Fast innovation requires economies of speed!
I heard Steve Ballmer say on Bloomberg –
“There are some things small companies do better and there are some things big companies do better!”
While there are many things each of them does better and the other can learn from, I am truly intrigued by the capability of smaller companies to innovate fast. On the other hand large companies impress me with their capability to rapidly create economies of scale.
Our business environment is changing rapidly and the customers are in a power position in the fast digitalising world. As the wave of digitalisation spreads, traditional businesses will be pressed to rapidly innovate and to create customer-specific value.
What does this mean for large enterprises?Are they up for this innovation game? Are they structurally organised and agile enough to rapidly and simultaneously deliver economies of scale and innovation? If not, will they survive and even thrive in this wave of digitalisation? These and similar questions have led me to a very fundamental question – how do large organisations structurally differ from their smaller peers when it comes to ability and agility to innovate?
For the sake of clarity and further argumentation it is important to define what is large and what is small in this context. Large enterprises are mega corporations funded largely by equity and small enterprises are those which are largely privately held or funded by venture capitalists i.e. start-ups.
The ability and agility of companies to deliver innovation is largely defined by how they create and maximise value and for whom. Fundamentally, shareholders continue to be the most important stakeholders for large enterprises. There is no escaping the fact that the shareholders are owners of the companies where they invest their money and hence they expect their agents – the managers of the company to run the enterprise profitably and to create big value for the owners. Therefore maximising shareholder value automatically becomes the mantra for the large enterprises. In contrast, in start-ups and small enterprises the idea of the start-up emerges from the known or even unarticulated needs of the customers, consumers, users or other businesses. Maximising customer value is therefore the underpinning motivation for small companies.
So, what has value creation to do with ability and agility to innovate?
That’s a million dollar question! In my observation the value creation fundamentals drives the focus of companies. Large enterprises strive to maximise shareholder value which requires increasing top line and improving the bottom line constantly so as to have a big pay cheque for their shareholders. Improving bottom line requires cost-efficient operations (lower unit costs) and increasing top line requires more volumes (more units) and a higher unit price. Profitable growth would mean higher volumes for lower unit costs and a higher unit price.
Delivering higher volumes at lower unit costs requires economies of scale and unsurprisingly driving economies of scale requires heavy focus on command and control bureaucracy to manage costs of operations. A lot of management resources in large enterprises are spent in managing internal processes for improved profitability. This inside-out focus creates rigidity in processes, encourages standardisation and industrialisation and is best suited for volume business. This does not promote innovation; on the contrary it is likely to impede any innovation.
Innovation requires economies of speed i.e. speed of product/service innovation. Speed is relevant at every stage of the innovation process – the speed of identifying customers articulated and unarticulated needs, speed of creating early ideas of products, services or solutions to meet customer needs, speed of go-to-market, speed of testing early ideas (or even prototypes if possible) and getting feedback from the market quickly to ensure that company stays relevant for new customer demands.
Customers are likely willing to pay a higher unit price for the right products and services delivered to them at the right time in their innovation cycle.
Speed is however more likely inhibited if resources are shared between creating economies of scale and innovation. The yesteryear model of heavy investments in R&D does not solve this new age challenge of delivering fast innovation as innovation is not a result of one function of a company any more – it is in fact the most important function of the client serving staff.
Small companies have a distinct advantage at fast innovation as they do not have their resources tied up in managing and controlling internal processes. In small companies the core and only focus of its management and employees is on the customer’s business processes, customer expectations, customer’s value creation processes and its end customers. Admittedly however, small companies have the challenge with scalability of their innovation.
Large enterprises must transform structurally to deliver fast innovations to customers while sustaining their competitive advantages that support economies of scale. This structural transformation requires ambidexterity with respect to resource allocation between economies of scale and economies of speed. Essentially it could mean that volume business should be separated from innovation-driven business but still have an integrated leadership to drive the agenda to grow fast and grow profitably.
Disintegration of volume and value business alone is not enough as the key is to dedicate separate resources e.g. capabilities and funds to both businesses in order to speed up innovation without disrupting the volume business.
Such ambidexterity can allow large enterprises to shift focus from internal processes to customer processes and identify opportunities in the new digital world to proactively create innovations for customers.
If executed well, ambidexterity can become a source of superior competitive advantage for large enterprises as they can multiply the innovation efforts with their economies of scale and ensure fast commoditization and commercialization of digital technologies and business models.
I invite constructive comments, critical peer review and active discussions on this topic so all of us can learn from each other on experiences and knowledge related to #fastinnovation, #ambidexterity and #agileleadership
My post and the thinking behind is largely influenced by
The Ambidextrous Organization- Harvard Business Review by O’Reilly III, C. A., & Tushman, M. L.
Unbundling the corporation – Harvard Business Review by John Hagel III and Marc Singer