Professor of Strategy and Entrepreneurship; Robert P Bauman Chair in Strategic Leadership
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If you are 70 years old, you’re probably not entering the next Olympics. Septuagenarians are not Olympians. Likewise, if you’re the CEO of a big corporate, you’re not going to make Forbes’ top 30 under 30. A start-up and an established company have as much in common as a young entrepreneur and a chairman of the board.
Successful innovation involves two things: discovering something new; and bringing that thing to the mass market. Young firms are good at discovery and big ones are good at scaling things up. So let the small ones discover, and if you’re a big firm, consolidate or grow those things into a bigger market.
Of course, in real life, it’s not quite that simple. Scaling a new idea into a bigger market is much easier said than done. Corporate graveyards are littered with the tiny tombstones of the failed ventures of big businesses.
But that doesn’t mean big companies should abandon the quest for innovation. There are two main options for corporations with an entrepreneurial glint in their eyes. They can create a separate unit, like Nestle did with Nespresso, for example. Or they can consolidate with existing start-ups. Some firms have done very nicely out of consolidation. And in adopting this latter approach, Google is the prime example.
Corporate giants don’t come much bigger than Google. From driverless cars to robots to smart home technology, Google is transforming many different industries and creating new markets wherever it treads. However, it’s not doing it strictly by itself: Google is acquiring companies left, right and centre to make this happen.
Google has acquired over 200 companies since 2001, and has more than 3,500 venture alliances with start-up firms in Silicon Valley. What does that mean? Here’s an example. Say a company out there in Palo Alto – two people in a garage, let’s say – are doing R&D on a technology that no-one’s heard of. The idea may go bust after a year but the duo are unknown so nobody would hear about it. Google gives them a million or so for a ten percent equity stake. (Remember, Google has 3,500 others like this.) The following year, Google goes back to each of the 3,500 and asks about progress. If the nascent venture looks good, Google offers to increase its equity stake: “Here’s another ten million”. To another, Google might say “We don’t like the way this is going, we’ll withdraw our equity stake.” And so it goes on, year after year.
A decade down the line, Google might like the way one of these firms is going and buy it out completely. Google didn’t make the discovery, but it liked what it saw and bought it. A huge firm like Google can market a new idea to the world. It has the distribution power to reach out to the whole planet, it has the marketing capabilities to convince consumers to buy its products, and it has the economies of scale to sell at low cost. The point is this: big firms like Apple and Google don’t discover a lot for themselves.
Similarly, you, as part of your established firm, don’t have to discover everything yourself. Yes, invest in R&D, invest in the market, make sure you know what’s happening out there. And when you see something you like, use your resources to scale it up and capture the whole global market.
Which company was the pioneer of online bookselling? Nil points for those who said Amazon.com. The first online bookstore came from an Ohio based bookseller named Charles Stack in 1991. Amazon didn’t come along until 1995. It’s an example I often use to illustrate the very simple point that individuals or companies that create radically new markets are rarely the ones to scale those ideas up and become a household name.
This may come as a surprise to people who were fed the idea of ‘first-mover advantage’, but many scholars, including myself, have shown that it is simply wrong to think people who get first-mover advantage end up dominating a market.
At the beginning of the American automotive industry, there were more than 1000 firms making cars. By the late 1950s, there were only seven. Likewise in the tyre market: in the early 1920s, there were 274 competitors but by the 1970s, only 23 had made it. Of course, the winners in these races were the ones who had a winning formula, but there were many others, also with the winning formula, who disappeared. The point is that the market giants of today are the ones who painstakingly and actively invest to grow the market and attract customers to it. These companies are rarely the ones who were there at the start of the race.
But what happens when a large corporation does indeed come up with a new and disruptive idea? The company faces an acute problem if this great, radical idea threatens to disrupt the very market on which the corporation has hitherto relied for its sales and profits. The business risks cannibalising itself.
One way to get round this is to create a separate wing of your company. This is the kind of radical innovation that has worked for many global companies. Take almost any UK newspaper. Many of them have adopted the idea of distributing news online. They have realised that this will cannibalise their paper business, but they also acknowledge that in 50 years there will be no paper business. So they set up a digital arm of their business, the idea being that while the paper base shrinks, digital will grow. In 50 years’ time they’ll be ready for the digital world.
The same could apply to many traditional banks at the start of the digital revolution. They came up with mobile digital banking, in the full knowledge that it would destroy not only the branch network but also the entire way of doing banking today. But they knew that 50 years hence, it would probably be the only way of doing business. So banks set up a separate business to develop mobile banking while at the same time managing the decline of the banking network. A few decades in the future, their branch network will be a miniscule part of their organisation. This is how smart companies are using radical innovation to great success.
Established firms can’t transform themselves into start-ups. That’s an absolute. But what they can do, and should do, is be more innovative. Innovation, after all, is not one thing. The start-ups are good at one kind and the big firms are good at a different kind. Start-ups create radical disruptive new markets. Big firms are good at incremental product or process innovations or innovations that continuously improve what they are already doing. Disruptive innovation creates new markets. If big firms are clever, they’ll take those new markets and expand them as only they know how.
There is, of course, a type of innovation – ‘sustaining innovation’ – that improves the way things are already done. There are a million little things the big and established companies can do to continuously improve their business and come up with sustaining innovations. The problem is that even if big firms dream up a disruptive innovation, they rarely pursue it because it could cannibalize their current business. A hotel firm like Hilton probably came up with the Airbnb idea long before Airbnb did. They just didn’t put it in to practice. My experience with big companies is that they do come up with ideas but then they say ‘we can’t do this.’ However, if an entrepreneur has an idea, he or she is happy to press ahead: there is no existing business to cannibalize.
All this has big ramifications for the corporate world today. My research has found a clear reason for the current situation: the skills, mind-sets and competencies needed for the first part of making a successful company – starting up – are more than just different from the ones needed to bring a fledgling firm up to the mass market, they directly oppose them. This is precisely why, if a company wishes to embark upon a project that will disrupt its existing market, one of the options I recommend is creating a separate unit or division to nurture that new growth.
Creating a separate unit of a business to shelter bright young minds from the red tape and procedures of an unwieldy established firm is no guarantee of success. Sometimes, the two businesses can fail to make the most of the synergies that exist between them. The new start-up unit can also be left vulnerable to attacks from other big companies within their industry. And because the parent company tries to solve these problems by applying its own mind-sets and processes to them – approaches that conflict with those of the young businesses – it doesn’t work.
In essence, companies have two options: outsourcing innovation through venture alliances with start-ups in the manner of Google; or creating a separate wing of the company for entrepreneurial growth. Getting other companies to do your exploration for you may have a few advantages over the separation strategy. It’s certainly easier to manage, mainly because you don’t need to think about two businesses at the same time.
One thing is for certain: much of the thinking of recent years, aimed at making big corporations more innovative by becoming more like start-ups, is misplaced. To repeat: a big corporate shouldn’t try to be a start-up. Like individual people, they should use their own strengths for their own good. If you’re 70 years old, it doesn’t matter how much you train. It doesn’t matter how many chicken breasts you eat. You’re not going to beat an 18 year-old in a race. You might, however, beat them at chess.
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