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Why do big corporates lag behind when it comes to innovation?

(Image credit: Image Credit: TeroVesalainen / Pixabay)

Every successful business is constantly striving to innovate. Companies large and small are always on the lookout for ways that they can gain a competitive edge over their competitors, with many naturally turning to technology in this pursuit. The rise of big data, artificial intelligence (AI) and the Internet of Things (IoT) means that there’s now a growing number of tools at the disposal of organisations who are on a mission to transform their respective industries.

But for some, leveraging tech to their advantage is an extremely challenging task. As someone who previously worked for large management consultancies before making the decision to launch my own business, I have come to understand the comparative advantages startups possess when it comes to driving innovation, and quickly adopting the latest trends.

So, why is it that smaller companies, with often much more limited resources, are typically at the forefront of innovation? And what are the organisational barriers that mean corporates are lagging behind?

Bureaucracies stifle innovation

Peter Thiel (VC investor and co-founder of PayPal) summarised it well when he wrote:

“It’s hard to develop new things in big organisations… Bureaucratic hierarchies move slowly, and entrenched interests shy away from risk. In the most dysfunctional organisations, signalling that work is being done becomes a better strategy for career advancement than actually doing work.”

There is a lot of truth behind this observation, which comes from his best-selling book Zero to One. Large companies are often stifled by layers of management and bureaucracy, which makes even the smallest and simplest changes difficult to put into motion. I believe this a fundamental challenge facing large corporates which, if not properly addressed, will seriously undermine their position in the market.

We’re already seeing the consequences – between 1955 and 2017, only 60 of the Fortune 500 companies remained on the exclusive list. Since 2000, this list has changed even more rapidly. According to Capgemini, since the turn of the century 52 per cent of companies in the Fortune 500 have either gone bankrupt, been acquired or have ceased to exist. By contrast, the global startup scene is flourishing. According

 to data from Companies House, in 2018 the number of new companies registered across the UK alone rose by 5.7 per cent to over 660,000 – a record high.

Startups are inherently flexible and creative in their approach to innovation. They aren’t hindered by the red tape that renders larger companies inflexible, and early stage businesses often place innovation and new technology at the heart of their proposition.

Innovation equals risk

It goes without saying that you cannot innovate without taking risks. But there is no guarantee that trying something new will land you success – a fear that deters large corporates from experimenting and innovating.

Meanwhile, a culture of experimentation is far more likely to proliferate in startups than in large corporates. Simply put, larger companies are typically far more risk-averse, which ultimately stunts creativity. Historically, this mentality might have worked in their favour when corporates reigned supreme and had an established base of clients and customers. But with the rise of countless startups pushing the boundaries and disturbing the status quo, this mentality has quickly put companies who fail to innovate at an immediate disadvantage.

What can corporates do to catch up?

All of this is not to say that corporates will continue to be outpaced by startups. But there does need to be a shift in their approach if these larger businesses are ever to compete with their more flexible and creative counterparts.

Embrace risks

Corporates shouldn’t take risks simply for the sake of taking risks. Rather, they need to be willing to proactively embrace risk-taking and create a culture where the ability to fail or experiment is a valued part of innovation.

Adobe offers a helpful example of how companies can encourage more ‘out-of-the-box’ thinking. The company launched a ‘Kickbox’ scheme – an open source, employee-driven innovation scheme which was deployed to give creative thinkers the tools and techniques they needed to develop their ideas. Employees benefited from support and mentoring, while Adobe reaped the benefits of a more innovative workforce.

Moreover, there are countless examples of when entrepreneurs have taken significant bets – which ultimately payed off. Take Zipcar, for instance. People today wouldn’t think twice about sharing a taxi home (how many of us have used UberPool in our lives?), but back in 2000, Zipcar was just an idea that the co-founders came up with while dropping their kids off at the same kindergarten. They managed to turn this idea into a massive business – which they sold to Avis in 2013 for $500 million. They started with only $68 in their bank accounts.

Corporates have talented staff and often the capital to invest in new projects. What they need is the freedom of expression so that employees – from senior managers down to lower level team members – can act on interesting ideas. Some might fail, but if just one good solution comes out of 20 attempts, this could help deliver real value for the company.

Learn from startups

There is mutual value to be had in large corporates collaborating with startups. On the one hand, large corporates are able to offer the execution capability; namely, the resources, infrastructure and geographical reach needed to support technological advancement.

Startups, on the other hand, are by their nature small, agile and nimble – which means they are well accustomed to spotting inefficiencies within a business and coming up with creative ways that tech can be used to improve the product or service.

In-house tech incubators and accelerator programmes are but two ways that startups and corporates can benefit from one another’s areas of expertise. By supporting fledgling companies that are hungry for growth, these startup partnerships are a powerful testbed for corporates.

While corporates are not naturally inclined to take risks and innovate, that’s not to say that they can’t be clever when it comes to overcoming this obstacle. By actively encouraging experimentation – without being too rigid in their assessment of how likely these pursuits are to bring success – and taking a page out of the book of innovative startups, there’s no reason that large companies can’t drive digital transformation within their organisation. Success, after all, doesn’t have to be framed as fulfilling a specific objective, but rather something that can be achieved by simply learning and gaining knowledge.

Ritam Gandhi, Founder and Director, Studio Graphene (opens in new tab)
Image Credit: TeroVesalainen / Pixabay

Ritam Gandhi is the Founder and Director of Studio Graphene – a firm that specialises in developing amazing blank canvas tech products. Prior to this, he worked as a consultant for a decade for the likes of Accenture and Bank of America Merrill Lynch before.