The Ingredients of Innovation

USC Marshall’s Gerry Tellis discovers what factors drive the efforts of the most innovative organizations.

Whether it’s Apple or Google, Amazon or Netflix, innovative companies establish practices that break the mold of traditional business models. But what drives these companies to be innovative, when so many others miss the mark?

That question is central to Gerry Tellis’ scholarship. As the Jerry and Nancy Neely Chair in American Enterprise and professor of marketing at the University of Southern California’s Marshall School of Business in Los Angeles, Tellis became interested in organizational innovation while he worked to identify the characteristics of successful, long-established firms.

“I found that market share, advertising, and order of market entry weren’t the key factors of long-term success,” says Tellis. He next discovered that successful companies define themselves as pioneers, but that being a pioneer itself doesn’t safeguard a company against disaster. In fact, Tellis says, “most pioneers fail because they are so happy with the results of their first entry into the market, they don’t innovate anymore.” Tellis’ research eventually led him to this conclusion: The biggest determinant of long-term success is relentless innovation.

In his 2013 book Unrelenting Innovation: How to Create a Culture for Market Dominance, Tellis discusses ill-fated companies such as HP, which introduced an e-reader in the mid-1990s, and Kodak, which developed the first digital camera in the mid-1970s. Instead of focusing on these inventions, HP and Kodak abandoned them because they refused to undermine their old models. “Their prior success caused a blindness to future innovation,” says Tellis.

He calls this failure “the incumbent’s curse,” which arises when companies possess three unfortunate traits—they focus on the present rather than the future, they insist on protecting successful products from cannibalization by new products, and they possess a systemic aversion to risk.

According to Tellis’ research, organizations that avoid these traps share three traits of their own. First, they establish incentives for innovation and reward new ideas—even if those ideas cannibalize other successful products. “These companies have strong rewards for success and weak penalties for failure,” he says. “They encourage employees to take risks.”

Second, they empower employees at all levels with the autonomy to experiment. By contrast, in many risk-averse companies, hierarchical structures require all decisions to come from the top. Too often, “only the mundane survives” in such cultures, says Tellis.

Finally, innovative companies encourage individuals within the firm to compete to produce new innovations and prototypes. “Google, Amazon, Samsung, and Apple are prototypical relentless innovators,” says Tellis. “They don’t just strive to innovate every year or every quarter—they’re doing this on a daily basis.”

For his next book, Tellis is exploring the role of innovation not just in organizations, but in entire civilizations. “I believe the rise and fall of civilizations is due not to wars, leadership, or a change in environment,” he says. “While those things play a role, I’m arguing that the rise of a civilization is primarily due to the adoption of formative innovation.”

For instance, while today’s least-developed societies, such as Cuba and North Korea, are overseen by totalitarian governments, Tellis argues that it’s not totalitarianism that holds them back. It’s their leaders’ fear of innovation. Societies that flourish do so because they embrace radical innovations, from the printing press to mass manufacturing to mobile technologies. Like most organizations, business schools face the rise of new competitors and nontraditional models in their market. In response, says Tellis, business schools can succumb to the incumbent’s curse, or they can reward relentless innovation while embracing, and even encouraging, failure. From MOOCs to competency-based programs, new models do threaten traditional business education. But these are threats that are pushing all education providers into the next phase of education.

“I don’t think business schools or faculty need to be afraid of innovation. They need to be afraid of the lack of innovation,” Tellis emphasizes. “Just like business leaders, faculty need to focus on the future. They need to be willing to cannibalize their successes and take risks. It’s tough medicine, but it’s medicine we all have to take.”