Peter principle of innovation

Interesting approach:

Every company innovates until it finds a cash cow. At that point only innovation that supports the cash cow is promoted. Further, any innovation that threatens or does not support the cash cow languishes or is actively killed. Eventually, most of the true innovation ceases as the innovators leave and start new companies and the cycle repeats.

Yet I would hesitate to declare it a “business law”. But it’s a robust perspective, that rings true most of the time, if only because it reflects that most companies put a premium on stability and countability, and try to avoid change and any “rocking the boat”. There are not many firms that are able to renew themselves repeatedly, they are the exceptions that prove the rule.

This finds support e.g. in the thinking of Clayton Christensen (some BMID-coverage), who holds that companies try to hold on to their old (obsolete) business models and ways of operating as long as possible. They have a hard time understanding (or appreciating) upcoming technological innovations, mainly because these are not yet as powerful and capable as the older technology, i.e. the cash cow.

  1. Hello Martin,

    As the author of the original post I want to thank you for the mention.

    I need to chip in here just a bit. The tendency you mention in your last para, of companies to hold on to old ways of thinking is not the same as the ideas expressed in my article.

    For example, Google is a relatively new company and it has found a cash cow – advertising. It uses revolutionary technology and things are always changing inside the company, we are told.
    So these are not a bunch of fogies who don’t want to change – they embrace change every day – BUT NOT IN THE REVENUE STREAM.

    It is important when talking about this “cash cow” principle that we are focused on the revenue stream which becomes a static invariant, even if everything around is youthful dynamic and ever vibrant.

    The companies you mention that hold on to old business models often do that even when the revenue stream has moved on, so these are not good examples of the cash cow principle, IMHO.

    Once again thanks for the mention.

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  3. Hello Nitin,

    I am not sure whether I understand your point then, and if I am happy with a “cash-cow principle” …

    But let’s try to clarify what we mean, definitions and all but briefly.

    – revenue model (see below)
    – business model (see below)
    – cash cow (the down-left-quarter in the BCG matrix, at least for me)

    To me the revenue model of a business is only one component of this businesses particular business model. So I have a really hard time understanding you, when you argue “holding on to a business model when the revenue stream has moved on” … These two are intertwined, and should not be separated in my mind.

    And I would hesitate to think that Google are clinging onto their revenue models when they are expanding it happily all the time. See e.g. the current moves in Docs and Spreadsheets that are offered at reasonable fees (sic!) to SMBs, or the introduction of “click-through” ad pricing schemes.

    In fact Google are embracing change as you rightfully argue, nothing to dispute here. They change their “modes of operation” and their revenue sources adaptively, so they are surely not a good example for your principle.

    See, if we need to “focus on the revenue stream” for the principle to work, it loses much attractiveness, and grounding in prior research, which has found tons of other reasons for corporate (business model) inertia.

    Please understand that I perceived your adaptation of a person-focussed idea on a corporate setting an really interesting addition to this line of thinking and research … and I would advise against being too narrow with it.

    Just my 2 (Euro-)Cents .. and thanks for stopping by