Innovation and the Fear of the Unknown
Why large corporations struggle to generate the ideas that sustain their future -- and what they are doing about it
A In the reception area of a technology start-up in central Manhattan, a small team of programmers is developing a platform that will allow subscribers to receive personalised guidance from artificial intelligence systems modelled on real-world experts -- nutritionists, fitness coaches, family therapists. The company is young and its commercial future is uncertain, but its founders are confident of one thing: their idea makes the senior executives of much larger organisations deeply uncomfortable. It is precisely this discomfort, many management theorists now argue, that reveals the central predicament of the modern corporation. Large companies have never been more aware of the importance of innovation; they have rarely found it harder to achieve.
B The evidence that innovation drives long-term profitability is now overwhelming. A sustained analysis of Fortune 500 companies over a twenty-year period found that those generating the highest share of revenue from products introduced within the previous five years consistently outperformed their peers on almost every financial measure. The companies most frequently cited as benchmarks of corporate success -- those that transformed retail through logistics, reshaped publishing through digital delivery, or created entirely new categories of consumer electronics -- did so not by optimising what already existed but by conceiving something that had not existed before. In an era when cost efficiencies are quickly replicated and product margins are continuously compressed, the capacity to generate genuinely new ideas has become the principal source of sustained competitive advantage.
C And yet large organisations are structurally ill-suited to producing this capacity. The chief executive of a major media corporation, speaking at a conference on management practice, put the difficulty plainly: managing a large creative enterprise is fundamentally harder than managing a small one because size inevitably introduces the bureaucratic structures, approval processes, and risk-aversion that stifle the conditions in which new ideas can take hold. His response -- breaking his studio division into smaller, semi-autonomous units at the cost of some economies of scale -- is representative of a broader trend in which large companies attempt to replicate internally the conditions that make smaller organisations more inventive.
D The structural advantage of small firms goes beyond cultural factors. In earlier decades, a scientist or engineer with a commercially promising idea had little choice but to take it to a large company, which alone could provide the capital, laboratories, and distribution networks needed to develop it. This is no longer the case. Venture capital markets, improved access to cloud-based computing, and global supply chains that can be accessed without ownership have dramatically lowered the barriers to entry in many industries. Innovators who a generation ago would have joined a large employer now build their own companies instead, taking their most valuable asset -- their ideas -- with them. Even in capital-intensive sectors such as pharmaceuticals, entrepreneurs can conduct productive early-stage research and then sell to larger companies only at the point where clinical trials demand resources beyond their reach.
E The response of some established companies has been to acquire rather than create. Several of the largest technology companies have built significant portions of their current product portfolio through the systematic purchase of smaller innovative firms. This strategy brings both the products and, crucially, the people behind them inside the acquiring company. The difficulty, as many executives have found, lies in retention: the founders and engineers who drove innovation in an independent start- up often find the culture of a large corporation stifling, and departure rates among acquired talent are frequently high. For every acquisition that integrates successfully, there are many more in which the ideas survive but the people who might have generated the next generation of ideas do not. F In seeking to cultivate innovation from within, companies have adopted a range of strategies. Some have established internal ventures -- what management writers have called 'intrapreneurship' programmes -- that give selected employees dedicated time and resources to develop new ideas away from their normal responsibilities. Others have redesigned incentive structures, offering larger bonuses for successful innovations and, as importantly, making explicit that well-conceived projects which ultimately fail commercially will not damage the career of those who led them. Changing this last assumption -- that failure is a career-ending event rather than an inevitable component of any genuine innovation effort -- is widely regarded as the most fundamental cultural change that established organisations must make.
G Whether these measures will prove sufficient is disputed. The founder of the Manhattan start-up described earlier recalls approaching several large technology companies three years ago with an early version of his concept. The reactions ranged from polite incomprehension to outright dismissal. He does not regard this with bitterness: he acknowledges openly that his idea might yet prove unworkable. But the episode illustrates the central irony of corporate innovation -- the very qualities that make a truly new idea valuable are precisely those that make it most difficult for a large, established organisation to recognise. Innovation, ultimately, involves committing to a course of action whose outcome cannot be known in advance. That irreducible uncertainty is something no management process, however well designed, can eliminate.