Why is innovation hard for large organizations?


I came across an interesting post on this topic, and I have to say, that I really agree with what the author, Kareem wrote. In it he mentions three key reasons for the general failure of large companies to innovate:

  1. They must protect their current business
  2. Too much bureaucracy or too many stakeholders in the process
  3. They don’t provide the proper financial incentives for innovation.

I’m sure most of us who have worked in larger companies have experienced the first two. I’ve also seen a lot written about the first two points related to big company culture, management practices etc. People today cite Apple as a great example of a company that has figured out how to deal with those two points.

I want to spend the rest of this post talking about point 3, which I think is critically important and of which I have not seen as much writing.

In any general cross-section of employees, there will be a small subset who can be deemed as truly entrepreneurial and innovative. A lot of them probably come from the Product Management and Engineering teams! And most of those people are smart enough to understand the value they can bring to a company as well as to themselves if they can deliver a successful product to market.

The problem is, in a typical large company, the ROI proposition for bringing an idea to market is completely skewed in favour of the company. Kareem says it really well in his article:

People are incredibly quick to learn which behavior is rewarded in any system. If you want to innovate, there are two options: remain in a system that pays out an annual salary and a relatively meager bonus for your awesome product. Or, strike out on your own, and build a product that might have a significant pay off, while living off savings or investment.

Now imagine a large technology company that has set aside a large pool of money for acquisitions. That number could be in the hundreds of millions of dollars or even higher. The company wants to make acquisitions that help bolster it’s current market position as well as take it into new (likely adjacent) markets.

There are probably lots of innovative startups out there, working on new products that are potential acquisition targets. Now as the company is out there evaluating the market and potential targets, and then spending big bucks to acquire those companies (likely making the founders of those companies wealthy), what are the innovators inside that company thinking?

They are thinking:

“Hey, how do I get me some of that?”

Now imagine if the company took, say, 5%-10% of that acquisition pool and used it to create a fund that would invest AND if successful reward new innovative products by employees. The structure of how this would be done would have to be worked out carefully so as to ensure transparency in the process of who got funded, and clarity in how success was measured and rewarded, but in theory it is possible.

I can think of at least one model, where an quasi-independent group would review the ideas and decide how to provide an internal equivalent to angel/seed funding to get the project to a stage where it could be evaluated in detail. This model would be no different than what one would face if they took their idea to an Angel or VC for funding.

Regardless of how it is done, there could be significant advantages for the parent company by doing this.

  • It sends a very clear message that existing employees can see significant upside if they are major contributors to success in the company
  • It significantly reduces the potential for “brain-drain” in the company, by stopping some of the best innovators from leaving to form new companies outside
  • It provides a lower cost option for the company to “acquire” new innovative products than going out to market and paying a premium for “hot” acquisitions.

The return for the employees who go this route would be lower than what they might get if they were to strike out on their own, but then again, the risks they would face would also be lower. They could leverage many of the large company’s resources as well as the large customer base of the company. While some hardcore innovators may not like this situation, I’m pretty sure many others would.

Imagine an incubator, funded by the large company (and possibly by other external investors as well) that would provide the environment for these ventures to develop, grow and ideally graduate and become successful. If the venture is one that the large company wants to acquire, they can do so relatively easily given their stake in the company. If they don’t want to acquire the company, the market can decide the value of the company and like any other VC, they can regain their investment (and much more) by some kind of liquidity event.

What do you think of this? Is it possible for large companies to develop incubators for their own employee’s to create innovative products and companies? Or are there other issues and complexities that would make this concept more likely to fail than succeed?

Saeed

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5 responses to “Why is innovation hard for large organizations?

  1. Companies need to set up separate business units that are not constrained by the current organizational structure. They need to be set up in the way that a startup would be set up, with the company being the VC for the new BU.

    Paraphrasing from Clayton Christenson – for innovation in a big company to work you need to strive for profit, not growth.

    Forcing an innovative business unit to drive to profitability over other factors such as market share, percentage growth etc will allow them to focus on the right things as a startup does trying to take off before they run out of runway.

  2. Good points Kevin and Saeed. As a provider of Innovation Mgmt software, we have come across many reasons why companies cannot innovate. Another point I heard recently with a client was that many innovators did not get credit for their contribution to an idea. As you know, innovation is hard work and involves many experts contributing along the way. Our application keeps track of each users’ participation through the innovation process from idea collection, ranking, collaborating, and ultimately making those ideas reality. I believe this “tracking” of contributors will foster more innovation cultures within large orgs.

  3. Ameet Kulkarni

    Interesting thoughts. I agree that theoretically it is possible, but points 1 and 2 come into play big time making your suggestion difficult to implement. I am not aware of any company that has successfully “rewarded” in-house innovators. The pay-off in launching one’s own firm is significantly higher. It will be interesting to read about at least one firm where this has succeeded and how they managed to do it.

  4. Michael Ray Hopkin

    I agree with Paul that innovators do not typically get credit for their ideas. And obviously they do not get compensated enough to make it worth taking their ideas to the company. So those with great ideas usually leave, or they shelve their ideas and keep working their “job.”

    I had a conversation about this last night with a good friend who’s extremely technical, and who has an excellent idea he wants to take to market. Our discussion turned toward the role company leadership plays in promoting or extinguishing the birth of new ideas. The leaders have to decide whether they want — as their employees — the type of people who innovate and create. If that’s the type of people they want they have to be willing to let the innovators keep significant interest in their inventions. Not an easy problem to solve, but I believe it’s solvable.

  5. Innovation is, indeed, very hard to manage. It is hard to encourage, because once employees put an idea out there, it becomes the company’s. Either rewards for individual innovation need to increase, or it is necessary to implement a system that encourages innovation as part of the process. This is where, I think, something like integrated product management can help.

    The idea is to pull in different techniques and innovative ideas, and look at the problem from new angles. Of course, it also means that you need to learn new methods of approaching problems and finding solutions.