Resolved: that big companies are better at innovation than small ones
PRO
Schumpeter in the Economist reports new research on innovation and the corporation, specifically the work of Michael Mandel of the Progressive Policy Institute
Mandel proposed three explanations for the big corporation as an engine of innovation:
1. The best path to economic growth is the creation of a new product category or operating system. Only big companies, like Apple and Google, can create these. (Plus, small companies may or may not be able to live in the shade of these giant oaks.)
2. Big companies do better in global marketplaces.
3. Only large companies have the scale to address big problems, and many of our our current problems are big problems (education, health care, environment).
Schumpeter adds three more:
4. Big companies have the resources to find and afford the best talent.
5. Big companies are learning to be more porous and more nimble.
6. Big companies now come scaling up out of small ones at a ferocious pace. Some of them remember their origins. They get large without growing out of their smallness.
CON
As Schumpeter notes, conventional wisdom holds that large companies are too slow and clumsy to be creative, that small is beautiful.
Indeed this wisdom is so conventional we tend more to assume than prove it. I wish I could recite all the evidence that supports the CONTRA case.
The only thing I can report is that several people inside the corporate and consulting world have told me how deeply frustrated they are by the corporation’s inability to innovate.
Indeed, to judge from these unscientific results, this is now a critical moment in the history of the corporation. Some few years ago (less than a decade) the corporation decided that innovation was the thing and it devoted itself to centers, institutes, laboratories, skunk works and a range of strategies and tactics meant to deliver innovations out like a major leaguer firing sunflower shells round the dugout.
Many corporations are now on notice: innovation is much harder than it looks. Much, much harder despite vast amounts of money and managerial initiative.
A truth is dawning:
that the corporation can sometimes act like a gravitation field from which new ideas and products cannot escape. Someone has great ideas. Entire teams can have great ideas. But the corporation itself acts like a dark star. It does not create alternatives to itself. It consumes them.
How we do innovation in the corporation must remain high on the todo list for 2012.
I have seen so many great ideas in big companies killed by either internecine wars between divisions or layers of management who see their primary value as saying “no” to anything different. Saying “no” is usually the right thing to do, but these people tend to be from the wrong background to appreciate what is important and what isn’t.
Some medium and big companies have the right culture to encourage innovation as well as to harness it – Apple, Google, Pixar … but most don’t. Changing the culture of a company seems to be enormously difficult. I don’t have much hope for quick changes – you can’t just bolt this on. I should add that most small companies are really bad at innovation too.. It is extremely difficult and getting the right mix of people is non-trivial.
Mancur Olson is the guy to read here.
IF you have an existing system…then the folks who benefit from this system will work awful hard to avoid departing from the system. In a large corporation, especially one with a steady income, doing what works has huge $ value. Small companies try new stuff because they have to. I’m suspicious of any large company maintaining the right incentives over 20+ years. Maybe HP did from 1960s-1990s. But basically, it’s against both the income-stream/lifeblood of a company, and the power of the existing power-holders to innovate substantially.
Here’s the link to the full Mandel paper:
http://progressivepolicy.org/scale-and-innovation-in-todays-economy
I can’t help the feeling that Mandel is oversimplifying and abstracting away some of the more interesting nuances associated with innovation.
The taxonomy of innovation might not be the sexiest thing in the world, but process, product, market, organizational innovation all favor different types of companies and approaches to innovation and understanding the differences provides insight. Radical versus incremental innovation also favors organizations with different sizes and approaches.
Where Mandel’s paper ends, the anthropolgist/ethnographer’s work should begin!
Juri, well said, surely we can do better than “big” and “little.” Thanks, Grant
We can also do better than talking about “the corporation” as if they were all the same.
One problem with these reports is they never define the term innovation. Inventing something,
producing a new kind of product, and making money, are three different things often sloppily combined
by use of that word.
I think the big vs. small debate isn’t the best one. There’s a different way
to think about which organizations have success with new ideas, predicated
on culture (which I think you’ll find interesting for obvious reasons):
Can big companies innovate? Yes.
Scott, thanks for the comment and the interesting link. I just ordered the Kindle version of Mindfire. Best, Grant
Innovation isn’t limited to invention or novelty; it’s about creating value.
New ≠ better. New ≠ new to all.
Innovation can rise from yesterday’s failure or insights gleaned from the past.
Innovation = invention AND reinvention.
Questioning, experimenting, observing, connecting dots.
Leveraging under-utilized resources, increasing effectiveness.
Big AND small companies can spark innovation at equal measures.
Innovation starts with obsessive customer empathy and employee engagement.
It flourishes in a culture where risks/creativity are balanced by a methodical and rigorous process.
Innovation strategy — defining vision, targets, tactics, financial goals, strategic roles, and screening criteria — improves the chances of success.
Thanks to Scott and Aretae for reminding us of the various forms of innovation and Olson’s work regarding the consequences of social organization. I agree that both of these positions are important to this conversation.
I also believe precision in the definitions has implications for the associations that are implied by some of the above statements. I expect that small and large organizations foster different types of social organization— if smaller and larger firms differ in terms of incentives, organizational systems, and communication structures then they are likely to differ in their ability to sustain coordinated, innovative action. If innovations are defined in terms of their impact on the allocation and coordination of knowledge, ideas, and resources, then these internal distinctions are critical. If innovation is defined in terms of success in a product-market (which is implied by the references in the original article), then a larger firm’s market power may offer it certain innovative advantages (see Reinganum’s work tempering the results of Gilbert & Newbery that are cited in the paper).
In sum, if our language and logic is imprecise, we get very mixed associations between crude metrics like size and innovation. This is the point of an introductory passage I wrote in a recent paper with Tammy Madsen. “Although numerous, dramatic examples exist wherein small, young ventures have successfully entered markets previously dominated by large, established firms (e.g., Foster, 1986; Utterback, 1994), drawing definitive conclusions about the relationship between firm size and innovation activity from the empirical literature is difficult. Notable studies show that small and young firms (Mitchell and Singh, 1993) and large and established firms most often introduce radical technologies (Cohen, 1995). Noting these contradictory conclusions, other work suggests that the relationship between firm size and innovative productivity is either bell-shaped (e.g., Ettlie and Rubenstien, 1987) or U-shaped (e.g., Pavitt, 1990). Summarizing the state of the empirical literature, a recent review states that ‘researchers have not reached a consensus about the role of size. Contradictions abound. Managerial useful generalizations are rare’ (Chandy and Tellis, 1998: 475).”
I admit that both pros and cons are convincing!
The democratization of innovation is benefiting small companies and leveling
the playing field. I believe that small companies will be better due to
open resources, speed to market and the imperative. That said, I will
always bet on intellectual capital, where it resides.
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A very short list of disruptive innovators from the last 25 years. Big companies? Each one actually disrupted a big company that couldn’t get out of its own way.
How about the large, “innovative companies” like Kodak, Pontiac, Palm, RIM, Sony, the US legacy airlines, HP, Madonna, TCBY, Encyclopaedia Britannica or World Book, ABC Wide World of Sports, Sears, KMart, regional department stores, independent jewelry stores, MySpace, the entire recording industry, local stationery printers, etc…
David, Brilliant recitation of the evidence. Thanks! Grant
It seems to me that innovation can come from both large and small companies, but a greater issue is where is wealth coming from? The cult of the startup is alive and well, but there is little emphasis on helping companies grow into the second stage (10-99 employees, USD $1-50 million in revenues) is sadly lacking. Innovation, whether disruptive or complementary, requires the ability to move the concept from an idea to a widely distributed product or service. Such skills require management skills and an understanding of the technology of business. A lot of startups with great ideas cannot make it across the gap to become viable businesses. Any innovator, whether small or large has to be able to move innovation into production, and that is the heart of the matter.
Barbara, what a great point, assume we assume the scaling up will “just happen.” Thanks, Grant
A forum held by the Foundation Consultancy would agree with you. We held an event on why innovation was difficult in big business but the comments of the former Cheif Head of Staff at Unilever persuaded the gathered group of London’s business leaders otherwise.
The debate was added to by the opinions of innovation leaders at o2 and the Guardian and the event was covered by a former Observer management writer Simon Caulkin.
Our top 10 tips for successful innovation can be found on our site as well as an article on the event please see http://www.the-foundation.com/innovation-in-big-companies-is-it-a-waste-of-time/
Any questions get in touch via Foundationthinking on twitter!
It’s turning into a real debate isn’t it.
Late to the debate, but I thought it worth sharing that Eric Ries’ thought (author, The Lean Startup fame), not mine, is that the “think tank” or “skunk works” model that you reference in your post is typically employed by (big) companies can have a negative impact on said companies acceptance of new ideas. His theory, which I agree with, is that by creating a division, team or in some cases literally a room that innovation can only be borne from, you end up telling everyone outside of that room that you don’t/can’t/shouldn’t innovate. This can result in a natural defensive posture by those not allowed inside the “room.”
Point: innovation should be encouraged, enabled and rewarded throughout the entire building, not just for a select few.
Michael, very useful, thanks a million. Grant
Where large companies appear to have innovated, it is often through the acquisition of a start-up. Big companies also often obtain key employees through this process.
There is also the notion of surface area – in a small company most employees are near the surface, outward facing, interacting directly with customers and markets, and so have access to the information needed to guide decision-making.
In large companies the majority of employees are shielded from the outside world, follow established “processes” already laid down, work toward incentives created by hierarchical superiors, etc. Only a thin outer layer are in touch with external reality.
Innovation is disruptive – in large companies there are more people with the power to veto an idea that threatens their patch.
Daniel, I’m with you. This seems exactly right to me. Start ups are often the way innovation is made to happen and yes a big management system is inclined to create that many more barriers and nay sayers. I ran the argument up the flag pole because it is so provocative and I am nervous that “our” argument feels so intuitively right. These are the ones that need special scrutiny. Thanks again. Grant
That there is another dimension to the ability of organizations, regardless of size, to “innovate.” Innovation in any organization depends on the the rationale to innovate. Innovation as a cure for a company that is already treading water, having previously demonstrated its inability to understand its customers, or perhaps having failed to recognize changes in their marketing environments are not likely to succeed nearly as well as the organizations that have had innovation as an essential part of their corporate DNA. I continue to be amazed by the “innovations” of 3M – an example of a company that seems to have always had innovation as a core principle of the culture. Companies that come to innovation late in the game are not likely to be as successful, regardless of their relative size. The attractiveness of “skunk works” or other successful innovation technologies do not succeed for companies that merely attach them to an already sinking ship.
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