The Discipline of Innovation

Jay Rao
Professor

One proposed solution

Today Morning Agenda

The Valley of Elah: Israelites vs. Philistines
The Innovation Environment: David vs. Goliath

How can David can beat Goliath?

Windows of Opportunity

Which type of David can beat Goliath?

Where do entrepreneurs come from?

New Product
Vitality Index
(NPVI) = Sales
from products
introduced in the
last 5 years

Goal =
NPVI of
40%

Source: How 3M thinks about, structures R&D

By Larry Dignan | June 17, 2011 (David Meline, CFO, 3M)

FRESHNESS INDEX
MarketCap vs Freshness Index in Pharma
350

R = 0.304

Market Cap

300

JNJ

250
ROG

200
150
100

50

AZN
ABT LLY

BAY

SNY

NVS
MRK

PFE
GSK

AMGN
BMY

0
0%

5%
10%
15%
Cum Percent of Sales coming from Drugs approved after 2007

20%

The Valley of Elah: Israelites vs. Philistines

The Innovation Environment
David vs. Goliath

Success & Survival in the Valley

MONKEY

3% 3%
4%

10%
35%

10%

GORILLA

CHIMP
35%

Source: Moore

Fage arrived in the U.S. in

1998, 9 years before Chobani.
Fage still #1 in Greece with
25% market share.

$6.1B

$3.12B

Founded 2002

Workday, NetSuite,
Cornerstone OnDemand,
Workforce Software,
Ventyx

Source: 2013 ERP Market Share Update: SAP Solidifies Market Leadership; Trends & News By Louis Columbus, Published May 13, 2013

14

Hedge Funds

All Firms Die!

2000

Number of Firms in the U.S. Typewriter Industry

Number of Firms in the U.S. Automobile Industry

Launched

90
80

75

1500

Number of Firms

70

Entry

60

70

Exit

50

65

Total

40

55

20

45

1000

Years (1874 to 1936)

Number of Firms in the U.S. Picture Tube Producers

80

Number of Firms

74 77 80 83 86 89 92 95 98 1 4 7 10 13 16 19 22 25 28 31 34 36 38

90

steel closed body

50

Number of Firms

Liquidated
80% of U.S. products in all-

30

10

500

50% of U.S. products in allsteel closed body

60

Entry

40

Exit
35

Total

30
25

70

Entry

60

Exit

20

50

Total

15

40

10
30
20

10

0
1900

1910

1920

49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70

Years (1900 to 1960)

Years
(1949 to 1970)
0
Source:
Mastering the Dynamics of Innovation,
Uttberback

1996

1997

1998

1999

2000

2001

Source:
Fund Research,
Inc.1960
1930 Hedge
1940
1950
Boston Globe Dec. 16, 2012

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Source: Fortune, April 8, 2013

Which firm should have been Facebook?

Image Source: www.pandasecurity.com

Which company should have owned the iPod

space?

17

Kodak Moments
1975 Invents first digital camera, but does not bring to market. Fears
cannibalizing film. Has 95% market share in U.S. film.
1984 Declines to sponsor LA Olympics. Low cost Fuji wins contract.
1994 Introduces QuickTake digital camera. Sold through Apple
1997 Fuji has 17% market share of U.S. film
1997 Launches website for people to upload & share photos
2005 Kodak ranks #1 in U.S. digital camera sales $5.7 B.
But, loses $60 on every camera sold. Severe undercutting by Asian low cost
manufacturers and several new entrants.

2006 Kodak outsources manufacturing of digital cameras to Asia.

Outsources first time in its history.

2007 #4 in U.S. digital camera sales.

2010 #5 in U.S. with 7% market share
2012 Files for bankruptcy

1999
2001
2003
2004

2008

Network Walkman
iPod (Apple)
iTunes (Apple)
Jukebox SonicStage
Connect Music Store
2.5 million songs from all
labels, but Windows only
Kills Connect

21

Computer Industry Life Cycles

Revenue

Tablets

PCs

Mini-Computers

Mainframes
Time

Founded by Ken Olsen in 1967

First Firm to be funded by venture capital
DECs PDP-8 is considered the first mini-computer
1972 revenues = $6.5 billion
1989 revenues = $14 billion

WANG

Source: Christensen

Source: Christensen

APOLLO
COMPUTER, INC.

WAYNE

Making Choices About The Future

64bit
75% on $500,000

Performance

32bit
50% on $250,000

VAX
PDP11
PDP8
PDP5

8bit
25% on $3000
Time

1982-86, Digital spent $2 billion developing a PC;

Entered the market four times and exited it four times
Source: Christensen

Industry leadership does not last

Typewriters
Manual

Electric

Word Processors

PCs

Tablets

Computers
Mainframe Minicomputers

PCs

Tablets

Hard Disk Drives

14

Leadership in Retail Services didnt last either

General Purpose

Bookstores

Toys

Electronics

Corporate mortality is very high!

The average life span of a
U.S. S&P 500 firm is
around 15 years; it was
70 in the 1920s.
Out of the top Fortune 25
in 2010, only 18 remained
from the year 2000 and
only 6 from the year 1980.

Average life expectancy of

all firms, regardless of
size, in Japan and much of
Europe, is only 12.5 years

Between 1995
and 2012, 87% of
the Fortune 500
went off the list

Only 16% of firms listed

on the 1957 S&P 500
remained on the 2007 list

1/3rd of the Fortune 500 listed in

1970, had disappeared by 1983
acquired, merged or broken to pieces.

Source: Fortune, S&P, BW, and others

Average Age of Global 1000 since 1980

Source: Factset, 2011

Global 1000 Percentage of Survivors Year to Year

18 years
14 years
12 years

Source: Factset, 2011

Global 1000 by country

Source: Factset, 2011

New Entrants into the Global 1000

Source: Factset, 2011

Fa
cts
et,
20
11

Survival Rate of Monkeys

The Role of Monkeys in the Economy

Where do entrepreneurs come from?

Percentage Contribution to the GDP

by the top 100 firms in the country

Between 1990 and 2010

Labor Productivity (real output per worker)
Spain went up by 15%
Northern Europe went up by 25%

Cost per worker

Spain went up by 120%
Northern Europe went up by 60%

That means labor costs per unit produced in Spain

rose three times faster than in Northern Europe
Source: Ghemawat and Vanormelingen, 2012

The World Economy: Historical Statistics. A. Maddison, 2007

A la luz de nuestra historia este es un

desafo muy exigente...
PIB per cpita
US$ ppp

Ao
inicial

Ao
final

Aos que nos

tard duplicar

De 694 a 1.325

1820

1877

57

De 1.325 a 2.768

1877

1920

43

De 2.769 a 5.781

1920

1988

68

De 5.781 a 11.520

1988

2004

16

Education spending as a % of GDP in Chile

Education spending as a
% of Govt. spending

Percentage Contribution to the GDP

by the top 100 firms in the country

What Spain, Greece, Portugal, Italy..Need

1. Create more high growth companies
2. Make existing companies bigger
We Need More Scale-ups Not Start-ups!
Source: Ghemawat and Vanormelingen, 2012

Create more high growth companies. How?

A look at 3 different countries

Source: Ghemawat and Vanormelingen, 2012

Start-Up Nation

60 years old
7.1 million people
Highest density of tech start-ups in the world
These start-ups attract more venture capital dollars
per person than any other country
2.5 times the U.S., 30 times Europe, 80 times India, and 300
times China.

Has more companies on the tech-oriented NASDAQ

than any country outside the U.S.
More than all of Europe, Japan, Korea, India, and China
combined.
Source: Senor and Singer

Source: Haaretz

Why is Israel so successful?

Israel Defense Forces (IDF) Experience
18 to 22 year olds; minimum 2 years

Technology Boot Camp

Next generation technology

Mission Orientation, Team work, Leadership, Pride

Resource starved
Improvisation, innovation

Diversity
70 nationalities

In the reserves
No hierarchies, no salutes, first name basis, informal

Surrounded by enemies
Unlike Greece and Turkey who also have mandatory military experience
Source: Senor and Singer

How can other countries create high growth

entrepreneurs?

Early Evidence from the U.S.

Nikolai Kondratiev (1892 1938)

Between 1965 and 1985, the US economy broke

the Kondratiev cycle.

From 1974 1984 the US added 24 million jobs.

Where did the jobs come from?
In the U.S., The Fortune 500 firms permanently lost 4-6
million jobs in the period 1970 - 1984
Significant job losses in federal, state & local govts., large
universities, large high-schools, and the large hospitals
They had created all the jobs for a quarter century after WWII

W. Europe lost 4 million jobs in the same time period

Japan added about 10%
less than half the rate of the U.S.
Source: Drucker

Entrepreneurship had come to the rescue!

1983 Inc. 500 list of fast-growing, young, privately
held firms

Construction
Chain of barbershops
Chain of dentistry offices
Hand tools manufacturers
Financial service firms
Free-standing health facilities
Continuing education
Collaboration between for-profit, not-for-profit and
government

Source: Drucker

How come the US did not break the cycle during the
1929 downturn?

Where were the entrepreneurs?

Source: Drucker

Management skills and training was the primary

driver of entrepreneurship!
Management had brought about profound
changes in entrepreneurial mindset, behaviors
and capabilities

Source: Drucker

U.S. Firms, Labor & Employment

2011 Statistics of US Businesses, Source: US Census Bureau
Employment by Firm Size # of Firms % of Firms # of Employees % of Employees
# OF EMPLOYEES
# OF FIRMS
% OF FIRMS
TOTAL EMPLOYED % EMPLOYED
Non-Employers (zero FTEs)
21,708,021
78.21%
21,708,021
15.25%
Total
5,684,424
113,425,965
1-4 FTEs
3,705,275
13.35%
6,139,463
4.31%
1-4
3,532,058
62.14%
5,857,662
5.16%
5-19 FTEs
1,705,092
6.14%
15,630,773
10.98%
5-9
978,993
17.22%
6,431,931
5.67%
20-99 FTEs
532,391
1.92%
20,922,960
14.70%
10-19
100-499 FTEs

592,963

10.43%
7,961,281
88,586
0.32%
17,173,728

7.02%
12.07%

20-99
500+ FTEs

481,496

8.47% 0.07% 18,880,001

18,311
60,737,341

16.65%
42.68%

Total100-499

81,243 27,757,676
1.43% 100% 15,867,437
142,312,286

13.99%
100.00%

17,671 Patters and0.31%

Source:500+
2007 County Business
2007 Economic58,427,653
Census

51.51%

Transformational vs. Subsistence Entrepreneurs:

Colombian Data

The structure of the U.S. economy

More than 50% of all businesses are home-based and
over 72% are sole-operator (2006 data).
The average business bring in $45,000 per year.

Only 6% of firms had revenues of more than $1

million.
SBA defines big business as firms over 500
employees.
By definition, 99% of all businesses in the U.S. are small
businesses.
Source: Invisible Capital, Chris Rabb

2009 Study of 549 high-growth founders

(Article: Anatomy of an Entrepreneur)

Source: Kauffman Foundation

High Growth Entrepreneurs:

Not the brightest in college

Source: Kauffman Foundation

High Growth Entrepreneurs:

Dont come from great wealth

Source: Kauffman Foundation

High Growth Entrepreneurs:

Better educated than their parents

Source: Kauffman Foundation

High Growth Entrepreneurs:

Didnt come from family business

Source: Kauffman Foundation

High Growth Entrepreneurs:

Not Young!

The average and median age of company

founders in the sample when they started
their current companies was 40 YEARS!
The standard deviation for this distribution
was 7.7.
(Consistent with prior research)
Source: Kauffman Foundation

High Growth Entrepreneurs:

Had significant industry experience!

Source: Kauffman Foundation

66

Silicon Valley
1954
1957
1965
1970
1975
1980
1986

Shockley moves to CA
Shockley Semiconductor has 50 employees
14 Semiconductor spinoff firms
35 Semiconductor firms
54 Semiconductor firms
63 Semiconductor firms
102 Semiconductor firms

Between 1947 and 1986,

129 Semiconductor firms
Were launched in Silicon Valley
ANCHOR FIRMS
& SPIN-OFFS

8 key people leave

Shockley to form
Fairchild Semiconductor
3 key people leave
Fairchild to form Intel
(1968)
Shockley Semiconductors
was a catalyst for
forming 30 Silicon Valley
ventures:
Intel, National
Semiconductor,
AMD, Teledyne,
Rheem, LSI Logic,
Kleiner Perkins

Anchor Firms & Spin-Offs

Minneapolis

Waterloo, ON

Helsinki

Preliminary Evidence from Colombia

Edad al momento de iniciar

Edad al momento de iniciar la empresa

Mas de 58 aos

0%

Entre 53 y 57 aos

2%

Entre 48 y 52 aos

5%

Entre 43 y 47 aos

2%

Entre 38 y 42 aos

19%

Entre 33 y 37 aos

30%

Entre 28 y 32 aos

16%

Entre 23 y 27 aos

23%

Entre 18 y 22 aos
Menos de 18 aos

4%
0%
0%

5%

70

10%

15%
20%
25%
Procentaje de Respuestas

30%

35%

Maximo nivel educativo del Emprendedor

Mximo nivel educativo

Doctorado (en el extranjero)

0%

Doctorado (en Colombia)

0%
19%

Maestra (en el extranjero)

30%

Maestra (en Colombia)

7%

Educacin Universitaria (en el extranjero)

33%

Educacin Universitaria (en Colombia)

Educacin Tcnica (en el extranjero)

0%
7%

Educacin Tcnica (en Colombia)

Educacin Secundaria (en el extranjero)

0%
4%

Educacin Secundaria (en Colombia)

Educacin Primaria (en el extranjero)

0%

Educacin Primaria (en Colombia)

0%

Ninguno

0%
0%

5%

10%

15%

20%

Porcentaje de Respuestas

71

25%

30%

35%

Aos de Experiencia Laboral Previa

30%
26%
25%

Porcentaje de Respuestas

25%

23%

20%
16%
15%
10%
7%
5%

4%

0%

Menos de 1
Entre 1 y 5
Entre 5 y 10
Entre 10 y 15
Aos de Experiencia laboral en otra empresas establecida

72

Mas de 15