Innovation has evolved in a few years from being something desirable to become an absolute imperative to compete, especially in the case of multinational companies that compete at global level. However, most of these large corporations struggle to manage innovation successfully, and despite increasing levels of investment and innovation efforts, results remain still quite disappointing. Corporations are typically accused of being slow and bureaucratic organizations with little appetite for innovation and with no effectiveness using its enormous resources in terms of money, technology and people.
However, the reality is not so simple and inability or lack of ambition the only possible explanations, there must be some boundary conditions that explain the poor corporate performance in managing innovation and why in the last decades the most disruptive propositions have originated, in most cases, inside recently created small startups. In this post I will try to explain the barriers and obstacles that face corporate innovation.
Paradigm shift in Innovation
Until relatively recent times the most revolutionary innovations typically used to emerge from R&D labs of large companies, the only ones able to finance projects with long maturation and return periods. However, since we entered the era of information technologies in the 70’s, R&D areas alone cannot maintain the pace of adoption of new technologies generated in any corner of the planet. The past forty years have seen an explosion of new technologies (IT and telecommunications, social media, retail trade, transportation, financial services, life sciences) and the emergence of new markets, industries and types of consumer. The performance and cost of three key elements in the evolution of the digital economy –computing power, storage and communication bandwidth has been improving rapidly for years, allowing great progress and development of new technologies at an unprecedented speed. This impact has been amplified by combining these technologies into platforms and open ecosystems that reduce the level of investment and development time of new products.
In addition to this, partly because of this inability to keep up to date of the most disruptive technologies, and partly by the pressure of companies’ financial areas, in last decades corporate innovation has been guided by a short-term economic component and therefore it has focused more on evolve and improve products and services that were already on the market and less on seeking new businesses and disruptive products due to the higher risk and longer return period. If you link this to the unstoppable growth of new entrants fueled by the fresh money coming from venture capitalists, we have the technological and financial environment to allow that innovation management moves towards business ecosystems like Silicon Valley that are at the origin of companies like Apple, Google or Facebook, to mention some of the most famous and largest market capitalization ones.
A business model to protect
This explains the evolution of innovation management from a macro point of view, but then we have the internal factors determined by the objectives and motivations of companies. A established and consolidated company has already found a sustainable and profitable business model in one or more business lines in one or more geographies, and its main objective against shareholders, employees and customers is to consolidate that business and make it grow incrementally. And in this expansion process, the company that was initially formed by a few talented employees grows from having only resources (people, technology, finance, know-how) to first create an organizational structure, a series of processes and key competences, and finally a company culture, which ultimately is nothing more than a way of doing things and attributes associated with that way of managing business. The resources can be interchanged and easily modified, but the processes and company culture are a very solid component that is complicated and expensive to evolve and change when the search for new products and businesses requires it.
On the contrary, startups are organizations in search of a business model yet to be discovered, so they have nothing to maintain or protect and this gives them more flexibility when making risky decisions for themselves or for the industry as a whole. In addition, as initially they only have resources, and processes&culture are work in progress, they do not have to fight operational, mental or cultural barriers when the time comes to pivot the initial product, so they adapt better to market changes.
Therefore, we see that corporations face a dilemma, on one hand ‘exploit’ their current business model in the most efficient possible way (the one that generates the cash flow and profitability today) and make it grow steadily, and on the other hand, ‘explore’ new business opportunities (adjacent to the core business or more disruptive ones). This duality is called Ambidexterity, which in business management means developing the capacity to meet the needs of today’s business while at the same time working in the products that may radically change the rules in which the industry operates. This ability to manage the short and long term, mature businesses against radically innovative products is a skill difficult to develop and even more complicated to sustain over time because companies tend to focus on short term profitability and cash flow generation, giving less importance to initiatives that will be the cornerstone of the future. So ambidextrous companies are able to generate a huge source of competitive advantage, as they anticipate the future working on it from the present time.
The internal barriers
A study conducted by the consulting firm Bain for 5 years in over 40 countries showed that in most companies (over 90%) barriers to achieve innovation and growth objectives are not technology, market saturation, regulation or competition, but internal barriers inside organizations.
From these list of barriers we could highlight a slow decision-making process with too many people giving their opinion, the existence of organizational silos (causing lack of collaboration and communication between divisions), too many mid-levels, lack of clarity in divisions’ and employees’ roles&responsibilities, or financial focus on the short term. In this context, it’s more likely that a very few number of new initiatives will survive because being risk-averse offers a better result in the short term to managers.
These internal barriers begin to emerge inside companies when they start to grow significantly and its operation becomes more complex. From that moment focus is often put almost unconsciously more on money and return (‘exploit’) rather than quality of the products or customer satisfaction. The company grows and becomes more bureaucratic and more cautious, and in most cases arise the organizational internal barriers mentioned before that prevent corporations from properly managing their innovation efforts (‘explore’). This is also a paradox, the more a company grows the more difficult becomes its internal operation and the conditions to keep on growing.
To conclude, in this post we have analyzed that the pace of technological change and the availability of capital have allowed innovation to emerge outside the corporate environment of large companies, which must be permanently balancing the short and long term. Furthermore, as companies grow and expand they have to deal with internal organizational barriers that kill most innovation initiatives. Therefore, corporate innovation faces enormous challenges to overcome the context and motivations within organizations themselves, not so much for the lack of talent or ambition to compete.