The Innovation Strategy Big Companies Should Pursue11 June, 2015 / Articles
The inability of established firms to come up with breakthrough innovations is a truism today. It wasn’t always so. Joseph Schumpeter, the 20th century economist known for heralding the role of innovation in the evolution of society, argued that established firms were best positioned to innovate because of the resources available to them. Edith Penrose, one of the most prominent management thinkers of the 20th century, agreed.
It was the modern combination of internet and venture capital that changed people’s minds, by opening up a new source of breakthrough innovation: high-growth startup companies. With their appetites for high risks and returns, and no legacy systems or brands to encumber them, agile young businesses produced so many breakthrough products and services that they came out ahead, even given a high rate of failure and even though it often took many experiments to arrive at a winning business model. Innovation scholars who studied these new wellsprings of innovation soon came to appreciate the power of the entrepreneurial ecosystem, rich with resources and creative stimulus.
As the idea took hold that innovation comes from the “startup nation,” many established companies ceded the ground, deciding to focus on execution and efficiency instead. It wasn’t long, however, till they realized that these two strengths without innovation were not enough to win.
In reality, established companies never lost the advantages that served them well in past innovations: the much larger set of resources under their control and the extensive networks, often spanning the globe, they could tap. They might be at a disadvantage in hatching breakthrough solutions at the product and service level, but they beat startups in more complex breakthroughs – those that called for creations or transformations of whole markets and industries. Take, for example, the challenge of bringing about any major innovation in healthcare. Yes, we see startups launching ingenious products and services, but established players are taking the lead in shaping the new healthcare market into which these new solutions can be integrated. The same is true in the energy and transportation sectors, and in the realm of “smart cities.” (In some rare cases, such as social networks or internet content marketing, startups launch products and services capable in and of themselves of creating new industries. But in general, the newness of the business behind them imposes important growth constraints.)
Is it possible that large established companies could excel in both parts of the innovation challenge – not only driving the industry change to take advantage of new solutions, but also serving as hotbeds to create them? It is, but it will require creating different environments within enterprises, more conducive to breakthrough, bottom-up innovation.
You’re no doubt familiar with the distinction between breakthrough and incremental innovation. Terms such as the ambidextrous organization have been coined to highlight the difficulty of managing both simultaneously. What makes this especially challenging is that incremental innovation calls for managing knowledge on many fronts, whereas breakthrough innovation is more about managing ignorance. The processes are necessarily different.
There is another important dimension along which business innovations differ. Some come from the top down, conceived in the upper ranks of an organization and translated into execution plans for lower levels to carry out. Others percolate from the bottom up.
Combine these two dimensions and you can imagine four distinct types of innovation. First there are incremental innovations driven from the top – the updates and extensions planned to ensure continuous progress. Second, there are incremental innovations driven from the bottom, which we could call emergent improvements. The third group consists of breakthrough innovations driven from the top: these are strategic bets. And fourth, it is possible for breakthrough innovations to start at the bottom, and constitute strategic discoveries.
A firm choosing to pursue one of these types of innovation would rely on different processes than it would use for another type. A goal of continuous progress would involve formal planning processes yielding specific, demanding goals, while a goal of emergent improvements would call for processes such as employee suggestion collection and brainstorming. A firm wanting to place strategic bets would need processes to test the rightness of the vision and the organization’s ability to execute.
Big companies have all these processes in place. The ones they don’t tend to have are processes appropriate for strategic discoveries. The advantage of the startup ecosystem is that it brings together people with diverse skills and perspectives and allows the good ideas that result from their interchange to gain traction, without hierarchies of decision-makers to quash them. Corporate processes not only neglect but often prevent such breakthroughs.
How would a management team change that? To create a “startup corporation” environment, it would need to put a number of things in place, beginning with a different approach to motivation. People should be inspired by the vision and culture of the company, not compelled by its hierarchy and rewards structure. It would need to provide the stimulus to inspire new ideas: ways to interact with others from a rich mix of backgrounds through interest groups, idea fairs, and collaborative networks. It should attract interesting players from the company’s landscape to discuss and test ideas. Mechanisms would have to be designed to enable these diverse people and ideas to be combined. Methods would have to exist by which experiments would reveal the technology-business model combination that could succeed.
The point here is that breakthrough innovation need not be random: How you innovate determines what you innovate. Luck plays a role, but it favors the prepared mind.
It’s up to managers in big companies, then, to work on this missing part of their innovation capability – building the startup corporation strengths to generate strategic discoveries. Established companies can be at least as great a source of high-growth innovation as new, agile ones. They can be effective in devising breakthrough products and services, and they are uniquely positioned to create and redefine markets and industries. If they can learn to believe this about themselves, perhaps we will see that Shumpeter and Penrose were right all along.