Why do large corporations resist innovation?

If you follow business blogs regularly, they are filled with story after story of people frustrated with their organisations for not innovating. For dismissing their ideas. For pulling funding and support from projects that have barely had a chance to take their first breath. But beneath the surface there is a much larger problem lurking – if you look past the disgruntled employees (who arguably are rightly so), there is a fundamental systemic issue. We hear of companies going into administration every other day. Some of them large, staple names that dominated our lives a few decades or even years earlier. HMV is one such company that springs to mind. It makes you wonder – as a music and media power-house, employing thousands of people, could no one see the online digital revolution coming and identify profitable opportunities? Or was no one there to listen to those who could?
This is actually a fascinating issue that really intrigues me, and one that I come into contact with on a regular basis. Organisations define themselves as pursuing innovation, but they are rarely open to many ideas. The irony is that the cost in exploring these ideas when compared to that of many acquisitions to enter new verticals, is literally a drop in the ocean. Whilst we now hear about some amazing initiatives by corporations looking to find a way to nurture this spirit of innovation internally, it’s shocking to think about just how many companies there are today that are still so far from it.
Last year I attended an event where the head of innovation at Tesco gave a very interesting talk – they run their own startup incubators, and really do explore a lot of new ideas (we won’t get into whether they should have pushed some of them as far as they did! That’s another story entirely). But at a fundamental level, this is a great way to operate. But that still doesn’t solve the fundamental problem.
Companies may be separate legal entities, but they’re run by people. And people resist change. They have an inherent fear for the unknown and become easily accustomed to operating within what they know. Moving outside of this means more work. It could mean redundancies for others which they have to make – or even worse – for themselves. It means risking not hitting their targets. So forget the head of innovation. Forget the Business Development director. Forget all the senior executives who have the ability to take ‘helicopter days’ and understand what their organisation needs. How do you ensure this approach trickles down throughout the organisation, to the product managers, the sales directors, the procurement departments? Because it’s in those departments that this ethos, this ‘open minded’ approach to innovation – and thereby opportunity – will make a difference to the organisation as a whole in the medium and long term.
Imagine the following scenario: You’re the head of a department, and a new supplier approaches you with a new product. It’s relatively new and untested, but it looks interesting. You run a trial, and you see that it significantly outperforms the product offered by the incumbent supplier. Maybe it sells more. Maybe it generates more buzz. Maybe it’s just better altogether. But there’s a catch – it also costs more.
Logically, a simple A/B test between these two products would provide a good indication of which one the company should be buying. Use both products, identify the gross profit across all your sales, maybe throw in some subjective metrics for customer satisfaction and general buzz, and you should have a fairly good understanding of which one is *best* for the business. The problem is, which one is best for you? Which one is best for your boss? And his boss?
Even if a product can demonstrate a better ROI, and in a shorter period of time, it doesn’t mean you won’t miss your targets for the quarter. Which means both you, and your boss, might not get their full bonus. And this is the fundamental flaw in corporations today. The incentive structure from pure sales to general performance management is generally not correctly aligned with the medium and long term objectives of the business. And the reason for that is simple – most organisations don’t know what will happen in the medium or long term. They can try to plan for it as effectively and ardently as they want, but business is about change.
Companies like Google are remarkable because their dynamics enable them to operate in a completely different way. They have such a phenomenal market penetration delivering recurring revenue (their advertising still accounts for the gross majority of their revenue) that they can – financially speaking – enable people to quite simply innovate. Sometimes they create amazing products (like Google Maps or Gmail, or Google Docs), and sometimes they fail rapidly (like Google Wave). But the point is, they are constantly innovating, and constantly learning. Their employees are empowered and motivated, because quite simply, their creativity isn’t hindered at every intersection.
But this isn’t necessarily possible in all organisations, where the culture might be the polar opposite of Google. Where margins might be a lot tighter too, thereby exacerbating the problem. I’ve given this a lot of thought over the past few years… my next post will identify 10 steps organisations can take (albeit some may require external input and/or perspective) to effectively nurture innovation. Stay posted!