Syrian civil war, Greece default, U.S. debt and global recession are some of the major risks the world faces in 2013. But the biggest risk a company faces is not from external global events; it is the failure to innovate. Because technology is constantly changing and can make a firm’s current products and services obsolete.
Consider the following recent examples: the popularity of digital technology sent the leading photo services company, Kodak, into bankruptcy; the continuing success of the iPhone has sent shares of the leading mobile phone maker, Nokia, tumbling; the popularity of tablets has decimated the market cap of the leading computer maker, HP.
Technologies today are advancing at an ever-more-rapid pace. That progress means that the current position of any company is never secure. The most vulnerable are the leading firms in their markets: the likes of Kodak, Nokia and HP. The strongly entrenched positions of market leaders and the steady cash flow from their successful products and services give them a false sense of security and assurance against risk. This leads to what London Business School marketing professor Rajesh Chandy and I call “The Incumbent’s Curse.”
The incumbent’s curse is partly driven by an organization’s asymmetric attitude to risk: market leaders shun risky innovations because of the incoming profits from their current offerings while entrepreneurs and small firms have little to lose and eagerly embrace risky innovations.
To maintain market leadership, incumbent firms need to adopt a culture of unrelenting innovation. This culture requires them to embrace risk, focus on the future and cannibalize successful products with risky innovations. The failure to innovate is the greatest risk a firm faces.