How to innovate in established companies?
And why have incumbents lost the willingness to innovate?
In the beginning of the 20th century leaders were looking to developing reliable products aimed at serving a pressing customer need. But the 1960s large corporations looked to maximize shareholder value: they cut cost and increased efficiency to improve returns while neglecting to develop new products and failing to address new markets.
Today, each of the top 5 largest companies by market capitalization started out after the 1960s which shows that many older companies simply failed to innovate. So how should incumbent embrace innovate again?
Microsoft’s pivot to innovation
The author looks at Microsoft’s pursuit of cost-cutting strategies when Steve Ballmer was at the helm of the company. The Seattle giant missed out on numerous new markets. When the newly appointed CEO, Satya Nadella came in, he decided to manage the company much like a startup looking not at lagging indicators such as quarterly results but rather future bent indicators.
Innovation-driven Market research
Specifically companies should reconsider their way of conducting market research. Rather than looking at the “Total Addressable Market” (TAM) made up of market sizing, market share and analyzing what is known, companies should revert to the “Total Addressable Problem” (TAP) focused on discovering new customer problems leading up to new markets and fresh growth. As an example, Mark Zuckerberg’s social network addresses a new kind of need, that of connecting people to one another, rather than trying to take market share away from competing technology Giants.
Executives must also change the way they relate to customers. Rather than listening to what clients say, leaders should look at what customers do. In market research instead of asking customers what they may think of a given service and how much they may spend on it, a growth minded market research would ask if they would be willing to sign up for the service right now.
Developing tolerance to failure
But, as many innovations fail, executives really need to embrace productive failure even if most operational excellence minded leaders look to minimize errors. Getting large corporations to innovate starts by forming the right team. Rather than going for overachievers, the author suggests that the team may be made up of “interesting misfits” boasting adaptability, curiosity, humility, and a passion for experimentation as key qualities.
- The author also looks at the financial model. The author recommends that executives go for “intelligent risk taking” and while supporting multiple innovation projects.
- Companies should create a “growth board” where a small team at the top of the company can look through innovation projects and finance and funds those 80 most promising.
- The funding should be done on a step-by-step basis as the innovative team is delivering results much like venture capitalists invest in a startup.
- And finally, the author recommends that executives invest in many innovation projects at once to mitigate risks.
To sum up
The author shows that established companies go for cost-cutting strategies over innovation ever since the 1960s. But, today, the world’s leading top 5 companies by market capitalization were all created after the 1960s. Established companies must innovate again if they want to continue to grow. The author recommends that established leaders
- learn new market research methodologies
- form teams made up of “interesting misfits,”
- create a “growth board” in charge of spotting and funding promising innovation projects
- support many innovations at the same to mitigate risk.
But the author does not get into the details of how leaders should choose one innovation project over another. He does not mention the decision-making framework that executives could use to spot disruptive innovation.