulrich: There is a tremendous opportunity in television in terms of the gap in the current user experience, which is just terrible. Basically it’s the worst of all worlds; it’s sort of on demand, but you have a broadcast schedule, so we have these devices that will record for us so we can watch it when we want to. It’s inconceivable to me that this will stay like that. It seems to me that where television will go is that I can watch whatever I want, whenever I want it, on a big screen. That’s what a television should do for me, and that strikes me as a big near-time opportunity.

It’s largely a problem with the broadcast networks and the people that control the wiring into your house protecting their business models at the expense of the user. It’s not sustainable and somebody will work around that probably over the Internet. I think television will be delivered on the web at some point. And the devices you use to view it will be commoditized. But getting the system in place that organizes the content, finances the production of that content, puts it into it, edits it, curates it so that’s accessible to the user, those functions will need to be improved in order to get it to work.

I’m pretty convinced there’s a big opportunity for somebody. It could be Apple, which was able to basically do that in music. They were able to fill the big gap in the user experience by improving the content delivery mechanism. In some ways that was one of Steve Jobs’ biggest innovations. It wasn’t a technological innovation; it was an ability to negotiate with some very difficult people across various industries to get that deal done. That’s going to happen in television as well. Will Apple be able to do it? I don’t know. They might have a strong enough brand that they can bring enough for the networks, broadcast and cable companies to get the right kind of deal done.

Arabic Knowledge@Wharton: Silicon Valley is a culture where failure isn’t discouraged. Is it important for failure to be accepted as part of the process of becoming a successful innovator?

Ulrich: The goal in innovation should be to fail as early and inexpensively as possible. Big failures are no fun and I don’t think should be reinforced by culture. So for instance, the Iridium Satellite project, which I think was close to a US$100 billion investment, resulted in putting 80 satellites in geosynchronous orbit so that people could make satellite telephone calls from anywhere in the world. It was a colossal failure and essentially lost everyone’s money but it was an innovation where you had a very hard time testing the market until you made the US$100 billion bet. And those kinds of innovation projects, especially as an entrepreneur, are best avoided. You want to find opportunities where you can test the market for US$1 million, even for $US10,000, and answer the question of, ‘Will anyone use this product?’

No one likes failure, but failure that’s early and inexpensive, you may not even categorize as failure, you categorize it as I learned something very inexpensively and now I can try again with much better information. That’s more an adaptive learning process, where you look to test your hypothesis as early as possible and as inexpensively as possible.

The whole movement right now around the lean start up movement has a nice concept call the Minimal Viable Product (MVP) which basically says, define the MVP and get that to market as inexpensively as possible in order to learn whether there is a market; then, how you can improve that product in order to best meet the needs of that market. It’s less a failure around some particular venture then changing gears completely, then it is an ongoing adaption based on experience and failure. Tons of good companies have taken that approach. Even Amazon and the Kindle — the first Kindle was terrible, it was ugly and had quite poor usability but it was something and it works. It was the MVP, and after other iterations it got a little better and now it’s really very good.

Arabic Knowledge@Wharton: Futurists such as Paul Saffo have talked about certain products failing because they were ahead of their time and succeeding years later. What’s your view on consumer adaption and the introduction of new technologies?

Ulrich: There are two distinct phenomena that you’re describing: One is the rate at which an innovation diffuses. Even if it’s a good innovation, one that will be adopted in the long run, those diffusion rates are quite slow in almost all industries. So if you look historically at new category products, there are almost no instances of products that take off in fewer than three to five years from when they’re introduced and that’s just kind of a fact of life. It’s really hard to get innovation to diffuse even if the product does offer quite a bit of benefit, that’s one phenomenon.

The second is whether in fact the product is ahead of its time. Usually what I think we mean by that is that the bundle of features and benefits of that product delivered were just not quite good enough, relative to what the consumer needed or wanted at the price the product was offered. So for instance if you look at the Apple Newton, it had a touch screen, some memory, ran applications, and had a calendar feature. It kind of had all the stuff that an iPod touch has except it just wasn’t very good at any of them, so it didn’t deliver enough benefit relative to it’s cost for it to work with the consumer. So you can say it was ahead of its time or its technological trajectories were such that it didn’t get good enough until 10 or 15 years later.

I think it’s generally more an issue of the technological trajectories than it is consumers not knowing what they need, or taking awhile to warm up to the idea. I think consumers figure it out pretty quickly, and by that I mean within three to five years after something has been introduced. I think, really, does the product actually deliver the benefits? Which it often doesn’t, it’s often not there.

Arabic Knowledge@Wharton: Do you see opportunities for job creation in industries such as e-Commerce in post Arab spring countries such as Egypt?

Ulrich: There are some parts of the world where technology allows communities and societies to skip whole generations. The cell phone is the best example of that where in Africa and to a large extent in India, landlines are never going to be installed because the cell phone is better, it leapfrogs all the infrastructure issues. So I can imagine some elements of e-Commerce could let some economies skip generations of development that have happened in the developed world.

You might imagine retailing and distribution skipping the big bricks and mortar establishment that evolved over decades in the rest of the world. I could imagine that happening but I think at the end of the day it’s hard to imagine technology offering economic solutions. I think that technology and the economic growth in the developing economies probably happens together, that is you aren’t going to get the economy to develop just because the technology. There is going to have to be a base of economic activity there in many different sectors. Maybe the technology can enable that or make it happen a little faster but I don’t really think it’s a panacea.

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