Many large companies appear sluggish and even confused when it comes to developing disruptive new products or services that set them up to lead the market rather than desperately follow others. In fact, many look to smaller companies, essentially their competitors and venture capital funded start-ups, for innovation in their industries.
Examples of this can be found in all types of industries. Large businesses have turned to high-profile acquisitions rather than disruptive innovations to drive their growth strategies.
In 2016, General Motors (GM) acquired Cruise Automation, an innovator in autonomous vehicle technology. The acquisition was a strategic move on GM’s part to build a team within their company that was dedicated to the development of self-driving cars. Rather than breaking new ground themselves, GM absorbed into their company those who were disruptive innovators.
Large media and technology companies have also used the acquisition strategy to help them keep control of their markets. In 2014, Apple purchased a stake in the music technology company, Beats. As a result, Apple was able to push forward with key integrations between their existing technology and that of the new innovative company. At the time of the acquisition it was estimated that Beats held a 60% market share in the high-end headphone market, which gave Apple inroads into a new market.
Even banks use the acquisition model for growth. 2017 saw more acquisitions of fin-tech startups by the top US banks than any other year. (1)
Why acquisition strategies are seen as lower-risk when compared to disruptive innovations.
The pressure for companies to get into new technologies is heavy. As Hal Vogel of Vogel Capital Management put it:
“They’re trying to get ahead of the curve and there’s pressure to get into new technologies. It’s important to take risks and experiment.”
The problem is that most experiments fail. Therefore, to mitigate their losses, many big-media giants, car manufacturers, financial services conglomerates and other large businesses utilize small in-house teams to seek out niche markets and the companies leading them. This portfolio approach spreads the risks across numerous companies, so the risks are not all on one venture.
Why Big Companies “buy innovation” rather than innovate themselves
It’s very easy to say, “We want to innovate” and very hard to put into practice, especially for established businesses with multi-levels of management and a variety of stakeholders.
As Marc Shedroff, VP Samsung Open Innovation Center, put it:
“I don’t think big companies innovate less per se, but admittedly there are unique challenges to keep in mind”
Challenges faced by large companies who want to innovate to transform.
- Large companies are more focused on short-term results so they can satisfy their shareholders.
- Innovation requires buy-in from not only the innovation division but also senior leadership and the whole organization.
- Success has traditionally been measured against goals that are set using existing processes and metrics.
- Complex chains of command in large businesses slow down the decision making process.
- Loyal customers are not always receptive to innovation and the latest technology applications.
- When a smaller company has an innovative idea, it often receives recognition in the press whereas innovation within a larger company can often go unnoticed, especially if their primary product or service has strong brand recognition.
- For innovation to succeed, failure must be an option, but failing too often and in noticeable ways may go against the risk profile and brand of more established businesses.
Big companies don’t innovate more because of the obstacles and inherent risks involved.
It’s not that big companies innovate less, after all, many of them built their reputations on disruptive innovations when they were smaller companies. Rather, as they mature and increase their foothold in their markets, they are more closely watched by the public, the media, and their shareholders. The demand for short-term returns on shareholder investments makes meaningful investments in innovation risky especially when they fail to deliver the expected commercial results and traction.
In 2011, General Electric (GE) sought to advance itself in the digital software markets. Despite pouring billions of dollars into a new business unit called GE Digital, which promised to be a growth unit for the company, the company stock price has continued to fall significantly over the years, and General Electric’s other products have suffered as well.
Although publicly, things looked good at GE Digital, internally it was a different story. Much of the revenue GE Software was generating came from other GE business units, not external customers. When shareholders were struggling to see results in both the core businesses and innovation growth unit,, they grew dissatisfied, and the CEO was forced out.
In 2018, companies spent as much as $1.3 trillion on transformation initiatives. Most of that money was spent on failed programs and of those that didn’t fail, only 16% were able to sustain change. Even high-tech, media, and telecom only had a 26% success rate. (2)
Procter & Gamble made a bid to become “the most digital company on the planet.” In 2012, even while leading their industry, they decided to move forward with a digital transformation. The goals were broad and without purpose. That lack of “why” behind their “what,” along with a slumping economy led to problems right away. Their CEO was also asked to resign.
The bottom line is that big companies can’t or won’t innovate more until they solve the underlying issues that block them from innovation and transformation. Their myopic focus on the outside through competitor trend-chasing and latest trending technology acquisitions will set them up for the ultimate failure of their business.
In today’s business environment where disruption is accelerating, Leaders lack the confidence, courage and possibly the “know how” to truly lead, and instead follow the herd to play it safe in a disruptive market to the detriment of the companies they lead in the medium and long term.