November 30, 2015

Why Big Companies Choose Not To Innovate

Why Big Companies Choose Not To Innovate

Clayton Christensen’s conclusion that small markets don’t solve the growth needs of big companies was best captured in his bestselling classic The Innovator’s Dilemma, which gave us many insights on why big companies with far more resources than market entrants, often fail to embrace disruptive innovations until it’s too late.

Furthermore, Christensen argued that competent employees have been trained to know what’s good for the company and how to build a successful career within a company. This is directly tied to company growth targets and employee incentives, both of which are evaluated on an annual basis at most listed companies and large private companies.

I recently argued that short-termism plagues the modern company and that companies can learn a lot from the German national football team who were given the mandate to develop something truly special over a period of ten long years, culminating with their success at the 2014 World Cup in Brazil.

More and more companies that were once small and built their reputation on disruptive innovations, are now big, have large value growth targets, are watched like hawks by the business media and report to shareholders who usually demand short-term returns on investment.

They have become victims of their own success.

This also explains why many once innovative companies, like Apple, have turned to high profile acquisitions to bolster their growth strategies.

The trickle down effect of these pressures on company executives ultimately results in decisions being made that align to the short-term growth needs of companies. The only way to achieve these short-term growth needs?

By focusing on sustaining existing markets as opposed to disruptive ones.

Consider the diffusion of innovation theory, popularized by Everett Rogers. The theory states that innovations spread through social channels over time. Innovators first embrace a disruptive technology and are followed by early adopters, the early majority, the late majority and finally, the laggards.

Source: Everett Rogers

Essentially, what this implies is that the early market for disruptive innovations is generally quite small (the innovators number just 2.5% of the eventual market) and thus, does not solve the growth needs of large companies who may require, say $500m in revenue growth, to satisfy a 10% revenue growth target.

Furthermore, Geoffrey Moore, author of Crossing The Chasm, suggests that fordisruptive innovations there is a gap, or ‘chasm’, between the first two adopter groups and the early majority. This further draws out the time required to realize a return on investment on disruptive innovations.

As such, executives charged with making resource allocation decisions are forced to focus on the near term wins which are usually fueled by existing paying customers, who already represent ‘the majority’, and whose business models are driven by existing technologies rather than disruptive ones.

For example, if I’m in the business of selling LCD displays to Apple who then use the displays in the sale of 9 million iPhones in one year, it makes more sense to make small innovations to what Christensen calls ‘sustaining technology’ and appease the existing market than it does, say, to focus on a disruptive type of screen that our customer, in this case Apple, would have no immediate need or desire for.

To best illustrate this point, I have compared the time in years it took for some of the most disruptive innovations and companies of the last sixty years to go from development to mainstream success.

* I have defined mainstream success as widespread consumer or industry adoption for innovations such as the pocket calculator and minicomputer respectively and net profits above $500m for the companies listed. Essentially, I define mainstream success as the market penetration required to interest or satisfy the growth needs of a large, profitable, listed company or private company that is an industry leader.

When compared with the one year employee incentive lifecycle at most listed companies and large private companies, it’s not difficult to see why large companies, who have the resource capacity, generally don’t invest in disruptive innovations. When they do, projects are often shelved because the return on investment is not delivered quickly enough to satisfy revenue targets.

Add to this the fact that millennials, who will make up 75% of the workforce by 2025, expect to stay in one job no longer than three years, and it’s easy to foresee innovation going the way of the dodo in large established companies.

Today’s run and gun world of the tech startup is fueled by an ecosystem of venture capitalists and angel investors who generally expect a return on their investment after not one year, but usually five years. Investors experienced in financing early stage, disruptive technology companies understand that the lifecycle from customer discovery through to market creation and penetration takes time. In many cases, five years may not be enough to achieve mainstream success, but it is enough to gain valuable market insights, gauge commercial viability and develop enough traction to welcome a significant increase in company valuation.

Do the same laws of nature not apply to large organizations? Of course they do. As such, Christensen argues that companies should create new organizations, independent from the growth targets, values and processes of the mothership, where goals are aligned with the motivators of passionate innovators charged with developing the disruptive technology and finding a market for it, rather than building technology for an existing market who may not need the technology.

To further increase the likelihood of success, these independent companies need to subscribe to lean and agile product development theories. They are creating disruptive innovations for unknown markets and as such should focus on short development cycles where feedback loops derived from customer discovery activities, like those prescribed by Steve Blank, are incorporated into the iterative development process. This not only raises the likelihood that there will be a market for the end product, but also extends the funding, or the ‘runway’ available for a project, so that those in charge can fail their way to success.

A fantastic example of this in action can be found at none other than General Electric, the forth largest company in the world. The company has launched an initiative dubbed Fastworks, in collaboration with Eric Ries, author of The Lean Startup.

Essentially, the company trained almost 80 executives in the methodology underpinning The Lean Startup, set up growth boards to approve or reject potential projects pitched by employees (not dissimilar to entrepreneurs pitching to a panel of VCs or angel investors) and formed independent teams with the mandate to develop products unobstructed by the growth targets of the parent or subsidiary GE company in which they operate.

‍Source: GEReports.com

Already, the initiative has spawned successes such as a high-output 7HA gas turbine, developed 40 percent cheaper and two years faster than it would have been via traditional means, a light bulb with a bult-in wireless dimming chip and an oil well flow meter, being developed in collaboration with Chevron.

It may be seventeen years since The Innovator’s Dilemma was first published, but it is not any less relevant. Its findings, combined with lean project and product development methodologies popularized in the past five to ten years, provide the modern executive with the playbook required to stand any chance of surviving in an age where disruption, particularly of the digital persuasion, is unrelenting.

Innovate or die.

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Steve Glaveski

Steve Glaveski is the CEO and Co-Founder of Collective Campus which he established to help companies and their employees to create more meaningful impact in the world in an age of rapid change and increasing uncertainty. Steve also founded Lemonade Stand - a children's entrepreneurship program, wrote the Innovation Manager's Handbook vol 1 and 2, hosts Future², an iTunes chart topping podcast on corporate innovation and entrepreneurship and is a keynote speaker. He previously founded HOTDESK, an office sharing platform and has worked for the likes of Westpac, Dun & Bradstreet, the Victorian Auditor General's Office, Ernst & Young, KPMG and Macquarie Bank. Follow him at @steveglaveski and Book a free 15-minute call with Steve to talk through your innovation objectives.

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