Why Large Companies
Fail to Innovate
24th August 2016

Innovation is a term often discussed in companies. It comes as no surprise that when it comes to innovation, 78 percent of large companies say they practice some kind of open innovation process with employees (Research-Technology Management survey of companies with more than $250M in yearly sales).

Yet when I discuss ways to improve new product innovation with executives and managers at these same large companies, rarely do I find that their different business units, departments or team members share the same vision for innovation.

In specific terms, I define transformational innovation as creating some new type of product or service that doesn’t currently exist and is truly different from the competition. However when I give corporate employees this definition as a guide, most feel that their innovation strategies aren’t creating anything “new” and ideas rarely become commercially successful and deliver business growth.

Why?

One of the biggest reasons I see for failure to achieve transformational product innovation in 95% of companies is that they try to “innovate at large scale”. What I mean by this is that they’ve performed some good macro-level research and found a general market context where they think they can develop a new product. And to make the business case for any new product idea, this innovation has to serve a very large overall market size, at least $500M-$1B, or they won’t even consider trying to innovate in that area.

Here’s the problem with that strategy – transformational innovation is almost always counterintuitive, which is why it’s so difficult for large companies to do. They tend to have innovation rule-books or decision-making parameters in place that fundamentally block high-growth new product development. This means that if an individual or department can’t make the business case at large scale for the new idea, it won’t get funded or be allowed to progress down the new product development pipeline.

What they fail to see is that their innovation process needs to be more like a green house. The new idea is a seed that needs the right type of soil with the right temperature and planted in the right season. It needs to be watered and nurtured to allow it to grow. It needs to take root and find the right product-market connection.

You don’t plant massive oak trees, you plant seeds that grow into massive oak trees. You can certainly uproot an oak tree and replant it somewhere else (merger and acquisition strategy), but you would never expect a new seed to go from nothing to oak tree overnight.

Real innovation comes from finding the right product-market fit for a small subset of your customers. Trying to do this at large scale only sets up a “pass / fail” decision-making process based on an incomplete business case, which typically ends up in failure for any transformational new idea because the idea hasn’t been allowed to grow into that massive oak tree it could become.

These type of transformational ideas almost always seem like they don’t have huge potential at first … otherwise every other competitor would have already developed them. It’s counterintuitive for a company to understand that they must give the odd sounding ideas a chance to become great.

The ability to create transformational innovation is directly proportional to the number of individual customers you get direct insight from, not the ability to analyze macro research. You need to truly understand customers’ blatant and latent needs.

If you can discover a solution to a problem that 50-75 customers can’t live without, then you’ll have a new product that you can plant and grow to a large scale. Remember that at first this won’t necessarily pass the “large scale” business case test.

Large companies are blind to their current “intuitive sounding” method which is much harder, takes much longer and costs much more. That method says to market the hell out of a mediocre new product with the hopes that all of the different subsets of customers will ultimately find it mildly appealing.

Trying to innovate at large scale also doesn’t allow unrestrained ideas to naturally flow and lends themselves to adjacent product offerings or new ways to enhance existing product ranges. Teams are busy making the business case for their large-scale innovation, so their incentive is to prove their hypothesis correct rather than discovering what customers really need and then building that thing.

That’s why typical new product development results for large companies tend to be ideas that are fairly close to their existing products with some packaging or feature changes based on general characteristics of a market segment. The same characteristics of the same market segments that all the competitors have access to because they’re all pulling from the same sets of macro market research.

These types of status quo new products take far too long to be developed and get to market. That’s because the ideas essentially have to be ready for immediate production just in case a product or country manager signs off. In most cases this takes years and millions of pounds, dollars or euros because all of the up front requirements. If you’ve already taken years developing something, then obviously you need to have it ready to go the moment it is approved for launch (one more reason why transformational innovation is counterintuitive at large scale).

And if you have a product that’s close to an existing product and doesn’t really appeal strongly to any particular subset of customers, then you’ll have to spend loads on sales and marketing to convince customers that your new product is “innovative” … this is how large companies end up stuck in a vicious cycle of mediocre new product development.

Over the last decade, technology startups have disrupted traditional companies because the cost of developing and distributing software has become relatively cheap. It’s cheap enough for 3 friends in a flat or apartment to make something that’s easy to use for a specific group of customers, then find out how to scale that product to the wider audience (Facebook originally for Harvard students, AirBnB originally for convention goers, uShip originally for people moving house who had extra space in their cars).

Traditional product companies have large R&D departments and historically the cost of research, prototype development and manufacturing have been barriers to entry for startups. However, that world is changing.

Micro production capability is exponentially improving, making the cost of new product development accessible to startups across the globe. These new companies will be able to disrupt traditional large product companies by building something great for a subset of customers, starting with that one seed and growing it into a massive oak tree that can’t be moved.

So if you’re a product company looking to innovate, the question to ask yourself is: “If we are innovating the same way all large companies are innovating, are we really innovating?”

My suggestion for being able to achieve transformational innovation — be more counterintuitive, stop trying to force innovation at large scale and let your idea seeds grow into the massive opportunities they have the potential to become.