Keep calm and forget innovation

In times of great volatility, like the present, companies feel that they must innovate – go the extra yard, produce a miracle – to survive. History suggests it's a little simpler than that.

There’s a lot of hot air from the business media and business schools about innovation in the face of market volatility. It’s almost a requirement for consultancies to come out with surveys saying chief executives rank innovation as the second or third biggest priority. Talk of innovation usually hits the media’s hot buttons. Too bad many companies aren’t actually doing anything about it.

Jim Collins, one of the world’s most prominent management thinkers (his 2001 book Good to Great is ranked as the most influential) says innovation is not the answer. Furthermore, he says there is nothing new in volatility, there’s no "new normal”. Collins says relentless focus, discipline and paranoia are the only ways to handle volatile markets, not innovation.

There is no doubt the crazy volatility on the international and domestic market is having an impact on the business mindset. Just in the last fortnight, we have seen the US jobs market stalling for a second month. Britain has slipped into its first double dip recession since the 1970s, Spain is back into recession and the unemployment rate in the 17 countries that use the euro has reached a record high. The Italian banking industry now holds more government debt than other banks and the Spanish banking sector is in a similar position, zombie banks carrying too much debt. Eventually, you’ll run out of patsies prepared to fund it. The new political landscape in Europe just adds to the uncertainty and investors picked that up on Monday when they sent the stock market into the worst one day performance in five months, tumbling more than 2 per cent. That’s not surprising – what’s happened in Greece could spell the end of the EU as we know it.

Europe affects financial markets which affects us and that confounds the volatility here. Combine that with a soaring Australian dollar choking local industry and fresh reports every day of company failure and job losses in the non-resources sector of the economy. Alarmingly, Australian Securities and Investments Commission figures show insolvencies in the non-resources sector are now at their highest level since they started taking statistics in 1999. It’s not surprising that the last Dun & Bradstreet Business Expectations Survey has revealed that one in every four businesses now anticipates lower sales and profitability next quarter. Such is the interconnectedness of global markets. Things are happening a lot faster now and there is less time to reflect.

But in his latest book Great By Choice (Random House), Collins says such volatility is not all it’s cracked up to be, it was ever thus. We need to get some historical perspective, he says. The book, co-authored with University of California management professor Morton T. Hansen makes the point that volatility is nothing new, it’s always been with us. Instability, they say, is chronic, uncertainty permanent, disruption common and no one could ever predict what’s ahead. Furthermore, they say we had been lulled into a false sense of security because of the temporary geopolitical stability and good economy.

"The dominant pattern of history isn’t stability, but instability and disruption,’’ they write. "Those of us who came of age amidst stable prosperity in developed economies in the second half of the 20th century would be wise to recognise that we grew up in an historical aberration. How many times in history do people operate inside a seemingly safe cocoon, during an era of relative peace, while riding one of the most sustained economic booms of all time? For those of us who grew up in such environments … nearly all our personal experience lies within a rarefied slice of overall human history, very unlikely to repeat itself in the 21st century and beyond.”

So how should companies handle that? The authors look at companies like Intel, Microsoft and Southwest Airlines that provided shareholder returns 10 times greater than their industry over 15 years, and then compared them with a control group of companies that did not perform as spectacularly. There are similar examples of Australian companies.

There were some surprising conclusions. Contrary to what is often promoted in the media, successful leaders were not bold risk taking visionaries. They couldn’t see the future. Amazingly, they weren’t particularly innovative.

What they had instead was a fanatical, monomaniacal discipline. They relied on empirical evidence of what worked to determine when to go fast and when it was better to just pace themselves. They were also paranoid or given to what the writers call "productive paranoia”, obsessing about what could go wrong.

And contrary to the line that’s usually peddled, they weren’t the first to market. Gillette didn’t pioneer the safety razor, Star did. Polaroid didn’t introduce the instant camera, Dubroni did. Amazon didn’t pioneer online bookselling. Studies show that 64 per cent of pioneers fail. Pioneering might be good for consumers but it’s hazardous for entrepreneurs.

Productive paranoia is what saved John Casella who runs Australia’s most successful wine company in the US. Casella Wines is the outfit behind Yellow Tail, the wine that has reshaped the American wine market and which has a 42 per cent share of the Australian category in the US. The next closest is Lindemans at about 10 per cent. The dollar could have wiped out the company’s profits, as it did for wine companies and Casella’s revenues have dropped 13 per cent. But extensive hedging in anticipation of the worst helped it almost quadruple its net profit. With that fire-power, Casella is now planning to do the same thing to the Australian beer market.

Monomaniacal focus on strategy is what turned Domino’s Pizza into a success story. While other retailers like JB Hi Fi and Harvey Norman are suffering falling profits and Woolworths is downsizing its former flagship Dick Smith, Domino's had a 22.96 per cent lift in first-half net profit to $12.6 million. The digital strategy drove it. Chief executive Don Meij steered Dominos into digital platforms seven years ago, five years after the dot-com crash.

"In 2005 when we launched our online platform, it only did 1 per cent of sales. We were under a lot of pressure because just about every notable retailer in Australia was saying there was no money in online," he says. "Another year later, it was still only 3 per cent of our sales. We invested quite early because we really believed in the future. Today, online is about to go past half of our sales. As of next year, half of our digital business will come in on smart phone so we embraced the curve ahead. While the shift to digital was innovative, what got it over the line was the immense perseverance implementing a strategy and not succumbing to the herd, or leaping for alluring, but irrelevant opportunities. The trump card was not innovation per se but the ability to scale it with discipline."

Collins and Hansen are not saying innovation is bad, that would be stupid. But they found the most successful and enduring companies in the face of volatility innovated less than what we would expect. Once a company meets the threshold of innovation necessary for survival, they need a mixture of other elements. In particular, it’s a mix of creativity and relentless discipline. What a pity consultants, business media and business schools don’t promote that.

Leon Gettler is a contributing editor at LeadingComapny. You can follow him on Twitter @leongettler