Why Large Companies Suck at Innovation

23 May

People frequently wonder how it is that massive companies, like Blockbuster and Kodak, couldn’t keep up with innovation. It’s even more intriguing when young startups plead industry incumbents to partner or buy them years before they ultimately kill the incumbent. “But the incumbent had all the resources in the world,” outsiders say.

That’s true: incumbents are rich. They’re rich in revenue, profits and other assets. They’re rich in the amount of human capital at their disposal, their brand equity, and their networks. But they’re also poor in non-obvious ways. This is how even the Goliaths can tumble to the Davids in time.

The culture at large companies does not reward failure and risk taking. Rarely are the founders still around by the time a business IPOs – investors have booted them out or hired professional management. Sometimes this has merit, other times it’s detrimental.

The hired-CEO is there to keep their job. Keeping their job means appeasing the board. Appeasing the board means delighting shareholders… who just want quarterly returns. Rarely are CEOs given the leeway of Jeff Bezos at Amazon, who can reinvest earnings into crazy (and awesomely innovate) ideas; hello AWS!

So the culture, from the CEO down, is to keep meeting quarterly goals. And meeting quarterly goals can be stupid if your entire industry is changing. Look, just because someone carries a title like CEO and earns millions a year does not mean they’re competent: peek no further than Managing Directors at investment banks who earned tens of millions and pushed financial instruments they didn’t understand (CDOs) until the housing markets collapsed on them. I likewise have stories from the restaurant industry that would absolutely blow your mind. Salary does not equal savvy!

Employees at large companies are also not appropriately incentivized to create new value. Getting something right the first time is a total fluke; success comes with scars. Allowing employees to fail without repercussion would drive a hired-CEO insane –  that’s not closer to the quarterly goal, which means the CEO’s job is needlessly at-risk.

Thus there is no compensation program in place to support risk-taking and ensure a large outcome earns employees a large payday. In fact it’s most certainly the opposite: politics – not meritocracy – determine promotions at large companies. People are impressed with useless measures like age and “the number of people you’ve managed.” Just a thought, but that guy that’s been stuck in Kindergarten the past 10 years might not be the guy you want serving as Kindergarten class president. I don’t care how old they are – if they weren’t paying attention the first 10 times why are you spotting them on the 11th?

People at large companies are trained to execute, not invent. They’re trained to meet those quarterly goals and operate within a system that places emphasis on execution against a known quantity. Here’s the product, here’s the channel, here’s the price – don’t f*ck it up.

Successful invention requires hiring entirely new people, who frankly don’t want to work at your large company. They don’t want to deal with the politics and time sucks of useless meetings to stroke some middle manager’s ego. Neither do they limit work hours to 9-5 and turn down opportunities to learn and improve themselves. I find it massively amusing how the overwhelming majority – call it 97% – of people at large companies ignore outside emails because they’re “busy”… though they somehow find time to post pictures on facebook and make self-proclaimed quips on twitter. Funny how that works.

Invention require inventors. Inventors question. They listen for feedback. They make a hypothesis, test, and repeat until they get something useful. That is an entirely different skill set than one possessed by someone who doesn’t need to learn anything new because, “it’s always been done like this.” If only they’d bothered to read those emails they ignored, they might have learned why their company will be put out of business in three years.

To find success with innovation, you need to remove the innovators from those interested in self-preservation; create a separate and distinct division of the company. Make sure everyone knows that group is going to fail. And support it.

Hire entrepreneurs to work in your new division. Call them EIRs (entrepreneurs in residence). Give them a salary but let them know anything they take in compensation is subtracted from the equity they’d get if their idea is spun out. Here you’ll find people who are entrepreneurial enough to bake new ideas, but not so untethered that they don’t need a salary.

Grant the innovators access to your customers and product managers. Your advantage is that you can sidestep the miserable, early work of talking with prospective customers and understanding the status quo solutions in the market. This drastically speeds up the time it takes to find something that works.

If an idea is working – meaning customers have signed on and you’re producing a new stream of revenue – formalize the efforts by creating a new company. Seed the company with corporate venture dollars and spin them out so management is appropriately incentivized to make it successful. You have equity ownership in the company, and you can always buy it back if needed.

Obviously this requires a CEO who has the cerebral fortitude to create such a division. And not all CEOs can think this far ahead… regardless of their paycheck.