Disruptive Innovations and Large Companies

A few weeks ago I gave a seminar at an executive management class for a large, global company.  The class consisted of up-and-coming executives, roughly in their late 20s and early 30s with 5 - 10 years in the company.   The subject of my seminar was Managing Technology-based Disruptive Innovations.  I used my personal experiences at IBM, the development of the Internet strategy in the mid-late 1990s in particular, as a springboard for discussing two major subjects: why companies, no matter how big and successful, need to embrace disruptive innovations that will likely have a major impact in their industry;  and why doing so requires an entrepreneurial approach quite different from their more typical operational culture.

Given my long career at IBM, as well as my more recent involvement with Citi, it is not surprising that I am particularly interested in entrepreneurship and innovation in large companies.  While I’ve been involved with startups, the bulk of my experience has been with large, global companies, not just IBM and Citi, but many others I’ve interacted with as part of my work. 

Quite a few people think that entrepreneurship in large companies is an oxymoron.  In March of 2009, The Economist published a very good special report on entrepreneurship.  Its lead article defined  the term as: “somebody who offers an innovative solution to a (frequently unrecognised) problem.  The defining characteristic of entrepreneurship, then, is not the size of the company but the act of innovation.”

It further added:  “Many entrepreneurs are sworn enemies of large corporations, and many policymakers measure entrepreneurship by the number of small-business start-ups.  This makes some sense.  Start-ups are often more innovative than established companies because their incentives are sharper: they need to break into the market, and owner-entrepreneurs can do much better than even the most innovative company man.”

A good innovative idea is necessary, but not sufficient, to succeed in an entrepreneurial endeavor.  The innovation game is played in the marketplace, so you need to figure out how to best bring your innovation to market and nurture it along.  To succeed, you need to leverage whatever advantages you have in what is likely to be a tough competitive battle. 

Focus and speed are the key competitive advantages of a startup.  Startups are generally organized around one central innovation.  They can thus focus all their energies on developing the ensuing offerings, getting them to market as quickly as possible, and continuously improving them based on actual customer feedback. 

It is different with large companies.  Over the years, the company has amassed a number of valuable assets.  It has built an extensive organization, the bulk of which is dedicated to managing their assets, - continuously improving their products and services; supporting their customer base and channel partners; growing revenue, profits and cash; nurturing the brand, and so on. 

For a startup, a disruptive innovation is an opportunity to take on established companies with new products that offer significantly better capabilities and/or lower costs.  That's what creative destruction is all about.  Not surprisingly, an established company under attack will often reject and fight anything that threatens its market dominance and profits.  The company is already consumed with managing its existing operations, - a highly complex and demanding task.  It may see the new innovation as more of a distraction than an opportunity. 

This is generally a mistake, sometimes a very costly one.   First of all, the company needs to identify and acknowledge the disruptive innovation as early as possible.  Disruptive innovations, most of which are technology-based by nature, take years to develop, come to market, and build up enough momentum to threaten existing products and services.  Like watching out for asteroids, most such technologies can be identified and carefully tracked years before the broad marketplace notices that something new has now appeared on the horizon.  In all likelihood, universities and research communities, as well as entrepreneurs and VCs are already working on developing the new technologies and figuring out their marketplace implications. 

Once the company is convinced that sooner or later change is inevitable, it needs to analyze the potential consequences and come up with a plan of action.  This is often really difficult, especially if the actions require different business models and significantly lower cost and expenses.  The company will likely go through a period of denial, where it hopes that the change will not happen, or that it is so far out in time that it can leave it to the next generation of leaders. 

But, once it's clear that major changes are inevitable, whether you like it or not, it’s time for important strategic decisions.  How will your industry change over time?  What are the implications for your company, and what should you do about it?  How quickly should you move?  The answers to these questions and the ensuing actions you take are critical to the future of the business. 

Large, established companies cannot possibly compete with startups on focus and speed.  Instead, the company needs to figure out how to best integrate the new disruptive innovation with its key core assets.  This will make it easier to then embrace the innovation as a way of rejuvenating and transforming the company and its various products, services, processes and business models. It will be a major competitive advantage over both established competitors and fast moving startups.  

The company's financial strengths will enable it to hire the the necessary talent to develop and bring to market the new offerings.  Or, given the time-to-market pressures in an increasingly competitive environment, the company may decide to embrace the new innovations by acquiring a startup that already has a product in the marketplace, rather than waiting for the time it takes to start a new group and develop the product in-house. 

In the case of IBM’s Internet strategy, which I often use to illustrate these points in seminars and classes, we came up with the concept of e-business which we succinctly defined as Web + IT, that is, the combination of the industrial-strength IT infrastructures being widely used in business and government with the new universal reach and connectivity of the Web.  Any institution, by integrating its existing databases and applications with a web front end, could now reach its customers, employees, suppliers and partners at any time of the day or night, no matter where they were.  Anyone with a browser and an Internet connection was now able to access information and transactions of all sorts. 

Our point of view was quite different from what many dot-com startups and Internet analysts were saying at the time.  Many were claiming that in the Internet-based new economy, born-to-the-Web startups had an inherent advantage over existing companies, whose legacy assets, including IT infrastructure and customer base, were no longer relevant, would slow them down and make it hard for them to compete. 

We took a very different position.  Every business, we were convinced, would benefit from embracing the universal reach and connectivity of the Internet, not just startups.  We believed that the brand reputation, installed customer base and IT infrastructures that companies had built over the years would be even more valuable assets when combined with the new capabilities offered by the Internet.  Our position was not always popular during the dot-com bubble, but once the bubble burst a few years later, it was clear that we had developed the right strategy and had given our customer the right advice. 

With few exceptions, the assets that have made a company successful over the years are invaluable if properly deployed - from their products, services and loyal customer base to their brand reputation and financial strength.  Those companies that can properly leverage their assets and integrate them with up-and-coming innovations stand the best chance to be around for many years to come.

Comments

[Ken Stockman]

As a current IBMer, I'd like to rediscover that mojo that made large companies large. With history littered with examples of large organization innovation -- Lockheed Martin's skunk works, DARPA, etc. - what is the prescription for embedding innovation in every day operations? I truly believe the seed of every large, successful companies longevity still exists and just needs to be rediscovered and reborn. For IBM, Smarter Planet is that seed. What about other companies? How do they find their "Smarter Planet" strategy? I believe IBM reached beyond its core products and assets to find a kernel of truth that it could capitalize on just like it did with when it saw automation in the workplace as the advent of the information age. The task, I believe, for large companies, is to rediscover what made them large and successful and recreate that dynamic to sustain and grow in the next "age" of business.

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