4 Reasons Big Companies Don’t Innovate…or Get Disrupted

I’ve previously mused about “The Myth of Disruption“, but venture capitalist Anshu Sharma‘s recent Techcrunch/ piece got me worked up enough to finally organize my thoughts. Sharma argues the reason big companies don’t innovate is the “stack fallacy.” Big companies at the bottom of “the stack” have lost touch with end-customers. While startups at the ‘top of the stack’, are better equipped to uncover real needs and disrupt. Sharma contends that Ford thinks it can build an Uber competitor, but it’s likelier Uber could build a Ford. He also cites Oracle’s many failures to defeat Salesforce. While there’s some truth to the stack fallacy, it’s a kissing cousin of established vertical integration strategies. From my experience, this is just one small part of why big companies don’t innovate. Below is the icy truth no one will tell you: why most of what we’ve called “disruption” is bullshit.

So why don’t corporations innovate?

1. Gulliver can’t buy sneakers in Lilliput

Most corporate innovation fails because of size.

In any given year, only a handful of $200M businesses are hatched – globally. Now, imagine coming up with one of these unicorn ideas. (nay, Minotaur. Unicorns are so last year.) You should get a huge promotion, a Bentley, and coworkers should carry you to your car every day. That’s not exactly what happens. Why? You work at a yuuuuuuge company. It has a $1B marketing budget! Suddenly, your $200M revenue idea – adjusted for risk and a 3-5 year present value, can be dwarfed by raising the price of an existing product by pennies. Your block is too teensy for “the stack”…? No budget for you! We’re mailing more coupons!

In fact, many – if not most – top-level “stacks” are too small for massive companies to build or buy.

The app store is a decent revenue generator for Apple. It gets a 30% cut across brilliant and idiotic apps alike. But only a thimbleful of apps ever become big enough to be a blip on Apple’s financials. Sure, there’s the occasional Uber or Instagram. But it took millions of attempts to come up with those morsels. It’s a process no large company has the stomach to fund or manage. Nor should it.

The same goes for mobile carriers.  Sprint, Verizon, AT&T and T-Mobile allow tons of MVNO’s to re-sell their bandwidth and chase down niches they can’t. If one of these resellers gets big enough, the affiliated carrier buys it. That’s how Sprint acquired Virgin Mobile US and T-Mobile bought MetroPCS. Others like Ting and FreedomPop are banking on the same outcome.

2. They don’t have to. Really.

As I explain in this video, there’s far less disruption than bloggers and bullshitters would have us believe. Companies believe time is on their side – and it is. Aside from a handful of industries like tech and media (where all the noise-makers reside), many top incumbents can not only weather a disruption, but co-opt it.

Think of all their advantages:

• Established customer base
• Buckets of cash (…some floating offshore…)
• Brand recognition
• Global distribution and shelf-space
• Exclusive contracts
• Global supply chain and low cost procurement
• Stockpiles of patents to threaten, retard, or bankrupt innovators with legal fees and resource tie-ups

Industries like insurance, finance, auto, and aerospace are besieged by startups, but have additional layers of protection, like:

• Protective regulations
• High capital requirements
• Longevity – customers aren’t looking for their IRA’s, insurance plans, and 50,000 mile warranties to be disrupted or disruptive

So…what’s often called a “disruption” is more like an interruption.

Not only do most “disruptors” fail to put anyone out of business; the vast majority sell out to an incumbent. The numbers couldn’t be clearer:

Startups aren’t harbingers of disruption, they’re an externalized R&D function.

R&D and innovation have flatlined in many industries. That opened the doors for startups to provide features and functions they’ve been neglecting. The incumbent’s punishment for their R&D-linquency? Paying top-shelf prices – retroactively – to buy what they should have made.

Some incumbents are brilliantly, sometimes deviously, seizing control of disruptive technologies:

• Axel Springer, an old school German publisher, reinvented itself in digital, proving that if you’re smart, bold & have capital all things are possible.
• Financial services companies are now completely neutering and seizing the Bitcoin “revolution” for themselves:
  • They’re adopting Blockchain technology, the crown jewel of bitcoin
  • Major banks are about to
  • Others are financing Bitcoin’s biggest new “disruptors”. You’re not disrupting anything if you’re owned by incumbents.  It’s like declaring emancipation from your parents, but continuing to live in their house while they pay all your expenses.
• Even Netflix, which looks disruptive, has nuzzled itself comfortably into the media establishment. It’s:
  • Hiring Hollywood talent to produce originals
  • Seeking the establishment’s praise
  • Distributing content from traditional media companies
  • Being distributed through the very cable systems it was supposed to disrupt

Of course, incumbents are far from safe. In aggregate, the world is moving faster than ever, causing many to fail. But not from disruption. Most will meet their end from good-old-fashioned mismanagement, obsolescence, or lack of vision. I talk to companies every day that think they have more time than they do, misread market signals, or misunderstand their biggest strengths and weaknesses. As I wrote here, many companies sit on a sunken treasure of underutilized assets.

3. Not every big company is “stacked”, but it is “saddled”

The stack fallacy contends that the companies getting disrupted are more removed from customer desires than disruptors. Not necessarily.

The New York Times serves news directly to readers, same as Buzzfeed. (Contain your violent recoil…) There are no “stacks” of intermediaries at the NYT. Yet, one is a hyper-profitable ‘disruptor’ and the other is like a chimp with a coconut, trying to crack digital.

Amazon is seen as a disruptor to Walmart, but Walmart has a less “stacked” relationship. It sees customers face to face, not just online. You’d think Walmart could look deep into their eyes and know exactly what kind of Chinese-made camisoles they wanted. Not so.

The real issue here isn’t stacking, it’s saddling. Incumbents like New York Times and Walmart are dragged down by a potpourri of anchors:

• Financial and psychological sunk costs in old technologies, products, and services that should have been mercifully euthanized years ago
• Inefficient or heavy-handed processes
• Remnants from ill-conceived acquisitions or deals
• Outdated presumptions about what ‘the rules’ are

4. Defensive psychology

When I was pitching my first book, I was introduced to a senior executive at a major publisher. She spent the first 10 minutes of our call consumed with how abnormal our conversation was. “Usually, people go through an agent and submit a proposal and blah blah blah……” Ok, we’re on the call NOW. How about we talk about the book? She was a relic from an era that no longer existed – in a way, begging to be disrupted.

Big companies don’t defend status quo by accident. Ever try herding a group of 15 people to lunch? Now imagine herding 50,000 to do something completely new.

There’s deep individual and group psychology that explains why they don’t take the risks needed to innovate. As I deconstructed in The 9 Corporate Personality Types, big organizations have lots of anchors that keep them from innovating.

It starts with self-selection at recruitment. Most people joining large corporations didn’t opt for a beige cubicle, 401K match, and free bi-annual pair of prescription lenses to change the world. That doesn’t make them bad people or worthy of harsh judgment. Their DNA fundamentally differs from the dreamers and lunatics sleeping at their desks after coding all night. Risk-taking rarely in the blood of big companies.

A lot also has to do with age. By nature, individuals (and companies) with established reputations, brands, and assets try to protect them. They play defense. Those with nothing to lose are free to attack. (It also explains why the young are liberal and unencumbered, but slowly morph into Bob Dole as they have families and accumulate assets.)

So what’s a company to do?

Recognizing all this, I’ve focused on helping companies create and commercialize innovations through startup partnerships and acquisitions. This eliminates months of internal politics. It grounds conversations in reality, not PowerPoint. Still, even the best opportunities require healthy doses of change therapy.

Others are piling into corporate venture, hoping to mimic the success of groups like Google Ventures. But according to Harvard Business Review, the median lifespan of a corporate venture program is one year. Most corporations don’t have the stomach for the low probabilities of venturing. And as I satirized here, few can access Google’s kind of ubiquitous data. They know what’s succeeding, accelerating, or failing – vastly improving chances of successful investment.

What makes corporate VC especially treacherous is the added burden of trying to be “strategic”. On paper, looking for investments that can help the mothership makes sense. But it’s an added burden ordinary VC’s don’t have. So in practice, early stage strategic investors can end up with portfolio companies too small to have an impact and prematurely impaired from working with competitors.

The way to improve strategic ventures is to seek companies that are risk-proofed (fast customer and revenue growth), doing as many deals as possible (rather than succumbing to analysis paralysis) and focusing more on entrepreneur quality than strategic fit.

Many hold out hope for organic growth innovation groups…or ignore their futility. This infographic sums up how they can easily devolve into theatrics.  The secret to making these work is to focus all their energies on the most desperate and failing parts of the business. That’s where the will to change and invest resides. When all as going well, only the most disciplined companies can power meaningful organic change to the finish line.

A few industries, like drugs and tech, still do traditional R&D. They have no choice. But declining yields on those investments are forcing consolidation. Similar investments in consumer goods can produce occasional hits. More often, this creates product line bloat or temporary novelties. There are ways to improve results with new business models, customer experiences, and systems/processes, not just low-yield products and services.

Then there are the sabateurs. When certain incumbents can’t compete on quality, they turn to lawyers, lobbyists and copycats to crush or slow disruption. Some examples:

• Financial services companies trying to corner the market on bitcoin IP
• Taxi companies suing Uber
• Hotels lobbying for crackdowns and regulations of AirBnB
• Fossil fuel companies trying to kill solar tax breaks…while happily taking their own
• Auto dealers trying to prevent Tesla from selling direct to consumers
• Cable companies slowing web traffic to extract payments from providers like Netflix
• Cable companies suing Aereo out of existence (Admittedly, this was a stupid company)
• Lots of patent intimidation and resource-draining lawsuits

There are other approaches I can’t cover here, like open innovation and Lean Startup… but if you want to know more – or need help growing your business, contact us.

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Also, watch this video of me discussing the future of innovation: