May 16, 2013

Why Established Companies Fail To Innovate

Why is it that large, established companies have a harder time innovating than start-ups? Ron Ashkenas from the Harvard Business Review recently discussed this very topic with Steve Blank, an entrepreneur, author, and father of the “lean start-up movement.”  Steve cites a number of reasons why established companies often fail to innovate, and starts with something that we’ve previously addressed in Digital Growth Insights: an established firm’s focus on existing business models.

In order to operate efficiently and satisfy existing customers, established companies tend to focus more on existing models, while a start-up’s focus is to find a workable business model and match what customers need with what the company can viably offer. In a recent article, “Innovation – Helping CIOs Get Beyond the Buzzword”, we made a similar case, stating that the organizational structure of the typical company has remained unchanged for decades. These standard structures hinder innovation and the re-evaluation of business models.

Executives who believe that a company can survive by doing the same thing year after year are completely out of touch with today’s nimble, digitally-driven business climate. Established firms should take advantage of their existing resources, which are likely to be far greater than any start-up’s, and find fresh avenues for the company to create new revenue streams, and that can be done in a number of ways.  But, it can be challenging for big organizations to tackle innovation on their own, which is why in the article, “Decisions for a Digital World – Build, Buy or Partner?”, the “Build and Partner” product development strategy, which involves a combination of building proprietary software and outsourcing work to a partner, may be the only viable choice. By going with that approach, organizations can leverage the best of both worlds to meet their goals.

David Blank takes things one step further by claiming that it’s better for a big firm to invest in multiple start-ups, rather than putting all of their eggs in a limited number of baskets.  He argues that new and viable business models are tough to come by and require plenty of experimentation, research, and time. They’re risky ventures, and are more likely to fail than succeed. An established firm’s low tolerance for risk will only increase its chances for failure, unless it understands the importance of letting go of legacy models.

It’s also very important to have the right talent behind the scenes. Whatever the firm’s leadership strategy, it’s crucial to appoint innovative managers who are likely to scoff at the standard way of doing things, question authority, and have a high tolerance for failure. Managers who succeed at running existing business models are not necessarily the right individuals to search for new models and conduct risky, unproven experiments.

Start-ups do have an advantage when it comes to innovation, but that doesn’t mean an established firm can’t evolve with the times; companies like Nike and Coca Cola are living proof that being proactive in the search of new revenue models pays off. Focusing on new revenue models, and partnerships, is a good way to start.