Do Big Companies Have a Harder Time Innovating Than Small Ones?

Big companies are traditionally hit with the rap that they are lumbering behemoths, devoid of passion, creativity and entrepreneurial spirit.

That might have been true a generation or two ago, but in today's world, such a business, if it existed outside the mind of the ignorant, would have already been acquired or would be on the 'low hanging fruit' target list of hedge fund.

Large companies have developed a panoply of innovative products and services as well as the process innovations to produce them profitably and at scale. But that is not to say that large companies are inherently entrepreneurial or that they are the optimal vehicles for getting innovations to market.

The reasons for this disconnect between intelligence, resources and delivery has to do with the mission, pressures and people of such companies versus those of smaller start-up firms. As the following article explains, established firms are in the business of executing a strategy while start-ups are motivated to find a strategy that works. There are massive differences in risk assumed by the competing models and those, in turn, require different skills, tolerances and outlooks.

Research into managerial capabilities has determined that the kinds of people who will take a flier on a new business concept are not necessarily the same as those whose talents lend themselves to implementing a long term strategic plan tied to incremental performance improvements. One is not 'better' than the other, they are simply very different tasks demanding disparate orientations.

It may well be that big companies do not so much have a harder time innovating than that they have less motivation to do so. If innovation is instrumental to strategic purpose, they will find a way. If not, they probably wont bother, except to the extent that on-going customer acquisition and retention demands it. Entrepreneurial companies, by contrast, are committed to no plan until they have figured out what works to keep them alive. It is a more elemental and Darwinian proposition.

Innovation is essential to the existence of smaller, entrepreneurial start-ups, but it is usually one tactical feature out of many for those that have achieved some longevity and scale. JL

Ron Askenas comments in Harvard Business Review:

It's not surprising that younger entrepreneurial firms are considered more innovative. After all, they are born from a new idea, and survive by finding creative ways to make that idea commercially viable. Larger, well-rooted companies however have just as much motivation to be innovative — and, they have even more resources to invest in new ventures. So why doesn't innovation thrive in mature organizations?
What's striking about Fast Company's 2013 list of the world's 50 most innovative companies is the relative absence of large, established firms. Instead the list is dominated by the big technology winners of the past 20 years that have built innovation into their DNA (Apple, Google, Amazon, Samsung, Microsoft), and a lot of smaller, newer start-ups. The main exceptions are Target, Coca Cola, Corning, Ford, and Nike (the company that topped the list).
To get some perspective on this question, I recently talked with Steve Blank, a serial entrepreneur, co-author of The Start-Up Owner's Manual, and father of the "lean start-up" movement. As someone who teaches entrepreneurship not only in universities but also to U.S. government agencies and private corporations, he has a unique perspective. And in that context, he cites three major reasons why established companies struggle to innovate.
First, he says, the focus of an established firm is to execute an existing business model — to make sure it operates efficiently and satisfies customers. In contrast, the main job of a start-up is to search for a workable business model, to find the right match between customer needs and what the company can profitably offer. In other words in a start-up, innovation is not just about implementing a creative idea, but rather the search for a way to turn some aspect of that idea into something that customers are willing to pay for.
Finding a viable business model is not a linear, analytical process that can be guided by a business plan. Instead it requires iterative experimentation, talking to large numbers of potential customers, trying new things, and continually making adjustments. As such, discovering a new business model is inherently risky, and is far more likely to fail than to succeed. Blank explains that this is why companies need a portfolio of new business start-ups rather than putting all of their eggs into a limited number of baskets. But with little tolerance for risk, established firms want their new ventures to produce revenue in a predictable way — which only increases the possibility of failure.
Finally, Blank notes that the people who are best suited to search for new business models and conduct iterative experiments usually are not the same managers who succeed at running existing business units. Instead, internal entrepreneurs are more likely to be rebels who chafe at standard ways of doing things, don't like to follow the rules, continually question authority, and have a high tolerance for failure. Yet instead of appointing these people to create new ventures, big companies often select high-potential managers who meet their standard competencies and are good at execution (and are easier to manage).
The bottom line of Steve Blank's comments is that the process of starting a new business — no matter how compelling the original idea — is fundamentally different from running an existing one. So if you want your company to grow organically, then you need to organize your efforts around these differences.