I was recently approached by a very large airline, asking for my advice on how to drive innovation internally.
It is hard to summarize the discussion & suggestions in a single post so this post is divided into 3 parts:
Part -1 – Why Innovation is important and why are most corporations struggling with innovation
Why is innovation important?
Why is innovation so challenging for most companies ?
I would point out nine main reasons that hold back companies from driving innovation
- 99% of employees in large enterprises are not entrepreneurial – It is easier for a ten employees startup to make sure its 11th hire possess entrepreneurial characteristics. It is harder for a 10,000 employees organization. In large enterprises, by nature, most employees will do their job, no questions asked. Only a small fraction of them will question the status quo, search for improvement and become change agents. Changing the characteristics of 10,000 employees is an impossible mission. Focus on the 1% that is innovative by nature.
- Most ventures as accidental – Post-it, one of 3M’s best sellers, started off as a failed invention by Dr. Spencer Silver. To be innovative, one must experiment. Experimentation requires working under uncertainly and being able to embrace failure and learn. Most organizations are intolerant of failure. Being associated with a failed product or business is a long-lasting “stain” for employees. Organizations cut down budgets at the first sign of failure. Experimenting and failing, in my view, means learning something one didn’t know previously. It is that learning that increases ones likelihood of success moving forward. Organizations should be more tolerant of failure and more patient with learning curve.
- Magnitude and timeline – Skype, a VoIP service provider, was founded in 2003 by Janus Friis from Denmark and Niklas Zennström from Sweden in 2003. The company grew fast, but it still took 7 years to reach over $600M in revenues, according to their S-1. Microsoft, which recently acquired Skype, had $58.4B in revenues in 2009. For a new business at Microsoft to move the top-line “needle” by 1% in 2009 meant an additional $600M in revenues!! It took Skype 7 years to move the “needle” for Microsoft! Innovation usually starts small and takes time and patience to grow. Most companies prefer to invest each additional dollar in growing existing businesses than building new businesses.
- Most companies are focused on delivering the next quarter – Jeff Bezos of Amazon is one of the few public CEOs focused on long term growth. The Kindle is a good example of that: Much was written about the fact that Amazon is probably losing money on selling Kindles. The Kindle had its mark on Amazon’s 2011 net profit decline. But Jeff Bezos strongly believes that tablets are slowly replacing PCs and Amazon’s ability to be an early adopter and offer such a platform will greatly impact their ability to sell content in the future and drive long-term growth.
- Excessive capital – Most organizations believe that there is a direct correlation between the amount of capital invested in a new venture and its outcome. I would argue that opposite is true: Too much capital means less focus and too much expectation. A startup with $50K will use its limited capital to develop a Minimum Viable Product (MVP) and get its first customer. It will focus on small wins and use the little resources available wisely. Corporations should do so as well: deploy modest resources and focus on small wins.
- Sense of urgency – Lou Gerstner, the turnaround CEO of IBM, in his book “Who Says Elephants Can’t Dance?” pointed out that his ability to create a sense of urgency played a key role in the turnaround of IBM. Revenues & profits are growing and sales people are exceeding their quota so why experiment with new products? What’s the rush? The sense of urgency for a startup is dictated by the limited capital and the short window of opportunity. That does not apply for an established corporation.
- Incentives & accountability – In a startup, the incentives & accountability are personal. Should the company succeed the founders will get rewarded directly since they own a portion of that venture. Should the startup fail – they only have themselves to blame. Rarely do employees get significant rewards for successfully leading a new innovation. Rarely are there one or two individuals who are fully accountable for a new venture.
- Market focused vs. internal focus – Entrepreneurship 101: An early venture should focus its time and resource on two activities: understanding their customers and developing the product. Good entrepreneurs are able to avoid distractions and stay focused on those two tasks. It is harder for a corporate entrepreneur. Internal procedures (and bureaucracy), budget planning and approval, internal reporting tools are all distractions, leading to longer time-to-market. Add to that the overhead of senior executives, who spend most of their time managing, and you get a good amount of overhead.
- Wrong people on the bus – Are the skills required to incubate and grow a business from 0 to $10M the same skills required to grow and manage a $100M business? So why do companies appoint employees with no startup experience to drive innovation? A GM that managed a $100M business or a VP/Director for a large enterprise might not necessarily be a good fit to manage a new business. A new business is like driving a race car. Not every person with a driving license can successfully drive a race car. New innovations have their own challenges and require a different skill set than established businesses.