4 reasons why companies fail to innovate

Image courtesy of Vocoli.com

Ask any CEO or company leader and you would be hard pressed to find anyone who said that innovation wasn’t key to their future. But the trend of startup’s disrupting slow moving incumbents continues to grow, despite nobody wanting to be the next Kodak, MySpace, or Blockbuster.

Interestingly it is common that incumbents are the first to spot opportunities, and with tools and frameworks such as The Lean Startup, it is now easier than ever to validate and implement ideas.

So what is it about medium to large companies that find innovation so difficult?

1. Companies are designed to resist change

After initially beginning as a startup, a company establishes a proven business model and starts hiring people to execute and scale. As the company grows to hundreds or even thousands of employees processes are created to align everyone on agreed ways of executing the model, making decisions, and solving problems to ensure repeatability.

These processes are the way that companies convert their people and resources into customer value. Designed not to be changed easily, the more efficient and cost effective a company can repeat these processes, the more customers that can be serviced in their market, higher profits, and typically results in share prices that goes up. Everybody wins.

Except.

Process, aversion to change, and bureaucracy are the conditions in which early innovation dies. Innovation by definition is change. Process and bureaucracy are the kryptonite to a series of iterative and incremental MVP’s.

The ways above that companies compete and create value for their customers, are also the same reasons why companies find innovation is so difficult.

2. People are incentivised to keep the status quo

A stock photo from ‘Unfinished Business’ seemed really appropriate here

To ensure the best possible performance, employees are measured and incentivised to work within their P&L’s and execute the model. Cash money, bonus’s, extra team members, and career promotion are geared towards people who reach or exceed their targets and KPI’s.

It is typical for managers to feel that leading or being tied to failed projects is bad for their career, and those who don’t fail will be promoted ahead of them.

The result is that focus, time, and money is focused towards low risk ventures that:

  • Address the needs of important customers
  • Increase growth and\or profit
  • Increases the chance of promotion for the people doing it

Because innovation relies on adoption rather than immediate profit, it relies on the rest of the business to take them on. Anything outside of these criteria often doesn’t make sense to other departments.

You will have to convince the Vice President of ‘No’ to sacrifice their short term targets in return for taking on something new

Not only does the initiative not gain any traction, the leader spends the whole time defending the project instead of contributing to its success. Odds are that if budgets become tight initiatives such as these are deemed ‘non-essential’ and are usually cut first.

3. P&L focused CEO’s

Chief Executives hold the greatest influence on how easily innovation is likely to survive and thrive. Not only do they dictate the company culture and incentives, but also set the criteria on how decisions are made.

Command-and-control, top-down organisations have the most trouble innovating

CEO’s are judged by their board, and the shareholders. Even if the company does well by internal standards (profit, growth), they have to balance market expectations that have a huge influence on the share price.

So it is no wonder that most CEO’s are accused of focusing on short term performance, hiring smart people focused on execution, repeatability, process, and servicing high paying customers in the existing market.

The innovators dilemma is that sticking to this formula leaves the company wide open for disruption. The challenge for CEO’s as said by the legendary Steve Blank:

How do you create innovation in an organisation that is designed around ‘no change’, remembering don’t shoot your core business because that pays the bills?

The flip side is that it is possible. Startup style CEO’s have already worked this out, and realise that it leads to huge profits in the long run. This is obvious when you see how many are in Fast Companies 2017 top 10 most innovative companies (in order):

Amazon, Google, Uber, Apple, Snap, Facebook, Netflix, Twilio, Chobani, and Spotify.

The path that Jeff Bezos has taken is anything but traditional

Check out the full infographic at Funders and Founders

4. The criteria on which decisions are made

The criteria that companies use to make decisions, and what initiatives take priority permeate throughout every level. It is actually a good thing when everyone is aligned up and down the ladder. Pitching initiates and innovations that directly aligns with these comes with the high incentive of career advancement.

But in the case of new innovation, this can actually be harmful. For example if the company needs products that cover at least 30% overhead plus 15% profit on top, many ideas that could become winners in the future are killed off in the early stages before they have a chance to develop.

The bigger the company, the bigger the payoff that is required. A 50 mil$ company looking for a 10% return needs far less customer uptake than a 500mil$ company needing 10%.

The light at the end of the tunnel

If all of this makes it sound like only crazy people would take on corporate innovation, then you are mostly correct. But there are ways to do it, and companies need people like you and me to stay in the game.

The problem isn’t finding good ideas, the real challenges are actually:

  • Incubation and taking what might be a useful idea, to something that has traction with a customer
  • Getting the rest of the business to take it on

Knowing how your company works in relation to the above, the decision criteria, and how risky your idea is greatly affects your chance of success. Using language so that the idea ‘makes sense’ to the CEO and other departments is also key.

The word disruption can get people nervous compared with using the word innovation, that now is hugely in fashion.

I will write in a later post some of the ways I am able to work with these challenges, but in the mean time I would love to hear some of your stories below in trying to innovate in large companies.

Further reading: