Life in Small Bites

In this blog, I am going to talk about why large companies typically can’t innovate… What goes wrong? Why do they ultimately DIE?The year 2012 marks the death of Kodak, a $26-billion, century-old “cornerstone” company of the U.S. R.I.P.

Did you know that Kodak actually invented the digital camera that ultimately put it out of business? Kodak had the patents and a head start, but ignored all that. Why? That’s what this blog is about.

To put an exclamation mark at the end of the Kodak story: In this same year, Instagram, another company in the image business, was acquired by Facebook for $1 billion… The catch is, Instagram had only 13 employees at the time.

This is the difference between a “linear” company and an “exponential” one.

One of the biggest challenges that large companies have today is creating an environment that allows for innovation. Everywhere the rate of change is so fast that large U.S. companies are in constant danger of disruption. Not from competition in China or India, no. They’re in danger of being made obsolete from two guys/gals in a garage in Silicon Valley, or anyone, anywhere, empowered by exponential technology, willing to risk it all, driven by their passion.

Whether it’s steamships disrupted by the railroads, or railroads disrupted by the airlines, it’s typically the large entrenched incumbents that are displaced by innovators. It happens over and over and over again… Why?

Here are my four primary reasons:

1. True disruption means threatening your existing product line and your past investments. Breakthrough products disrupt current lines of businesses. My rule of thumb is: “You are ether disrupting yourself, or someone else is.” Most companies and boards are not willing to change, give up near-term profits (public companies are driven by quarterly perspectives) in return for long-term gain. These companies that are linear, myopic and inertia-driven will ultimately follow the path of Kodak.

2. Companies have too many experts who block innovation. True innovation really comes from perpendicular thinking. While this isn’t always true, I’ve met too many experts who are fantastic at telling me why a breakthrough can’t possibly occur. Think of it this way: experts whose field is disrupted are no longer experts, are they? They’re now “has-beens.” Plus, as we’ll see below, a true breakthrough requires massive risk… risk to reputation, something that an expert has spent decades building and protecting. This is why, to some degree, peer-review science really leads to incrementalism versus breakthroughs. This is why the National Institutes of Health, according to Michael Milken, funds more researchers over the age of 70 than under the age of 30.

3. Technology is changing exponentially — disruption is coming from outside the field — and large companies are unable to keep up.Technologies that used to be in a completely different field are now disrupting complete new arenas. Who would ever have thought that biology would be a disruptive force in the energy/fuel business? Or in the insurance business, with rapid genome sequencing being able to predict what disease a person is likely to have? Or that synthetic biology would become the new programming language for the 21st century? Companies that depend only on their internal experts cannot possibly evolve fast enough during these times of explosive innovation. They are the large, lumbering, doomed dinosaurs surrounded by thousands of rapidly evolving small furry mammals.

4. The day before something is truly a breakthrough, it’s a crazy idea. And experimenting with crazy ideas requires a high degree of tolerance for risk-taking. Large companies and government agencies have a lot to protect and therefore are not willing to take big risks. A large company taking a risk can threaten its stock price. A government agency taking a risk can threaten congressional investigation. Remember what happened with the solar-panel company Solyndra? It manufactured thin-film solar cells. The Department of Energy, through the Energy Policy Act of 2005, helped fund the company. The company filed for bankruptcy in August 2011, and then the witch hunts began… Who was to blame? How could the government back a losing idea? Clearly, the only option for a government bureaucrat who sees this is NEVER TO TAKE A RISK AGAIN…

The Department of Energy made an investment that failed, and it got raked over the coals for that failed investment. This is ridiculous. The fact of the matter is, the government should be making a lot of risky investments, the majority of which are likely to fail. But if every time the government makes an investment that fails, it gets negative front-page news and pulled into congressional investigations, pretty soon the government is no longer making any risky investments and progress become incrementalized.

So it really is difficult for large organizations or government to make disruptive change. For that reason, the how of creating approaches that limit risk but allow for upside is very important.

Can large organizations be innovative? Can they take risks?

The answer is YES… And the subject of my next blog.

This is a remarkable story. More to come!