8 Reasons Why large Corporations do not like Transformational Innovation.
In the second decade of the millennium, young companies began to pop up with breakthrough products and innovative business models that changed the rules of the game. The first generation of the companies (such as Amazon and eBay) that survived the dot.com bubble became giant companies. The second wave (such as Airbnb, UBER, Google and Facebook) that grew up after the dot.com bubble, also became giant corporation.
It seems that veteran corporations fail to adopt the language and culture of the newcomers. Concepts such as business models, customer research, fast failing and pivoting are not only not-embedded in the established industry, but cannot penetrate into it. Why do corporations fail to adopt the management culture of startups and bring breakthrough innovations themselves? Here are eight reasons that explain it:
1. A purpose of the startup company
The purpose of startup’s existence is to seek a sustainable business model for rapid and stable growth. This requires research skills, flexibility of thought, ability to see the big picture and at the same time go down to details and more. In case a successful business model will be found, but it will be different from the original model, the entrepreneurs will switch without hesitation. In fact, most startup companies have changed their business model as they mature.
The concept of managing a mature business is completely different in concept; it focuses on performance rather than on searching and learning. A mature business is designed to generate profits from selling well-known products or services to well-known customers. The banks sell credit, a cellular company sells subscriptions, Walmart sells products, the cable company sell content, and so on.It seems that these two worldviews cannot exist in the same organization at the same time.
2. Performance measures
A young startup company will measure its performance with the help of innovation metrics such as viral, cost to find a customer, customer stickiness, and so on.
A mature business examines its performance using financial metrics such as return on investment, internal rate of return, market segments, sales forecasts and unit costs. Therefore, it is managed by people who are skilled in managing production processes, marketing, sales, finance, and so on. The management of a mature company will find it difficult to approve a project that does not present a forecast of sales, cash flow and expected P&L for three years ahead.
3. Financial sources
Startup companies seek financing from government funds and venture capital funds. For the most part, these entities have a clear investment strategy and are very familiar with the market in which they operate. They can filter the startup companies and choose the more successful ones.
Most of the old corporations do not have an innovation thesis, and therefore their familiarity with adjacent or different markets is limited. The main financial resources of large corporations are debt or equity capital. This is a conservative form of financing that encourages innovation in core areas rather than breakthrough innovation or one that changes business models.
4. Capital raising rounds
The process of raising capital at a startup company is multi-stage and goes through several rounds of fundraising. In every round, the company must convince investors that its solution is suitable for the market, that its team is solid and motivated, and that its work plan justifies the investment. Since the recruitment involves concessions by the entrepreneurs (dilution of the share capital), the startup strives to raise only the amount it needs to make a significant move. This process ensures that only the best survive.
The process of financing an innovation project in a company is fundamentally different. The management or the board of directors decides on the desired directions of innovation, and injects the necessary sums as long as the team sticks to the work plan that it has committed to. In addition, management sometimes operates by considerations that are not necessarily relevant (selecting unskilled employees from the internal resources, ego considerations, etc.).
5. Development Methodology
The development process in a startup company is spiral and iterative. Customer search takes place simultaneously with product development and even feeds it. If during the course of development an attractive operation niche is identified, it is quite possible that the corporation will shift its activity in the new direction. This process is called Pivoting.
In a mature corporation the new product development process is linear and includes several stages. It starts with characterizing the market and customer needs, continues through defined stages of development and ends with the launch and sales efforts. When the product finds its way to the market, the developers are already engaged in another project and there is no one to talk to. It is not possible for the product to change its face during the development process.
6. A culture of failures
A startup company will examine several business models until it reaches the one that ensures rapid and consistent growth. During the search, the startup will undergo accelerated rounds of “failure, learning and correction”. The faster the startup performs these rounds, and without the erosion of the cash available to it, the more likely it is to succeed. The process is so deeply entrenched in the culture of the startups that it got the name “Failing fast” and even “Celebrating failure”.
In most of the corporations, failure is not something to be celebrated, on the contrary, in many cases it closes the project. Of course, changing the purpose of the project in the course of development is unthinkable in an established and institutionalized corporation.
Developing disruptive innovation is the wet dream of every startup company that wants to leave a mark in the field it specializes in. While it is not always possible to predict or plan the end result, but looking backwards, disruptive innovation is the key for a change (Facebook did not plan disruptive innovation, although looking backwards, it completely changed the world of communications).
Old companies will avoid innovation that has the potential to cannibalize its sources of income. Intel is an innovative company by all means, but it has been running with the 386 processor family for many years. Microsoft has been running Windows since the early 1990s, while Kodak, which invented the digital camera and censored it for fear of cannibalization, paid a heavy price for it.
8. Risk aversion
A startup company manages its business under conditions of extreme uncertainty. At the stage of formulating the idea and at the beginning of the development process, it can only guess who its customers will be, how much the product or service will be sold, and more. The fog dissipates as it progresses in searching for the business model and finding the first customers.
Adult companies hate conditions of uncertainty. They will find it difficult to approve breakthrough innovation projects in areas other than their core business. Thus, for example, the automotive industry will continue to invest in innovation in its core (or adjacent areas), but will not develop innovative means of transportation. On the other hand, Google invests a lot of capital in innovation that is not in its core areas (vehicles, space, DNA, etc.).
Many companies declare that innovation is essential for business survival, but they continue to run a “theater of innovation”; the development departments continue to develop the core products of the company or similar products (Adjacent innovation), but not game changing innovation (Transformational innovation). Implementing real innovation in mature companies requires a perceptional and organizational change: Formulating new financing methods, developing new management skills, defining appropriate progress indicators and openness to integration of new and groundbreaking ideas in the company.