Young start­ups have a drive to change the world. How do they innovate differently from (big) companies? What can your organisation learn from them?

According to statistics, 75% of the S&P 500 companies will be replaced by 2027. A company is normally removed from the list or replaced due to a decline in value or due to being acquired. The same trend is happening with the Fortune 500 – 50 years ago the life expectancy of a firm in the Fortune 500 was 75 years and today it is less than 15 years. It is clear that established companies are not living for as long as they once did and the rate at which these companies are dying off or becoming insignificant is increasing.

Why decline happens at great companies?

In the beginning of a company’s life, Product Engineers and Designers make great products that make the company successful in a certain field. (Let’s call this success a Cash Cow created from a disruptive innovation). After this initial period of success though, Salesmen become valued more and put in charge as they can move the needle on revenues. This causes Product Engineers and Designers to feel demoted and they begin to switch off: their efforts are no longer at the epicenter of the company’s daily life. It’s become easier to milk the cash cow than to try and add new value. The company stops playing offense, preferring defense and starts to die.

A company is a permanent organization designed to execute a repeatable and scalable business model. Once you understand that existing companies are designed to execute then you can see why they have a hard time with continuous and disruptive innovation. Somewhere in the dim past of the company, it was a startup too, searching for a business model. But now, as the business model is repeatable and scalable, most employees take the business model as a given. They measure their success by the success in execution, and it’s reward.

Not innovating to create new business opportunities is like letting a cancer creep up on you. Nothing seems wrong until it’s too late. Traditional financial systems are risk mitigation tools, and there is typically no weighting on speed. Startups are focusing on the execution, not on the risks.

Accelerators and Incubators

Accelerators and Incubators are popping up everywhere. Startup communities with meetup groups, pitching events, university entrepreneurship courses, co­working spaces, networking events etc are forming and picking up speed. Essentially, all of this helps entrepreneurs learn the skills and mindset of entrepreneurship, leveraging from past failures as well as successes.

The main question is: how to compete with startups?

For customers, it doesn’t matter if the answer for their problem is found by a multinational corporation with 500 employeees or a startup with 3 –­ they want the right answer to their problems as soon as possible. While stratups constantly taking a financial risk, corporations needlessly never take any, and it causes them to become slow and irrelevant.

A lean innovation journey begins by building the capabilities of certain individuals (Intrapreneurs), teams (corporate startup teams) and leaders (corporate startup team leaders). These individuals can come together as a cohort to work on live innovation projects, thinking boldly as entrepreneurs and focusing on key search principles rather than internal processes. To clarify, the key search principles are: a deep understanding of the customer, purpose built experiments, and data informed decision making.

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Over time, an entrepreneurial mindset can spread from “special innovation projects” to “daily work” activities and start to impact the organisation’s culture. Leaders will be able to walk the walk, know how to allocate innovation resources, and be able to find a balance between leading with search objectives, and execute objective.

Wheter it’s a small or a big company, the only way for businesses to consistently succeed today is to attract smart creative employees and create an environment where they can thrive at scale. But, besides having the required human resource, all companies need an innovation strategy.

Innovation strategies

When creating an innovation strategy, companies have a choice about how much to focus on technological innovation and how much to invest in a business model innovation. This matrix, which considers how a potential innovation fits with a company’s existing business model and technical capabilities, can assist with that decision. Certainly, technological innovation is a huge creator of economic value and a driver of competitive advantage. But some important innovations may have little to do with new technology.

Routine innovation builds on a company’s existing technological competences and fits with its existing business model—and hence its customer base. An example is Intel’s launching ever-more-­powerful microprocessors, which has allowed the company to maintain high margins and has fueled growth for decades. Other examples include new versions of Microsoft Windows and the Apple iPhone.

Disruptive innovation requires a new business model but not necessarily a technological breakthrough. For that reason, it also challenges, or disrupts, the business models of other companies. For example, Google’s Android operating system for mobile devices potentially disrupts companies like Apple and Microsoft, not because of any large technical difference but because of its business model: Android is given away free; the operating systems of Apple and Microsoft are not.

Radical innovation is the polar opposite of disruptive innovation. The challenge here is purely technological. The emergence of genetic engineering and biotechnology in the 1970s and 1980s as an approach to drug discovery is an example. Established pharmaceutical companies with decades of experience in chemically synthesized drugs faced a major hurdle in building competences in molecular biology. But drugs derived from biotechnology were a good fit with the companies’ business models, which called for heavy investment in R&D, funded by a few high-margin products.

Architectural innovation combines technological and business model disruptions. An example is digital photography. For companies such as Kodak and Polaroid, entering the digital world meant mastering completely new competences in solid­state electronics, camera design, software, and display technology. It also meant finding a way to earn profits from cameras rather than from “disposables”.

A company’s innovation strategy should specify how the different types of innovation fit into the business strategy and the resources that should be allocated to each. In much of the writing on innovation today, radical, disruptive, and architectural innovations are viewed as the keys to growth, and routine innovation is denigrated as myopic at best and suicidal at worst. That line of thinking is simplistic.

Most entrepreneurs are not born, but made. Successful entrepreneurs do share common personality traits, but the skills and methods can be learned. If innovation is the answer to surviving, then corporate entrepreneurship is a justified answer to innovation. It certainly is another useful tool in the toolbox and probably one of the best investments a company could make.

Partially republished from Jan Kennedy’s superb publication. Read it here.

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