Search for “management/innovation mistakes” and you’ll find “Top Ten Innovation Mistakes,” “Five Innovation Mistakes to Avoid,” “Three Innovation Mistakes You Don’t Want to Make,” “Three Management Mistakes That Crush Innovation,” and more. While these are mostly compiled by consultants and editors, the short list below comes from an experienced executive who has spent over 20 years as an investment banker, strategic thought leader and senior corporate finance decision maker.
Currently managing partner of investment banking and advisory firm Cobb Bay Partners, LLC, Jim Gruskin has executed over 50 capital market and strategic transactions valued at over $70 billion. In the process, he has observed “a few mistakes,” which he revealed to attendees at the CIMS Sponsors meeting in May with the caveat, “If we are honest with ourselves, we would have to admit that we have all made at least some of these mistakes.” Gruskin summarizes them here:
1. Over-Reliance on Anecdotal Information
“The temptation to form premature theories upon insufficient data is the bane of our profession,” famed detective Sherlock Holmes explained in Sir Arthur Conan Doyle’s “The Valley of Fear.”
But sometimes anecdotal information is all we have. That in and of itself is not a problem. However, I have seen people from CEOs on down who are convinced they are making data-driven decisions when all they are doing is churning through a limited pool of stale information that in some cases was gathered with a great degree of selection bias. That is rarely the best way to achieve an optimal outcome.
2. Experience-Driven Myopia
In the mid 1990s I worked on several financing and M&A transactions for pager companies when these were common communications devices.
I remember distinctly a financing roadshow during which the CEO of one client company mentioned that he couldn’t understand why people would want to abandon their pagers for pricey cell phones when cell phone battery life was terrible and coverage was spotty at best.
His theory: Why have an expensive cell phone conversation that is likely to be plagued by a poor signal (or dropped altogether) while powered by a battery that may not last for the entire call when you could instead send a text page or direct someone to make a clear-sounding call from a reliable land line?
We sat in meetings with hedge fund investors and pension fund managers while the CEO successfully made his case; his assertion — ludicrous with the benefit of hindsight — was based on the information available at the time and was quite plausible to many intelligent executives and momentum-driven investors.
Ultimately, funds flows began to reflect a secular shift, and the pager industry ceased to exist. Several billion dollars of equity market capitalization evaporated within a couple of years. Pager companies—particularly those with significant financial leverage — filed for bankruptcy protection or sold at valuations that reflected their distressed situations.
At the same time, major telecom companies and startup wireless infrastructure providers expanded cellular networks and towers to support new technologies. The major telecom companies that saw changing usage patterns and technology evolution early, as well as those who either invested in companies that participated in the wireless infrastructure boom or sold short the shares of paging companies, were the ones who profited from this shift.
3. Sinking Into Strategic Quagmire
Before starting Cobb Bay Partners, I was at R.H. Donnelley (later renamed Dex One) and was one of the people at the highly profitable yellow pages publisher and local marketing services company with responsibility for identifying emerging secular trends likely to impact Donnelley’s strategic position, which faced existential threats from an acute and unaddressed “innovator’s dilemma.”
There was a tendency to rely heavily on data analysis to guide strategic decisions at a time when a wrong move could threaten not just Donnelley’s rate of revenue growth but also the viability of the company itself. At the same time, we found the competitive landscape changing faster than our ability to gather information about it, let alone thoughtfully analyze the situation. These factors increased the risk of falling into a strategic quagmire.
According to the Corporate Strategy Board’s 65-year study of S&P 500 firms, almost 75% of companies experienced stable or even increasing margins prior to the point at which they stalled. Almost half were actually experiencing accelerating revenue growth prior to the stall.
I call this phenomenon, which could be a function of many factors, the “Super Nova” syndrome. In many cases it can be the result of avoidable mistakes:
- 88% of the stall factors consisted of controllable choices by the management team.
- 70% of these factors involved a competitive strategy decision that resulted in a breakdown in innovation management.
I would add another reason that companies can stall at critical times: decision paralysis.
4. Loss of Confidence in Business Instincts
I often find myself among corporate leaders who like to immerse themselves in data. But even if the data is targeted and relevant, it can in no way replace business instincts.
For instance, the CIMS faculty is vigilant about asking the right questions when working with corporate partners who use Big Data analytics to support business decisions. That can only be done by applying business experience and judgment, which is why operational managers and strategic leaders are key participants in CIMS Big Data projects, in addition to technologists. Big Data analytics is an incredibly powerful tool, but it is just that — a tool. It is not intended to replace business judgment.
During Board meetings to discuss potential strategic transactions, I have occasionally been asked about the valuation of a company or potential transaction counterparty. Valuation tools can support fairness opinions or provide guidance in these situations, but ultimately a company, like any asset, is only worth what someone is willing to pay for it. Analysis of precedent transactions and trading multiples of public companies as well as intrinsic valuation using discounted cash flows is relevant but not ultimately determinative.
The involvement of experienced people who can apply their industry knowledge and instincts is critical to separating signal from noise and moving forward with confidence.
Avoid These (and More) Mistakes
CIMS is currently developing an “Opportunity Finder” tool to help corporate strategy leaders, institutional investors and entrepreneurs grow and innovate more efficiently. The key is to “follow the money” in order to identify potential funding sources, track capital flows in target industries, discover disruptive technologies that are being funded, anticipate industry shifts, and find the disruptive innovators who are attracting the “smart” money. The Opportunity Finder can also help innovation managers to:
- Reduce or eliminate the anecdotal nature of certain data-driven decisions
- Conduct systematic and dynamic analysis to more easily spot trends and breakthrough opportunities, and ultimately:
- Make better decisions—faster.