Size Matters!
Yep. Size matters. But I don’t believe that bigger is better. C’mon people, get your minds out of the gutter. Obviously, I’m talking about innovation as it relates to company size.
There’s a very interesting article and forum discussion underway over at the Harvard Business School Working Knowledge site. In the introduction, Jim Heskett poses the question, “Do Innovation and Entrepreneurship Have to Be Incompatible with Organization Size?” His article does a wonderful job framing up the question, and not surprisingly (hey, it is an HBS website), the comments in the forum are very well-informed also.
I have my own thoughts on this. While it is possible for large companies to innovate well, and while they have certain advantages that small companies do not, I think small companies are, on the whole, much more innovative than large companies. And there are some very good reasons for that. I believe one of the great thinkers on this topic is Clayton Christensen. His 1997 book, The Innovator’s Dilemma is a classic. It’s focused on truly disruptive innovations rather than incremental ones. Christensen describes the challenges that large companies face, strategically, as they try to serve their current markets that support ongoing profit. What they struggle with is exploring niches and related market spaces that are often the seedbeds for the next really big thing. They ignore niche markets because, well, they’re niches. Those same niches are often attractive to smaller companies that can enter them with far less effort and cost.
Big companies talk a lot about innovation and entrepreneurship, and certainly some large companies are much better than others at innovating. But I think there is a reason that we typically equate the words like innovation and entrepreneurship with smaller companies. I’m not as famous as Christensen (yet), but I have a theory that touches on his…in a less sophisticated way. Here is Danziger‘s First Law of InnovationTM (yep, that’s a trademark symbol above that – I absolutely take myself that seriously!): “Big companies struggle with innovation because they are big.” Profound, huh? I really do think it’s that simple though. As sure as day follows night, there are some certainties that logically result (simply) from being big. And those logical certainties are ones that make creativity, innovation, and entrerpreneurship that much more difficult at large companies. What follows from “big”:
1. Increased competition internally from other ideas. Each one has its own advocates within an organization. Even if you’re sure your idea is the next big thing, there are other people in your company with other ideas. Incidentally, this doesn’t mean that all (or any) of the ideas actually are great. Who decides which ideas are best? Move on to #2.
2. Big companies have committees. They review ideas. They twist them, shape them, talk to customers about them, refine them. It’s very hard for radical new designs, wild ideas, and truly forward concepts to survive committees. Why so hard? Think about the make up of committees…see #3.
3. Committees are made up of stakeholders, each of whom is looking for something different.
- Sales wants something customers are asking for, so you better hope customers are ready for tomorrow’s big thing today.
- Finance wants numbers that are solid, though projecting revenues for something radically new is a bit challenging. So costs need to be kept tightly controlled. But controlling costs (including Marketing dollars) on something that is truly a breakthrough can strangle innovation in its metaphorical crib.
- Marketing wants to see what analysts and consumers think about the innovation. And they try to size a market that doesn’t exist…yet.
- Legal wants to make sure that risk and exposure are limited. And since it’s a big company, it’s a bigger legal target. All the more reason to be cautious.
- And then there’s upper leadership. Even with the best of intentions, most leadership is forced to do the things that are necessary to preserve near-term position and growth. And they’re often incented that way too.
- This is no knock on any of these committee members. They are all doing exactly what they should to maximize the near-term value of the big company and avoid disastrous mistakes. Sort of like investing in CDs all your life. No big growth, but no big risk. But let’s say you get the go-ahead through all that bureaucracy to proceed. Congratulations – you’ve moved on to #4!
4. Step 4 includes terms like “cross-functional teams”, “formal project management”, “near-term deliverables”, “system testing”, and more. It’s the land of implementation, big-company style. In the land of implementation, small-company style, you walk down the hall to ask the person responsible a question. And you get an answer. Because there’s no hiding. With big companies, there are so many moving parts that if one part screws up, others are put at risk. So, yes, things take longer. Much longer, in many cases. And what comes out at the end of the process may or may not resemble the original, fabulous idea. Bureaucracy takes its toll.
5. One more disadvantage of “big” is incentive, or more appropriately, lack of incentive. If an individual comes up with a fabulous idea and implements it in his own company or a very small one, he “owns” it for better or worse. He also owns an outsized share of the rewards if it’s as great an innovation as he believes it to be. In a large company there might be bonuses or revenue shares or stock grants. All good things to be sure, but generally these are income improvements rather than giant, individual wealth creators. So the incentives for radical innovation simply aren’t there in large companies.
Big companies do have advantages. They have scale. They have access to customers. They have resources. All good things, but all carry with them the “baggage of big” as described in the 5 items above. Does this mean that big companies are incapable of radical innovation? Of course not. My law of innovation states “Big companies struggle with innovation because they are big.” I didn’t say it’s impossible for big companies to innovate. The law of gravity clearly implies that it’s harder for something weighing 900,000 pounds to get off the ground than something weighing 160 pounds. And yet a 747 can soar far higher than I can jump. So in spite of my law of innovation, YES, big companies can innovate. They’ve simply got a lot more to overcome to do so successfully. Agree? Disagree? I’d love to hear your thoughts, so please share your comments. Thanks for reading!
What you wrote is pretty much all true for break-through innovation.
However, large companies are better at incremental, evolutionary innovation. And I believe most innovation is this type. This type of innovation is actually needed to commercialize the break-through innovation. This is why succesful entrepreneurs with break-through ideas evolve into large corporations or get bought by them, who will polish the idea and commercialize it.
Microsoft, Boeing, Google today are enormous corporations that grew around break-through innovation. It’s natural, because if the idea is solid and you find yourself selling to larger and larger audiences, you must evolve your product. The majority of people won’t buy something that is not simple, easy, safe, and cheap. And to get to the point the innovation needs to be polished, and that’s where large organization with its committees and lawyers are needed.
Innovation is also a system question. In the US innovation can be wonderfully rewarding – money, fame, power can result from innovation. And innovation in the US is sort of supposed to happen like this – small company builds something and becomes big or gets bought out.
But there are other models that have worked. Yes, large companies have been innovative – the classic example is the Post-It Note at 3M, or think of credit cards or supermarkets. They were innovations that changed people’s lives and came from an evolutionary track.
Then there is government-sponsored innovation. Perhaps the most innovative era in the history was during the 2. World War. In order to win the war, incredible advances in technology, medicine, logistics, materials, etc had to burst on the scene within a few years. And most of those were sponsored by the governments fighting the war. This model works today too, think of things like catalytic converters, space exploration or AIDS drugs that cropped up as a result of government sponsorship of innovation.
Which brings me back to an idea I have mentioned before: huge government rewards. John McCain championed this idea in his campaign, but I think he wasn’t bold enough. The US government could set up gigantic rewards for certain innovations – e.g. a battery that meets certain specifications, or a solar panel with specific criteria, or a drug that cures cancer, and the winning invention would get, say, $5-10 billion dollars. What the heck, the reward for the cancer cure it could be $100 billion.
The inventor would get a huge windfall for the invention immediately – without having to invest in manufacturing, marketing, distribution, etc. This would draw investors into these areas, put research into high gear and generate results faster. In return for the prize the inventor would have to give up licensing rights within the US, so that way production of these inventions could remain in the US, while the inventors would still be free to sell license rights outside the US.
Well, that’s my brief comment about innovation. Take it for whatever it’s worth.