Why Big Companies Can't Innovate

Maxwell Wessel, a member of the Forum for Growth and Innovation at Harvard Business School, provided a number of answers to this question, which I consider to be an accusation against big companies, in a series of blogs.  Actually, I would argue that the concepts presented would apply to any mature firm, both large and small.  Having worked for the same relatively small company for over 20 years, I can concur that they experienced many of these same problems in their attempts to innovate and the solutions recommended would make a difference going forward.

"Big companies are really bad at innovation because they're designed to be bad at innovation."  Mature companies are gauged by earnings or quarterly reports and are therefore focused on profit first.  Start-ups on the other hand are measured by how well they identify problems in the market and match solutions to them.  Having already identified customer problems and provided solutions to the market, more mature firms shift their attention towards efficient operation, making changes to both processes and organizational structure to accomplish this.  Over time they are redesigned to create operational efficiency, to "execute on the science of delivery", which is counter to the environment required for optimal innovation.  The focus is on manufacturing your product or service as economically and quickly as possible, minimizing cost.  What follows is product development that occurs in an operationally-efficient fashion.

Companies do not necessarily lack vision.  "The problem isn't the idea; the problem emerges from the relentless pursuit of incremental profit within mature organizations.  It's a pursuit that drives us towards incremental wins by leveraging underutilized assets."  They must recognize the limits of their organization as it exists today and "empower groups to function with very different goals and operational metrics."  Development teams cannot be forced to fit their potential solutions within the parameters of how business is conducted today, if they wish to create truly innovative and potentially disruptive products that will transform the business.

Mr. Wessel provided these four solutions to the problem:

1.) Create autonomous business units.  "The constant need to drive towards operational efficiency can be avoided through the creation of new organizations."  Negative influences that would come from within the parent company can be blunted, if a separate business unit has full authorization to develop and produce the creations they innovate.

2.) Incentivize for long-term viability.  "Leaders must make sure their innovators develop sustainability... and manage internal transfer pricing to ensure the development of viable business models."  This means that free access to manufacturing capacity, salespeople and marketing dollars, which may be in excess in the organization and underutilized at the moment, should be controlled and limited.  At the end of the day, the product or service must be able to support itself, with revenues covering its share of the costs of these resources.

3.) Test to learn.  "Systematically test your business model against the assumptions you're making... move from uncertainty to certainty using the fewest dollars and in the shortest period of time."  Encourage testing early and often to turn hypothesis about the market into proven results and gain supporting evidence for the product or service.  Negative results will help to quickly identify any fallacies in the business plan, which will allow for pivoting or termination of the project.

4.) Use your brain.  "Vision can be invaluable in forecasting where profits will flow if the world changes.  So when common sense and your Excel spreadsheets don't line up, use your brain."  Listen to your intuition.  Think.  Act.

Finally, Mr. Wessel recommends that companies pursue innovations, not half-heartedly, but with full commit, and not just to the idea.  My understanding is that means all the way through to realization of the product, if it is deemed viable.  I feel that if your company is going to go this route... to innovate, then it must have the backing and support of senior management, the full effort and resources required to determine if it can produce a solution that will be embraced by the market and bring profits to the company.  Anything less compromises the validity of the results and the direction taken as a consequence.