Bulletins Live ? Five Common Mistakes Business Leaders Make About ...

Freek Vermeulen, Associate Professor of Strategy and Entrepreneurship, London Business School, will be speaking at London Business School?s Global Leadership Summit. He has written this exclusive guest blog post for The Source.

The Source will be speaking to some of the world?s leading academics and chief executives in charge of the most successful global organizations. Find out what they have to say about leadership and the key to successful innovation throughout the week on The Source.

The vast majority of companies want to be innovative but it is not so easy and simple to achieve. A CEO cannot just order it and expect it to be delivered. They must carefully manage an organization so that, over time, innovations will emerge. And CEOs often make a number of common mistakes that hamper rather than induce such processes. Here are five of the most common:

1. Believe the numbers. One common mistake is to insist on ?seeing the numbers? too soon. Asking questions like: What is the size of the market?What is the net present value calculation? Whats the payback time?, and so on. For a truly innovative product, it is impossible to reliably produce any numbers. If a CEO insists on hard numbers before the project is even started, it will by sheer definition kill off any truly innovative ones, simply because you cannot compute the size of a market that does not exist yet.

One CEO who understood this well was Intel?s Andy Grove. An engineer proposed to him to work on something called a ?microprocessor?. The engineer could not produce any numbers, consumer research, and not even a good idea as to the sort of applications this product was going to be used for, but, Mr. Grove gave permission and a budget anyway. It made Intel one of the most successful companies the world of business has ever witnessed.

2. The success trap. Another innovation killer is sustained financial success. We call it the ?success trap?. When an organization becomes very good at something, it usually starts to focus on the thing (product, technology, or business model) that made its successthereby crowding out other options and points of view. Initially, this may make it even more successful, but there is going to come a time when its business context is going to change: new technologies, consumer preferences or foreign entrants emerge. And then the company and its top management finds itself trapped in the one thing it does so well, rigidly believing that what brought it success, will continue to make it prosper. But, in reality, it is rapidly becoming obsolete.

A great illustration of this is the 43 companies featured in the famous business book In Search of Excellence, by Peters and Waterman in 1982. These companies were considered to be leading companies in the world at the time, but now only five of them would still make the list; many of them having disappeared altogether (eg Atari, Tupperware, Digital). This illustrates that, paradoxically, it is in particular the top performers of their industry that find it difficult to adapt and survive when the world around them changes.

3. Believe they know the competition. What always strikes me, if I ask a CEO (or anyone else in an organization for that matter), who is your main competitor? they always reply with the company that is most like them. And subsequently they can tell me anything about that firm; its strength, weaknesses, products and plans. But in a way, when it comes to innovation, that is slightly delusional. The company that is most like you is really the least important competitor, simply because they are in the same boat as you are.

The most threatening competition often comes from a completely different angle: an adjacent industry, innovative start-up, or substitute. And that is a phenomenon of all times. Shipping companies suffered from the steam engine, radial tire champion Firestone was brought to its knees by the introduction of bias tires, newspapers are being squeezed by the Internet, while watchmakers suffer from the fact that nowadays everybody already has the time at hand on a mobile phone or laptop. Thinking your biggest competitor is the company most like you will leave a company dangerously exposed to outside innovation.

4. Believe that because everybody had always done it this way, it is the best way of doing things. Industries are rife with habits and business practices from which no one can quite remember why we do them this way. When challenging a CEO on one of those business practices, he lamented to me: ?Freek, everybody does it this way, and everybody has always been doing it this way; if it wasn?t the best way of doing things, I am sure it would have disappeared by now.?

Standard economic theory would support his point of viewthe market is Darwinian, therefore it should be weeding out bad practices. But, in reality, he is wrong. In many businesses, practices emerged with good reason, but once the circumstances changed, firms carried on using them for no reason whatsoever. Did newspapers have to be printed for so long on ridiculously large (and expensive) sheets of paper? Heck no; the English law, set up in 1712, that newspapers were going to be taxed based on the number of pages they printed was abolished in 1855. Could low-cost airlines not have worked many years earlier? Are buyback guarantees in book publishing (set up during the Great Depression) really still needed? Is detailing in the pharmaceutical industry still a useful practice? That everybody does it this way is no reason not to challenge it. The greatest innovations often come from challenging industry convention.

5. Asking the customers for their opinions. The final error is to ask their customers for their opinion. Pretty much any company I know has a yearly customer survey. However, there are two things wrong with this. Firstly, these people are already your customer; sure they are going to be satisfied with you; the others have already long voted with their feet. We call it selection bias. You are selecting to ask the ones who already like you, but what about the ones who don?t?

Secondly, even when a company is asking potential customers about their ideas for innovation, in the form of market research, it is tricky. It is usually takes the shape of asking respondents whether they would like (and buy) the new idea. Consumer research often is useful but not for truly innovative ideas and markets that do not exist yet. Research on the fax machine came back unambiguous: every respondent answered that they would never buy a machine like that; likewise for the mobile phone. As Farooq Chaudhry, producer at the highly innovative Akram Khan Dance Company, once put it to me: ?Customers? Forget about them.?

In conclusionb, if you want to be really innovative, you have to be leading the customers; not be led by them.

Freek Vermeulen is the author of ?Business Exposed: The Naked Truth About What Really Goes on in the World of Business? (FT Prentice Hall).

Source: http://www.bulletinslive.com/?p=859

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