Secret sauce: the key to serial innovation and profit growth

Why do some companies fizzle out and fade away while others build on a strong start? Dr Mike Tubbs looks at the key factors behind sustainable success and highlights his favourite consistent performers.

What makes a company successful? Consistent profitability. And what is the key to sustainable profitability? Innovation. The ability to adapt to change and keep producing products and services people want to buy is a hallmark of successful stocks. We will look at several serial innovators to gauge what they are doing right, what they have in common and which are worth buying now. Investors can also learn from companies that once dominated their fields, but then lost their innovative edge and fell by the wayside.
Failure has many fathers
Kodak is an interesting example of a firm that lost its edge. It once dominated the market for photographic film, materials and equipment. But Kodak failed to respond adequately to two different technological changes. The first was instant photography, where Kodak was worried by Polaroid’s success and planned to introduce its own instant cameras and films in 1976 using a different approach to Polaroid. However, following Polaroid’s successful launch of the SX-70 in 1972, Kodak decided to emulate Polaroid rather than come up with its own take on instant photography. This infringed Polaroid’s patents and Kodak had to withdraw completely from this market in 1986 and was ordered to pay Polaroid damages of $925m in 1990.
Kodak’s second failure was its decision not to exploit the invention of its own engineer, Steve Sasson, who invented and patented the digital camera in the 1970s. Kodak’s management realised that this invention would cannibalise its profitable film photography business and decided to hide rather than develop the invention. They justified this by focusing on the disadvantages of the large size and low resolution of their early digital cameras. Instead, they should have considered trying to reduce size and boost performance, the main ways electronic devices get better and cheaper.
Three irreparably tarnished brands
Nokia, Xerox and MySpace are three further examples of companies whose innovative drive flagged as they became larger. Nokia was originally a paper, rubber and cables company that saw opportunities in other fields, so it moved into electronics and computers around 1970. It created the world’s first cellular network, and also launched a carphone in 1982 and the first portable mobile phone in 1987.
Jormo Ollila became CEO in 1992 and turned Nokia into a mobile-phone business, transforming it from a loss in 1991 to operating profits close to $4bn in 1999. By 2007 Nokia had a 49.4% share of the smartphone market, but Apple introduced the iPhone later that year, followed by Samsung and others using Alphabet’s Android. Nokia’s market share had dropped to 3% by 2013 when it sold the business to Microsoft. Nokia had excellent hardware, but lagged its competitors in software.
Xerox was a top innovative American company of the 1960s. Its research centre invented what was effectively the Macintosh PC, but top management did not enter the PC market: they had been traumatised by losing over $1bn trying to enter the mini-computer market via an acquisition. Then there is MySpace, once the dominant social networking site. In 2005 Mark Zuckerberg offered to sell Facebook – then a small company – to MySpace for $75m. MySpace’s CEO, Chris De Wolfe, declined to buy and the rest is history. This is the corporate equivalent of failing to sign the Beatles. A similar mis-step was Electrolux’s decision to reject James Dyson’s revolutionary bagless cyclone vacuum cleaner because it would cut Electrolux’s revenue from selling bags.
Kodak and Xerox are examples of companies whose research and development (R&D) departments made important innovative advances that management failed to exploit. Nokia failed to respond adequately to the opportunities clever software offered for smartphones; MySpace and Electrolux rejected golden acquisition opportunities. These are three different ways in which companies can lose their innovative drive. The common thread is a “head in the sand” response to change and new potential commercial opportunities.

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