How failing to innovate affects the market cap of corporations

Enterprises don’t need to fear disrupters but fear disruption from the capital market

A growing number of enterprises feel the headwind from capital markets. Up and coming businesses get valuations far above conventional businesses that may be more than ten times as big. Those warning signals all too often are simply ignored. But that could become a fatal mistake.

Innovation takes 7 to 10 years

Theoretically, enough time for any established market player to respond and fight back. But it isn’t quite that easy. If you look at the early years of the then, new automaker, Tesla, you notice that the established players sold more cars in some metropolitan cities in a month than Tesla sold globally in an entire year. Airbnb sold so few vacation rentals a year that established hotel chains didn’t even notice. Early freelancer platforms connect some inexpensive workers with businesses who had a short-term need in a way that the established recruiting firms didn’t even take the time to understand their business. Now, some people may say this is ignorance. But taking the sheer number of companies that have tried something and failed into consideration, an enterprise cannot respond to any brain spark that may happen in this world. However, one group does take that time and effort for a very different reason.

Financial Market Analysts get extremely smart

In the past years, top investment firms completely disrupted the financial market. Yet it went almost unnoticed. With far more detailed insights, more intelligent tools, and evolving algorithms, they are able to predict the success probabilities of a new market entrant to a degree that was unimaginable just a few years ago. CEOs, Board Members, Unions, and Investor representatives will need to shift gear when it comes to innovation. Future-oriented investment decisions drive market caps (value of a company) into new directions. It’s no longer only in the tech space but now also in all other industries like the auto industry, the tourist and hospitality industry, in the business services where a substantial shift is happening: The capital market favors innovation over profitability and size. One newcomer in that market is investment management company ARK-Invest who states on their website We Invest Solely In Disruptive Innovation. And the reason is obvious; in the next 10 years, it is more likely that those new and innovative businesses will win, than the established and slowly evolving companies.

Innovation is entering all industries

We randomly choose Hospitality, Automotive, and Business Services in our research. You can see how companies with rapid growth into a large industry segment, while there is no or no adequate response from the current market leaders are seen by the capital market today.

AIRBNB
2007 first 3 guests — the company was founded
2009 21,000 guests
2018 300 Million guests
2021 market cap $93 Billion *
2021 Hilton market cap $36 Billion *

TESLA
2012 2,000 or so cars
2015 35,000 cars
2020 1,000,000 cars
2021 market cap $570 Billion *
2021 Daimler market cap $84 Billion *

FIVERR
2010 Some 1,000 jobs at $5 each
2012 estimated $6 Million
2018 estimated $100 Million in revenue
2021 market cap $7 Billion *
2021 Kern Ferry market cap $3.1 Billion *
at $2 Billion in revenue

* = June 15, 2021

Is the world insane? Then, what was with the market caps of Intel, Cisco, Microsoft, Google Facebook, and so forth. What happened to their competitors like DEC, Amdahl, Zilog, Alta Vista, AOL, or MySpace? Today the disrupters are identified much earlier and get evaluated much earlier to higher levels. Not to help them and not to kill others. The new behavior is only a logical consequence of the desire to be in a rising giant early. The advantage for established enterprises: They get a brand new early warning system. But even then, there is a potential for huge mistakes as you can see in our mini case study below..

Innovate or get disrupted

Trying to counter-attack a market intruder that has a disruptive business model or disruptive product, by trying to build something better is not leading to any success. A weak attempt to focus on “Gradual Innovation”, which is nothing but improvement, is definitely not an adequate response either. The only way to counter an innovation from a competitor, no matter what size or age, is by another groundbreaking innovation. Improvement is important — but it isn’t withstanding an innovation. Trying to be better than the new innovator is only an improvement and makes the former leader a follower of the new innovator.

MERCEDES BENZ CASE STUDY

The Daimler AG was an investor in Tesla. But eventually lost interest and sold the shares. Tesla was built on 5 unique aspects: 1) A very fast electric motor 2) New high capacity batteries 3) A big display giving space to all kinds of information 4) A digital experience that went far beyond the proprietary “Board Computer” and 5) A customer experience not seen from the conventional carmakers.

The competition only saw the electric motor and battery. They also did not see the timeline that it took 5 years from introducing the first Tesla to getting it at least a bit off the ground. Chevrolet killed its EV short after launch because they thought the market does not exist. Mercedes ignored it completely, then began to invest and built the EQ series. But it was only the replacement of the motor and tank for an electric motor and batteries.

Only with the EQS, Mercedes finally pushed the innovation button in many ways — BUT — chose not to really talk about it. Still, a market leader by the volume of cars they produce, Mercedes became a follower and did not push their innovation but what Tesla has since 10 years: Motor, Battery, and a “hyper display”. The digital experience and also the customer experience fell behind. And the innovation they made was not even mentioned. When the tough gets going the going gets tough.

Instead of standing their ground and continuing rejecting a large display in or on the dashboard and introducing their innovative head-up display — they competed in a space that has no future for both cars. Instead of drumming up their real innovation, they ignored it because they did not understand what customers want. The innovative MBUX system with a large display mirrored on the windshield, supported by a perfect and unique augmented reality system was not part of the competition. The leader turned into a follower and the capital market recognized it. How is this possible?

Envisioning the future and then creating it

Innovation is a mindset. For a company to be innovative it is not enough to compete on a product or service level — it needs a leadership team that competes for a new future with a vision that goes far beyond the here and now. It’s a competition for customers that may purchase a product today but with a perspective for the future. Analysts still hold onto the prediction that 90% of today’s enterprises will no longer exist in 2050. The bet is still on but the likelihood that those analysts are right is currently increasing, not decreasing.

Let me know your thoughts and opinion.