Too-Big-To-Innovate Is Not About Innovation

Jun 12 2014, 11:02am CDT | by

On a recent BBC World Service program, I was fortunate enough to chat with Bob Collymore of mobile and payment firm Safaricom, and venture capitalist Simon Cook of DFJ Esprit, about the problem established firms seem to have with adapting to market changes. We were in agreement, albeit for different reasons.

Whether applied to Microsoft, Facebook, or Apple, the too-big-to-innovate thesis typically focuses on the complex bureaucracy and short-term share-price orientation that come with success, conspiring to make big firms miss the next big thing. Microsoft’s embrace of Skype, Facebook’s digestion of WhatsApp, and Apple’s purchase of Dr Dre, are often cited to prove that the tech giants have lost their ability to create big innovations internally.

But the picture is more complicated. Big firms do innovate, intensively and incessantly. Their R&D departments unleash untold resources. Google may be notorious for financing experiments in anything from software to self-driving cars but even old-school incumbents like Volkswagen are at it. The number three automaker said it would invest a whopping $84B over the next five years. By comparison, a much smaller challenger, Tesla, invested $0.2B in 2013.

Given their financial heft, corporations tend to attract some of the brightest minds. So it is no surprise that studies find firm size to be a significant predictor of innovation. Those who suspect that this is mostly due to bread-and-butter innovation, rather than the more daring kind, should consider the fact that history is also littered with big inventions by big firms: the graphical user interface originated at Xerox, the digital camera at Kodak, and the smartphone at Nokia. GM pioneered electric cars decades ago and Microsoft showcased smarthome ideas back in the 1990s. I could go on.

So, innovativeness is not the problem. Resource allocation is, however. None of the above examples made it through the firms’ decision gates. You may recall that Apple popularized the GUI, not Xerox. Kodak (and Polaroid) abandoned their digicam efforts, losing out to Asian challengers. And Nokia did not manage to dominate smartphones either. Toyota stole a march on GM in hybrids, and the smarthome territory will probably go to the likes of Google, with Microsoft lagging behind.

How come big players drop the ball somewhere between the lab and the storefront? Given that established firms’ innovation engines generate lots of ideas, decision makers must choose where to allocate scarce resources. If the choice is between allocating resources to a tame project promising a guaranteed 3% return and a radical project promising vast fortunes, massive failure, or anything in between, decision makers tend to plump for the safer option. This is a tendency common to many, but since only large companies are actually spoilt for choice, it is here that the phenomenon is being documented most, for example by Clayton Christensen.

Many more innovations fail than succeed, so caution is understandable and, in fact, required. But since product development and refinement can take years, a decision not to proceed might leave the field wide open to competitors. And that decision is based on very limited information. Therefore, the chance of making a decision error is high (especially for established firms set in their ways). By the time it becomes clearer that an idea is going to fly, it is often too late to start development. Competitors will capture the market first.

A recent Globe and Mail article about Blackberry’s belated pivot towards smartphones nicely illustrates how hard it is to make up for lost time. The handset maker had experimented with capacitive touchscreens, modern operating systems, and device-agnostic software as early as 2006 but aborted each of these efforts prematurely, only to be then caught out by feisty entrants that are dominating the market with such offerings today.

The closer to launch an innovation is, the easier it is to gauge its commercial viability. In the example of another handset manufacturer I have worked with, project business cases estimated 12 months prior to launch were off by a factor of 2.5 (either way) on average, with some being wrong by an order of magnitude. Three months before launch, the firm typically misestimated by no more than 60% either way. Not perfect but a lot better. Making a final project selection at that stage promised a much better success rate: fewer misses and more hits.

If you add to this the insight that development costs ramp up over time and are low initially, there is a case for keeping project options open while they are still affordable. That way technical uncertainty can be eliminated and market forecasts become more accurate, without betting the company and without losing time on competitors. Samsung Mobile is an extreme example of this: it let just about every innovative flower bloom initially and thus was one of the few to make it through the transition from feature-phones to smartphones.

More such flexibility does not mean that project options should be allowed to proliferate unchecked. Without effective mechanisms to abort projects, resources will be wasted. Failing to monitor options hurts performance just as much as not having any. Motorola’s Iridium satellite project, for example, was a bold idea with massive potential, judging by what one could glean of the future telecoms market in the 90s. But over the eleven years of development, it became increasingly clear that terrestrial mobile communication would win the day. The lack of means to stop the satellite project led to one of the biggest write-downs ever. Optionality will have to be managed ruthlessly to be efficient.

Smaller startups don’t have to worry about their flexibility. Often they do not even have a formalized resource-allocation process yet. They tend to have one big idea and no choice but to make it work. When it doesn’t, which is often, we never get to hear about it (venture capitalists like Mr. Cook quietly take the blow). But when it does work, we are in awe of their innovation prowess, and wonder why the incumbents did not come up with the same idea themselves. Chances are they did, possibly even before the startup, but they probably killed the idea prematurely. In all likelihood, the newly successful startup will come to make the same resource allocation mistakes as it matures. Facebook grew on the back of a very successful innovation for desktop Internet but has been playing catch-up since IT went mobile.

Time to start changing the tone of the too-big-to-innovate debate and to tackle the real issue. It is not their innovation capability that holds large firms back. It is their resource allocation process. Better management of innovative options would alleviate the problem.

 
 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

IPad Air Giveaway 2014 is Online
IPad Air Giveaway 2014 is Online
Our sister site I4U News is giving away a brand new iPad Air or if you can wait an iPad Air 2. This is an $499 value.
 
 
Your Parent Or Kid Moved In: Are You Covered?
A record 57 million Americans now live in multigenerational family households — double the number in 1980, according to a new Pew Research Center study. And I bet many of them have the wrong homeowner’s or renters...
 
 
Pandora Looks to Challenge Terrestrial Radio's Dominance in Cars
Pandora Media is one of the largest Internet radio providers in the U.S. with more than 75 million active users. While the company’s active user count has increased at a robust pace historically, it is likely to slow...
 
 
Are General Manager Salaries About To Skyrocket? Will There Be A Front Office Salary Cap?
Are General Manager Salaries About To Skyrocket? Will There Be A Front Office Salary Cap?
It’s January 2026. New York Yankees owner Hal Steinbrenner gets out of his driverless car and triumphantly marches before the gathered press to introduce his prized new free agent. It’s a record-breaking contract—over...
 
 
 

Latest from the Network

Brown family lawyer denounces 'completely unfair' process
Washington, Nov 26 (IANS/EFE) The attorney for the family of Michael Brown had harsh words about the Missouri prosecutor who convened the grand jury that declined to indict white police officer Darren Wilson in the Aug...
Read more on Politics Balla
 
Champions League standings
London, Nov 26 (IANS) Following are the Champions League Group A-D standings ahead of Wednesday's fifth round of matches (tabulated under matches played, won, drawn, lost, goals for, against, points), according to...
Read more on Sport Balla
 
US urges eradication of armed rebels in Congo
Washington, Nov 26 (IANS) The US Tuesday called for efforts to wipe out illegal armed groups in eastern Democratic Republic of the Congo (DRC), as the number of civilians killed there has risen to some 200 in less than...
Read more on Politics Balla
 
Eating healthy tough for Cumberbatch
Los Angeles, Nov 26 (IANS) Actor Benedict Cumberbatch says he struggles to eat health food. The "Sherlock" star says that despite trying his best to maintain his nutritious diet, he often struggles to keep it up while...
Read more on Celebrity Balla
 
24 killed in coal mine fire in China
Beijing, Nov 26 (IANS) At least 24 workers were killed and 52 others injured in coal mine fire in northeast China's Liaoning Province early Wednesday, the state-owned Liaoning Fuxin Coal Corporation said. The fire...
Read more on Politics Balla
 
Jordin Sparks hits out at Jason Derulo
Jordin Sparks has taken a swipe at her ex-boyfriend Jason Derulo in a song. The 24-year-old beauty appears to take aim at her former lover, with whom she had a three-year relationship that ended in September, in her...
Read more on Celebrity Balla
 
Eva Mendes reveals motherhood has brought 'wild nights'
Eva Mendes has had some of the ''wildest nights'' of her life since giving birth to her first child, Esmeralda Amada. The 40-year-old actress, who has been dating Ryan Gosling since 2011, gave birth six weeks ago and...
Read more on Celebrity Balla
 
Cate Blanchett feels judged by other mothers
Cate Blanchett feels her parenting skills are being judged by other mothers. The Oscar-winning actress has three children - Dashielle, 12, Roman, 10 and Ignatuis, six - and says she's held to a different set of...
Read more on Celebrity Balla
 
Jimmy Page reveals his admiration of Leona Lewis
Jimmy Page says performing with Leona Lewis was one of the highlights of his career. The Led Zepplin guitarist was asked to name the greatest moment of his professional life outside of the band and he cited performing...
Read more on Celebrity Balla
 
UN chief 'deeply concerned' over escalating violence in Libya
United Nations, Nov 26 (IANS) UN Secretary-General Ban Ki-moon Tuesday said he was "deeply concerned" over the recent escalating violence in Libya, calling on all parties to "end these attacks and prevent further...
Read more on Politics Balla