Thursday, January 31, 2013
INNOVATE FASTER OR BETTER?
The other week I met with the leader of a new growth business for a large Asian company. The meeting was miles away from the corporate headquarters. The leader proudly showed me around her office, pointing out how the open, energetic feel compared to the closed-door, corporate nature of headquarters. The young staff certainly seemed to be enjoying itself in the lounge that was well-stocked with booze and snacks.
"So, what does your corporate parent give you?" I asked.
"Absolutely nothing," the leader replied without some degree of pride. "Except funding, of course. Otherwise, they completely leave me alone."
I didn't want to burst the leader's bubble, but I gently explained to her that what she said was actually quite troubling. The reality is she is fighting a tough battle with one hand behind her back. And the odds are pretty high that she is going to lose.
Yale School of Management Professor Dick Foster notes that a single firm cannot innovate faster than the market in which it participates. Why is that? Consider three key differences between a startup and an autonomous business formed by a large company:
Talent. A startup chooses the very best talent it can find to tackle an opportunity. The autonomous business more often than not chooses key leaders from its parent company, even if they haven't had relevant experience (a problem I described here).
Funding. The startup receives a finite slug of funding to demonstrate its viability. It has to zig and zag to find success before it runs out of money. The autonomous business will typically draw funding via the annual budgeting processes. As long as it doesn't fall on its face, it can chug along with its predetermined strategy. Since that strategy is likely to be wrong, the lack of adjustment is bad, not good. Too much capital can be a curse.
Governance. The startup is governed by a Board of Directors that typically includes an eclectic mix of founders, financiers, and advisors. That Board probably meets at least monthly and is on call if any quick decisions need to be made. The autonomous business is controlled by the parent company. Reviews might happen quarterly. Just getting a meeting on a senior leader's calendar can take weeks. Forget about quick decisions.
The end result too frequently is the market speeds ahead of the autonomous organization. A large company just can't innovate faster than the market.
But a large company can innovate better than the market.
There are some things that only large companies can do, because they have unique assets like technology, channel relationships, relationships with regulators, scale operations, and so on. In my recent HBR article, "The New Corporate Garage" I profiled fourth-era corporations that created powerful growth businesses by combining these kind of difficult-to-replicate assets with "just enough" entrepreneurial behaviors. And in "Two Routes to Resilience," Clark Gilbert, Matt Eyring, and Richard Foster described how companies that have successfully transformed their business in the face of disruptive change have made smart use of a "capabilities exchange" that allows new growth businesses to selectively draw on unique enabling capabilities without being overly constrained by legacy business models and mindsets.
If a company really wants pure unbridled entrepreneurialism, it should invest in a startup rather than creating a compromised organization that neither has complete freedom nor truly unique capabilities. If a company really wants to do something remarkable, it has to confront the very real tensions between operating a big business and supporting entrepreneurial behavior and between leveraging unique capabilities and being constrained by them. Those tensions will always make a company move more slowly than an unburdened startup. But mastering these tensions can allow companies to do what a startup cannot.
Scott Anthony is the managing partner of the innovation and growth consulting firm Innosight.. His most recent books are The Little Black Book of Innovation and the new HBR Single, Building a Growth Factory. Follow him on Twitter at @ScottDAnthony.