Many state that the development of truly new products and services cannot come from rigid bureaucracies and political games, which one assumes are typical of corporations.
This view is misleading. Established companies contribute greatly to creating and spreading innovation in society, only under different rules than those that apply to startups and research institutions.
The Death Star
Let’s start with Disruptive Innovation, the death star of any established company. The reality is that when products based on simpler, cheaper, and widely available technology hit the market with an acceptable level of quality, it is almost impossible for any established company to survive in the same form as before.
The competitive advantage that own proprietary technology once represented disappears, prices plummet, margins are squeezed and the fixed operating costs finally take a toll on the company.
Established companies should therefore never uncritically lead real disruptive trends. At least not from the core business. Do not believe the “disrupt or be disrupted” mantra without further ado. It could end in the company’s downfall.
An example? In the early 1980s, IBM had over 50 percent of the entire IT market in both the United States and Europe, and margins were annoyingly healthy. But Big Blue also wanted to lead the nascent PC industry.
The management felt that they had a very bad time, and in a panic they followed the disruption narrative to the letter.
The company with the most patents in the world decided to make the most critical parts of their IBM PC with simple commercial components plus the operating system from Microsoft. A de facto standard without significant barriers to entry for potential competitors was thus created in an industry where from before there was only fragmentation and chaos.
The consequence was that a flood of new competitors, led by Compaq, took over the market with their “PC-compatible” after a short time. The story also developed exactly according to the disruption theory. PCs, which were in principle intended to be able of performing relatively simple tasks, ate their way up in other critical segments for IBM. In 1992, just eleven years after the launch of the original PC, IBM’s deficit was as large as Ecuador’s gross domestic product and the company was on the brink of collapse.
IBM is not a tragic exception.I myself have experienced similar fates in my career.
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At the other end of the scale, we have incremental innovation, where most leading established companies are simply unbeatable. These have the resources to send their best experts to trade fairs and conferences, are used to absorbing technologies from nearby industries and are trained to quickly copy and improve competitors’ products.
In addition, the best employees jump from competitor to competitor with critical information in their heads. In some cases, such as in the automotive or chip industry, a small handful of players cover most market segments and can easily create innovative products for some customers by modifying products from other segments.
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Finally, we need to talk about radical innovation, defined as products and services that open up a whole new category, or improve performance or cut costs by several orders of magnitude. It is in fact an inexplicable myth that large established companies fail to launch radically new concepts.
There are countless examples of the opposite: Corian plastic for kitchens and bathrooms from Dupont, M1 microchips from Apple, fiberglass cables developed by Corning for telecom that made the internet possible, and the COVID 19 vaccines.
However, such capability requires strong environments with stable budgets and a top management that manages to give these environments a clear innovation mandate connected to the company’s business model over time without withdrawing support after a couple of bad quarters.
Established companies also contribute in their role as a market channel for radical innovation developed in younger companies, although this by no means usually is a smooth ride.
First, a partnership with established companies can make startups that develop radical innovations find potential customers before they run out of money and go bankrupt. In addition, larger companies collaborate every day to develop standards or infrastructure that other smaller companies can build on. The 5G mobile technology is a good example of this.
By the way, one of the fastest ways to international markets for new technologies is to include these in components or systems produced by companies with an international presence.
Mature larger companies are not hopeless when it comes to innovation.
Most of them have structures in place to create and promote it. However, measuring them all as one measures startups or companies that are in other completely unrelated industries is both wrong, misleading and unfair.
This post was first published on Shifter.no in Norwegian.
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