Why aren’t Large Companies Innovating?
“Innovation”—one of the least spoken words in company meetings, while revenue and profits are often heard.
Large companies & industries have a lot of talent, money, infrastructure, and network of partners—it seems logically right to assume that they have all it takes to be innovative. Counterintuitively, they aren’t. While startups, who don’t have any of those resources are the ones who innovate and disrupt large companies. Though there are exceptional companies that are good at innovating, like Google, while the majority struggle to. The rest of this blog will focus on the majority.
There are multiple reasons why large companies are bad at innovating, below are few reasons why
1. They already have products
Large companies have existing products & customers, and more importantly, they make revenue. When companies have these, the last thing they’ll do is to change something, i.e. innovate.
When products bring constant revenue companies would want to stick to it and not change anything. Because it is predictable, and predictability = safety. So companies would prefer being safe, and enjoy profits, rather than venturing into innovation which is quite unpredictable.
Large companies hold onto what they’ve always been doing, because it was successful in the past and in the present, so they will continue to do the same in future. But at some point, a Startup comes along and completely disrupts—throwing them out of business.
Usually, innovative products disrupt existing ones, so companies wouldn’t even think about cannibalising their own products.
Current products are doomed to obsolescence. There are still a few old companies in old markets, like Coke and soap, where the old product lasts decades, but in the high-tech world, change is constant, so you just cannot stand still. Protecting your current product is a formula for disaster. It’s the incumbent’s curse.
2. They try to do everything efficiently
Innovation is never straightforward, it always comes with risks—experimentation, mistakes, trial & error, and failure, most of which is not encouraged in large companies.
Companies measure success through profits, forcing them to maximise efficiency—minimize wastage, mistakes, reworks, etc. Every department tries to be efficient in whatever they do. So even if companies decide to innovate, they try to “innovate efficiently.” But innovation is impossible without mistakes or reworks, and in fact, the very process of innovating demand them. There’s nothing known as “innovating efficiently,” and when companies try to do it, they fail.
There is nothing wrong in being efficient, in fact, it is crucial for large companies—it enables them to distribute products at scale. But is not a good strategy for innovation.
Employees [of big companies] are taught to seek efficiencies, leverage existing assets and distribution channels, and listen to (and appease) their best customers.
Such practices and policies ensure that executives can deliver meaningful earnings to the street and placate shareholders. But they also minimize the types and scale of innovation that can be pursued successfully within an organization. No company ever created a transformational growth product by asking: “How can we do what we’re already doing, a tiny bit better and a tiny bit cheaper?”
— Maxwell Wessel, Why Big Companies Can’t Innovate
3. Employees have job descriptions
People in large companies have their own job description, which often is narrow and hardly has the word “innovation” in it. And most of them are paid to execute processes without changing anything. While this is very effective to attain efficiency, but hardly any innovation comes out of it.
People’s everyday job will prime to think in terms of the existing products and processes, making it difficult for them to think differently. And thinking innovatively will be even farfetched.
Innovation always happens with customer/user interaction. In large companies it’s the top management that formulates “innovation strategies,” but they hardly interact with customers. On the other hands, it’s mostly the sales and marketing team that interact with customers, but are busy following processes. This gap is one of the primary reason why many innovation strategies fail.
Your employees already have a day job. Do they have the incentives to speak up about change? Does your company have a culture that would allow insights to roll up to the C-Suite? Maybe… but maybe not.
—Kaitlyn Doyle, Corporations Need Startups for Strategic Insights
Why are Startups able to Innovate?
Startups innovate for the simple reason that they don’t have any of what large companies have. Their sole purpose of existence is to innovate and disrupt incumbents or create new markets, by offering radically innovative products. Because only by being innovative, Startups can exist, sustain, scale, and grow.
Primary reasons why Startups are able to innovate:
- Their success is not measured by revenue or profits, but by how innovative their products are and how much more value does it offer to the customers, compared to what they already use.
- They are flexible—they don’t have a tall hierarchy and rigid processes that could potentially stop innovation.
- They have high risk tolerance, as they have very little to lose if something goes wrong.
- Startups seldom think about operational efficiency, and it doesn’t make sense for them to be.
- Startups haven’t had past successes that they can cling to, they need to experiment and figure out what works and what doesn’t.
How can corporates be innovative?
One of the best ways large companies & industries can innovate is through collaborating with startups, like co-developing products, equity investments, acquisitions, etc.
At Forge, through our Industrial Technology & Venture Acceleration Program, we enable industry-startup partnership in strategic innovation and investment initiatives such as joint technology and product development, commercial partnerships, equity investments, and strategic acquisitions through Open Industrial Innovation. Learn more about our offerings here.