Monday, May 12, 2008

Innovation and the “Quarterly Company”

Trying to meet Wall Street Analyst’ targets, by focusing on the short term goals can do much harm than good for technology companies. This is mainly because of the fact that sustainability of a technology company is highly dependent on the innovation it brings to the marketplace. If a company loose the focus on the long term strategy due to “external influences”, a company might find itself running the company from “quarter to quarter” - and effectively becomes a “Quarterly Company” with hindered innovation .

Recently there was a good discussion provoked by ZdNet’s Larry Dignan related to the influence that the Wall Street has on the technology companies. However it should be stressed that it is futile to say that shareholders should not be taken seriously. Ultimately it’s shareholders money that companies are spending. However it helps to have at least some majority shareholders who have a sight in the long term strategy of a company. Keeping them enlightened about innovation and R&D strategies of companies is one way of getting the buy-in of such shareholders.

However companies like Amazon and Google have more luxury than some of the small time tech companies to invest more in innovation. Apart from that they have the power to withstand the pressure / criticism of the Wall Street when pursuing high risk long term goals. A recent BusinessWeek magazine’s interview (April 28th 2008 issue) conducted with Amazon’s Jeff Bezoz clearly indicates this fact. Bezoz claims that“I believe you have to be willing to be misunderstood if you're going to innovate”. The mis-understanding stems from the fact that when you are innovating you do not have the freedom to enlighten all the stakeholders of the companies on your strategy in an in-depth manner. If you do so this can very well help your competition. Adding to that there is no clear cut path that leads to innovation as well. This makes it even more complicated to spell out a strategy.

At the same time Google does not guide the investors on their future earnings and yet apparently earns the respect of majority of investors. The article titled “No More Earnings Guidance? Hallelujah” provides a brief insight into the “No Guidance policy” of Google. The Reuters article “No guidance" policy jolts Google investors again” echoes the sentiment of some sections of the Wall Street with regard to the said policy.

At the same time, there are examples of companies who got a beating in the innovation side trying to focus on the short term profits. Introducing Six Sigma to increase the efficiency of 3M Corporation was one such example where the creative culture was put on a back foot while attempting to increase the short term profitability.

4 comments:

aditya said...

Quarterly or yearly, I don’t think it is possible to plan innovation. There was a recent post up on our corporate blog (mahindrauniverse.com) on how innovation requires disruptive thinking. This requires us to create an environment that encourages our employees to think. I would like to get your views on innovation on our blog.

Nuwan Perera said...

Aditya,

As you correctly point out that we can not “Directly” plan innovation. However I believe what should happen is facilitating the process in a manner which productive to the company.

For instance Google Inc. facilitates innovation by allowing their Software Engineers to spend 20% of the time on their “Pet Projects”. This amounts to one day per working week, assuming a 40 hour work week. I think Google has reaped the rewards of this program, by launching a large number of innovative web applications over the past two years.

Thanks for the invitation and I visited your corporate blog. I will post my views in due course in your blog.

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