Why Big Companies Can’t Innovate

My friend Ron Ashkenas interviewed me for his blog on the Harvard Business Review. Ron is a managing partner of Schaffer Consulting, and is currently serving as an Executive-in-Residence at the Haas School of Business at UC Berkeley. He is a co-author of The GE Work-Out and The Boundaryless Organization. His latest book is Simply Effective.  For what I had thought were a few simple ideas about taking what we’ve learned about startups and applying it to corporate innovation, the post has gotten an amazing reaction. Here’s Ron’s blog post.

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What’s striking about Fast Company’s 2013 list of the world’s 50 most innovative companies is the relative absence of large, established firms. Instead the list is dominated by the big technology winners of the past 20 years that have built innovation into their DNA (Apple, Google, Amazon, Samsung, Microsoft), and a lot of smaller, newer start-ups. The main exceptions are Target, Coca Cola, Corning, Ford, and Nike (the company that topped the list).

It’s not surprising that younger entrepreneurial firms are considered more innovative. After all, they are born from a new idea, and survive by finding creative ways to make that idea commercially viable. Larger, well-rooted companies however have just as much motivation to be innovative — and, as Scott Anthony has argued, they have even more resources to invest in new ventures. Sowhy doesn’t innovation thrive in mature organizations?

To get some perspective on this question, I recently talked with Steve Blank, a serial entrepreneur, co-author of The Start-Up Owner’s Manual, and father of the “lean start-up” movement. As someone who teaches entrepreneurship not only in universities but also to U.S. government agencies and private corporations, he has a unique perspective. And in that context, he cites three major reasons why established companies struggle to innovate.

First, he says, the focus of an established firm is to execute an existing business model — to make sure it operates efficiently and satisfies customers. In contrast, the main job of a start-up is to search for a workable business model, to find the right match between customer needs and what the company can profitably offer. In other words in a start-up, innovation is not just about implementing a creative idea, but rather the search for a way to turn some aspect of that idea into something that customers are willing to pay for.

Finding a viable business model is not a linear, analytical process that can be guided by a business plan. Instead it requires iterative experimentation, talking to large numbers of potential customers, trying new things, and continually making adjustments. As such, discovering a new business model is inherently risky, and is far more likely to fail than to succeed. Blank explains that this is why companies need a portfolio of new business start-ups rather than putting all of their eggs into a limited number of baskets. But with little tolerance for risk, established firms want their new ventures to produce revenue in a predictable way — which only increases the possibility of failure.

Finally, Blank notes that the people who are best suited to search for new business models and conduct iterative experiments usually are not the same managers who succeed at running existing business units. Instead, internal entrepreneurs are more likely to be rebels who chafe at standard ways of doing things, don’t like to follow the rules, continually question authority, and have a high tolerance for failure. Yet instead of appointing these people to create new ventures, big companies often select high-potential managers who meet their standard competencies and are good at execution (and are easier to manage).

The bottom line of Steve Blank’s comments is that the process of starting a new business — no matter how compelling the original idea — is fundamentally different from running an existing one. So if you want your company to grow organically, then you need to organize your efforts around these differences.

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23 Responses

  1. A very American viewpoint of innovation that pretty much addresses the world coast-to-coast.

    Innovation is creating something no-one knows they need or want and dang the customers. If customer thinking is the driver it is commercial adaption, not innovation.

    Or it is a the new innovation what people will buy and not something new or original.

    • Great points for deliniation. When speaking of innovation as it relates customers you are in the right discussion. However there is a big difference when simply exploring ideas; the customer is not required. If you want to explore ideas without customers; don’t let anyone stop you. Just don’t act like a baby unable to feed itself. You are old enough to write. Old enough to work. And old enough to fund your own exploration if ideas. And then … you don’t need customers.

      • OK. I didn’t write that well. Customers are the final judges of innovation no doubt. Now I get it. I was thinking invention not innovation. I retract all I say unequivocally. In the future I will use my dictionary before commenting! Thanks Kendaddy.

        • No, customer are not the final judges of innovation. The are the final judges of value and quality.

          For me innovation is creating something new that is more than an incremental improvement of something that already excists.

  2. Having served multiple times at both the corporate and the startup level, my observation is as follows:

    With startups, the evolution of the business model and therefore the implied organizational model/culture occurs in tandem with the development of the innovative product/service proposition. They are inextricably linked. The product is the culture, the culture is the product, the brand is the culture, the culture is the brand.

    This is not necessarily true for large organizations where its not the norm for the innovation or product to “be the culture” or the culture “to be the brand or product”. For many large organizations with a “sustaining” culture, and all the enviable market and technology resources at their disposal… physical innovation is “easy”, the concomitant cultural business model innovation that needs to be in place “not so easy”.

    Maybe this is not such a bad construct in the wider scheme of things. Dynamic, innovative scalable startups and investors NEED acquirers who cannot do it for themselves. Maybe that is how innovation is supposed to work! (?)

    • Bravo. Great observation.
      I’m struggling at a giant company to innovate and create value for its customers. When an innovation hits the street and starts to make a tiny bit of money; the giant company tries to havest the new shiney income through efficiency tools rather than tune the innovation for greater customer satisfaction. Efficiency vs. Effectiveness.

  3. Amazing, just amazingly so very true.

    Peace,

    George Munchus,PhD

  4. Innovation for big companies is a reaction to an event that almost always has to do with revenue. It is not proactive because its not designed to be. Some companies try to create an environment of innovation by encouraging employees to come out and share their ideas. At the same time though the new ideas most likely will be changes to existing strategies and the usual answer is “oh this is an interesting idea but it does go against this and that strategy/imitative etc”. I not saying its easy to innovate. Not at all. The company has spent years and multi million of local currency to build a model and to become a big company this model works on some shape or form. The company has hired and trained managers to execute this model. Has gone out to investors and presented this model and promised growth and success. Innovation comes and says sorry but your model is not that good after all. Innovation is sometimes seen as the difficult employee the trouble maker who wants to stir things. Of course when the numbers drop when the customers have left then innovation is welcome but it’s not a nice to have anymore it’s not an initiative it’s survival.
    Small companies do not have a choice but to innovate. And they are most likely staffed with the “troublemakers” of the big companies who always wanted to innovate in the first place. There are some big companies out there who do innovate and do get it right but they are not that many. Not many good things come in high volumes! And as far as it
    Concerns the start ups no innovation translates to no start.

  5. I believe there can be an alternative paradigm for innovation in corporate America by creating a generation of intrapreneurs, or entrepreneurs within large companies, to bring innovative ideas back into the Big company. U.S. companies are regularly pressured by institutional shareholders or private equity owners to meet quarterly numbers, thus causing management to short-change innovation and cut-off opportunities to create new revenue streams and hence, intrapreneurial ideas.

    There are steps that management working within large or mid-sized companies can do to change this course and ignite intrapreneurialism. These corporate management transformations can include: (i) starting with the CEO, the concept and culture of intrapreneurialism should be officially introduced – or reintroduced – as a priority within the company; (ii) make organizational changes to facilitate intrapreneurship; (iii) publicly and financially reward intrapreneurialism; and (iv) dedicated investment dollars to intrapreneurialism.

    Big companies can be poised to contribute vitally to fueling economic recovery through intrapreneurship, with a powerful voice at the top advocating for ideas and innovation, concrete changes in place, and employees motivated to step out of their safety zone. At the same time, these Big companies can take their rightful place next to entrepreneurial small businesses in playing a critical role in global competitiveness.

  6. Congrats Steve!
    I do agree with your post!
    I’m looking forward for a version of the Lean Launchpad Educatord Handbook for big corporations. I’m sure that the original one is ok in a 70%, but… There’re some specific issues regarding big companies and internal entrepreneurs. For instance:
    -How do we choose the participants?
    -How do we build the teams?
    -Do we give a real challenge or problem of the company or freedom for creativity?
    -How and when do we involve key areas like IT, HR, Marketing and so on to avoid the “not developed here effect”?
    To sum up… How do we make real the Startup culture inside a big established company through the Lean Launchpad? Is it possible?
    Best regards!!

  7. Hi Steve,

    Thanks for sharing. I too have first hand experience in both corporate innovation as well as start up innovation. I’ve spent more than ten years consulting at a senior level on major projects at some if the world’s largest companies. Over the years I’ve also been approached by a number of start ups to help get them clear on their business idea.

    I absolutely agree with your three reasons why large corporates struggle to innovate. I would add a fourth reason – WIIFM – What’s In It For Me. A start up has a high level of urgency to find ways to innovate to stand out from the crowd and bring in the cash flow. They’ve got less to lose by experimenting because they don’t have established clients to keep satisfied and historical sales figures to maintain, nor do they generally have shareholders to keep happy. Large corporates have more resources to invest in innovation but they’ve also got more to lose when an innovation fails.

    Even when the writing is on the wall that their industry has changed and the old solutions no longer fit, it’s tough to change when your end of year bonus is usually dependent on how many sales you’ve made, not how many innovations you’ve introduced.

  8. I fully agree with the reasons mentioned above and I would like to add some others, per my experience in both startups and big companies:

    • Fear of uncertainty – they have a big, fat cow out there, yielding lots of sales. “Why should we try changing a successful business model? We’ll take care of the competition as we did in the past…” Getting out of the comfort zone is a challenge.
    • Caesar mentality – a lot of people in big companies are in an intense quest for power. Everyone wants to get to the Caesar position, where they can be the ones making the selections of innovative ideas.
    Only few innovations are selected, while the selection is not based on any actual experimentation – just on Caesar’s own judgment and interests. At the time I initiated innovations I believed in, just to be ruled out without proper explanation, not to say experimentation. Then I stopped…
    Centralized authority – because of the power quest and politics, authority to conduct small, low-cost experiments is never distributed to the ones that can really carry out real experiments.
    • Big companies are fat and slow – while in startups speed counts. Big companies take their time, with endless meetings and approvals along the management chain.
    • Traditional Product Management practices – old habits of a very long cycle processes, supporting sustaining innovations only (in the best case).
    • Fear of cannibalization of current lines of business – which I can understand (but there are ways to overcome it).

    To conclude, I think big companies must innovate, but can do so only under specific conditions.

  9. It’s sad that big companies do not see the need to innovate to keep their existing customers happy. The upper management of these big companies think that the best route to innovation is to acquire new startups as gap fillers for their existing solution to grow their customer base and expand their market share. But they always forget to evaluate the damage that these acquisitions do since the effort of integration that is involved with these acquired products or solutions damage the existing offering. It becomes a patch work which finally leads to other issues like performance, scalability and supportability issues down the road and customers end up unhappy.

    This mindset has to change with the leaders in these big companies. These leaders should see the value add of encouraging ingrown innovation v/s acquisition. This will not only help build overall better product portfolio, at the same time retain talented employees who are mainly seeking a place to work on challenging new tasks and ideas.

    Hope that day will come soon!.

  10. Big companies can’t innovate because they don’t want to. They prefer to trumpet the word “innovation” and leave it at that.

    Moreover, many large corporations, especially in today’s economy, are cultures of fear.

    As a professional creative, I know all too well that you can’t come up with ideas or develop them properly if you’re worried about making mistakes.

  11. I had a great conversation with a friend the other day about this exact topic. He works at a large networking product company, and took issue with my statement that large companies can’t innovate. His response was enlightening.

    Sure – it’s hard for large companies to do substantial innovation with new technologies, new products, and completely new business models. But in fact, large companies – particularly sales-driven companies – are extremely innovative when it comes to marketing, sales, channels, and other areas. These are cultures where business people are given great flexibility and drive significant experimentation in the ways they go to market. They discover new paths to different customers, which can have radical effects on even large organizations in short timelines.

    I think it is important to distinguish the different ways companies can innovate, because it’s not always about the technology.

    For anyone interested – I wrote a post last year called “Why Innovative Products from Big Companies Get Stuck: http://explorics.com/2012/04/25/why-innovative-products-from-big-companies-get-stuck/

  12. I think the bottom line is the reason big companies don’t innovate. Innovation has a lot of risk associated with it and shareholders want as close to a guaranteed return on their investment dollars as they possibly can. They are not looking for the next big thing but the next big check.

  13. I think this article misses the point by ignoring the innovative failures. But, I have to admit i did not read all the links…

    I think innovation is a means not a goal – it should be about succesfull companies – companies that stay in business. Then you’ll see that some companies manage to stay in business for a long time (becoming established, but adapting (innovating?) to cater changing customer demands. Like Oce that started with food color additives and changed to photocopiers, like 3M making sandpaper, inventing all sorts of things along the way and now well known for post-it memo’s.

    You’ll also notice that many start ups (innovative or not) fail to stay in business.

  14. I couldn’t agree more with Ron’s opinion. It seems so obvious once someone points it out. It is absolutely true that the mindset of those who are just starting a business is almost polar opposite, generally, to those who are keeping a successful business running. Trying to keep the ship afloat takes as much time, effort and brain power as it does to get it out of dock.

  15. ICONOCLASM

    Dr. Gregory Berns’ book ICONOCLAST describes an Iconoclast, whether an entrepreneur of a member of a major corporation as somebody who does something that most say cannot be done ….in which case I and long-time guru Dr. Nam Su have described the chain of events/stages in break-through innovation as:
    - Laugh at it
    - Resist it
    - Accept it
    - Take it for granted

    Iconoclasts have three characteristics:
    - Perception of opportunity (glass half full rather than half empty)
    - Absence of fear of failure and/or ridicule)
    - Social intelligence (how to steer and ideia that most this is crazy to fulfillment).

    The late Dr. Östen Mäkitalo, a wireless communication icon in Sweden told me that he was introducing me to his Senior VPs because of his fundamental philosophy that an idea will probably not be good enough to be a winner unless it is:
    - a bit difficult to understand, and
    - crazy in the opinion of most

    Regards from Sweden
    Brian
    Alias Sir George the Dragon Slayer
    Knighted in Canadian Dragons’ Den 2009

    PFCN is an acronym for Profitable Fulfillment of Customer Needs

  16. This conflict between executing a current business model and enabling intraprenuers can be overcome. Intuit is a solid example of doing this. Scott Cook, Brad Smith, and Roy Rosin helped drive their Design For Delight program. The misnomer in all of this is the belief that large companies can’t innovate; they can. Companies, during their planning cycles, have to set aside the time to innovate and that can be done in planning cycles. Intuit, 3M, Google, etc…they have all done it. These decisions take fortitude, structure, a program and process. Innovation, in my view, is taking an idea (a hypothesis) and putting it in the public to contend with…take it through that shaping and refining process against the value criteria of the customer’s “job to be done” and then continue to test and experiment until all key hypothesis from value, to market, to customer segment, to business model, etc…have been validated or refined and deliver a meaningful and measurable customer impact that is profitable for customer and company alike. Innovation isn’t a “thing”…it is a process that ruthlessly questions and tests a value hypothesis, etc…

    I would title this article “Why Big Companies DON’T innovate”….they can; they simply choose not to make the difficult leadership decisions that enable innovation. Innovation is driven by people…companies don’t innovate people do therefore put in the processes, program, and platform that enables it and innovation will happen.

    td

  17. There is a difference that is create by the way a small organization is evaluated versus a big organization. The lens used to see a success or change is different. Same quantum of change in a small organization can pivot it, turn it around while it may not lead to significantly visible changes for big companies. At least not for press at large to notice.

    So, small companies typically get large press for changes that they make. And it make sense because sometimes their core product or direction gets changed. Large companies get small press for many changes that keep happening.

    • Hemant,

      A small organization rarely if ever gets recognition for “sustaining” innovation (using Clay Christensen’s framework). I don’t believe that large companies do a good job with disruptive innovation, which is why they rarely get recognized for it; they rarely do it! Clay also talks about “efficiency” innovation, which I believe should be called and viewed as “reinvestment innovation”(tm), which companies also seem to do somewhat well. Small companies haven’t added the burden of cluttered processes and overhead; they can’t afford it.

      However, the lens of success as you mention must change. Large companies must learn how to innovate on the disruptive edge versus just waiting for small companies to innovate that way. Steve and Bob’s Customer Development Model coupled with Alex Osterwalder’s Business Model canvas is a great way to empower the intrapreneurs so that the lens and expectation of large companies begins to shift. As a note, if you look at consumer products companies some argue, including HBR, that 53% of the companies stock value is defined by whether or not the market believes the company can organically grow versus just by acquisition. This tells you that the lens is changing..even if slowly.

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