How Big Companies Should Innovate

Mature corporations are designed to execute on the science of delivery — not engage in the art of discovery. They're bad at innovation by design: All the pressures and processes that drive them toward a profitable, efficient operation tend to get in the way of developing the innovations that can actually transform the business.

This was the core thesis of the first article in this series. However, I also pointed out a paradox: being bad at innovation and good at execution isn't necessarily undesirable. Once businesses refine their model as start-ups and move towards mature operations, we as shareholders want them to shift from exploration to efficiency. We want our leaders to push their businesses toward profit generation.

But giving up the pursuit of innovation seems less than satisfying, if not unrealistic. Executives will always look for ways to achieve meaningful growth and engage in strategic renewal. If the odds were 99:1 against breakthrough innovation inside the mature company, we'd still see leaders chasing after that golden ring.

So how do you empower your corporate innovators to bring their ideas to market? How do you avoid wasting millions, if not billions, on projects destined for failure? How do you leverage your unique position to create meaningful returns and capture potential growth?

The answers to these questions aren't simple. If you're willing to acknowledge the barriers in your way, there are a few tried and true levers you can pull to ensure your intrapreneurial endeavors are better positioned for success.

Create autonomy. This is one of the most important weapons in the arsenal of new businesses. If the antibodies already exist within your organization to destroy new endeavors, you need to go outside of the organization to overcome them. In his seminal work, The Innovator's Dilemma, Clayton Christensen made the point that for disruptive innovations to be pursued effectively, they require autonomous business units. He was completely right. What's more, his solution applies not just in the case of disruptive innovation, but also the business model innovations that we repeatedly fail to embrace. The constant need to drive towards operational efficiency can be avoided through the creation of new organizations.

If Gerber's failed adult food business had been born outside of its existing organization, would the managers have distributed a product that looked like Gerber baby food? If they'd been able to pay the same amount for different packaging on the open market, what would the outcome have been? Would Gerber own today's V8? Would they operate smoothie stores like Jamba Juice? Would they have growth rates similar to Innocent, Naked and Odwalla?

We can't know for sure. But one thing is certain: faced at the onset with internal pressure to drive cost out of production, it was far less likely that Gerber could truly innovate. It could not build an adult food business within its existing structure.

Incentivize for long-term viability. Pursuing innovation inside a big company is a balancing act. The obvious assumption behind all corporate innovation is that companies have assets that can be unleashed to create value. However, in the process of unleashing this potential, leaders must make sure their innovators develop sustainability. Though giving away free support and access to infrastructure is vital in this process, doing too much of this can backfire. Leaders must manage internal transfer pricing to ensure the development of viable business models.

Imagine you want a group inside your company to figure out new ways to sell your excess widgets. To encourage this activity, you give a bunch of your excess widgets to a team and ask that they market them as something new and different. Your team comes up with a model that's wildly successful; their excess widgets sell like hotcakes. Then, when your team goes to scale up their business, you realize that they hadn't considered the cost of buying new widgets at market rates. After all, they'd been given all their widgets for free. The business then becomes unprofitable and goes belly up.

This might seem like a far-fetched example, but this type of failure happens more often than you'd think. Free access to salespeople, manufacturing capacity and marketing dollars all can inhibit the generation of sustainable business models. Transfer pricing inside a company is already a complex issue. But when it comes to innovation, it must be approached even more thoughtfully.

Test to learn. Over the past few years, Eric Ries' lean start-up movement has gained meaningful traction in the entrepreneurial community. The lean start-up puts forth an ideology of systematically testing your business model against the assumptions you're making. If you can move from uncertainty to certainty using the fewest dollars and in the shortest period of time, you're destined for great things.

The foundation of this theory, and others like it, is the scientific method. Questions are asked: Can our new asset offer a solution for our customers? Can it be profitable? Intrapreneurs must then be encouraged to test early and test often. Little by little, they can turn a hypothesis about the market into proven results.

If evidence come back that invalidates the basic hypotheses of the project, teams can cut their losses before they're too great. Simultaneously, as intrapreneurs test their ideas to gain supporting evidence for their products and services, they can justify requesting funds.

Boston Mayor Thomas Menino has been quite successful using lean operations in his efforts to innovate. A group inside his office, New Urban Mechanics, is charged with coming up with different technological solutions to city problems. Their major constraint, as described to me by one of its members, is capital. The New Urban Mechanics will only, initially, pursue opportunities that can be tackled with a small team and lean software development. By keeping the initial cost of exploration low, the office avoids stakeholder and voter scrutiny. The corporate antibodies, arguably stronger in government than anywhere else, that would normally attack innovation don't even know change is on its way. And when change does come, it works and is affordable.

Use your brain. Alfred Sloan, the late CEO of General Motors, was known for his focus on maximizing return on investment (ROI). It contributed to his success in transforming GM, a distant second in the automotive market, to a giant within the American industry.

Despite the famed CEO's respect for ROI, Sloan periodically invested in innovative efforts that couldn't possibly be justified by the numbers alone. Sloan created a central R&D unit to develop platform technologies for GM, protected the decentralized operations of his brands, and invested heavily during World War II on the hypothesis that capacity needs would pick up. When strict adherence to ROI didn't make sense, Sloan used the most valuable tool in his management portfolio — himself.

Creating guidelines to protect innovation can work; after all, the first three steps in this post suggest as much. But at the end of the day, intuition will always play a role in management. Vision can be invaluable in forecasting where profits will flow if the world changes. So when common sense and your Excel spreadsheets don't line up, use your brain.

This is the second post in a three-part series. Read the first post here.

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