Corporate Innovation Challenges

Christensen’s classic book The Innovator’s Dilemma (1997) shared that it is almost impossible for an already-established business to drive change. The winners in disrupted industries, according to his research, were almost always insurgents or young businesses that succeeded by attacking powerful market players. For more on why disruption is important read our blog Disrupt or be Disrupted.

Despite having many advantages over a startup, the research indicated that major businesses lacked the entrepreneurial spirit to start new enterprises. There can be no doubt that large businesses have had a challenging time responding to new firms that violated industry norms.

Why Large Corporations Struggle To Innovate

Steve Blank is a serial entrepreneur and the co-author of The Start-Up Owner’s Manual, as well as the father of the “lean start-up” movement. He teaches entrepreneurship at Stanford, has developed the content for the NSF’s I-Corp Program focused on the commercialization of university research, and delivers training to corporations. He has a deep understanding of how the innovation process works and cites three major reasons why established companies struggle to innovate.

Established Firms Must Execute An Established Business Model

First, Blank says, “the focus of an established firm is to execute an existing business model, to make sure it operates efficiently and satisfies customers. In contrast, the main job of a start-up is to search for a workable business model, to find the right match between customer needs and what the company can profitably offer”. A start-up is about finding a solution to a problem that helps a customer achieve a higher level of outcome. It’s about identifying how to turn something from an idea into a product that customers will buy.

New Business Models Are Inherently Uncertain

Second, finding a viable business model is not a straightforward analytical procedure. It necessitates iterative experimentation, engaging with a large number of prospective consumers, trying new things, and making modifications, as necessary. Discovering a new business model is inherently dangerous, and it’s more likely to fail than succeed. Established firms, on the other hand, have little tolerance for risk and therefore want their new businesses to be profitable in a predictable way. Managers in an existing infrastructure usually do not iterate using a divergent group of experiments because of the typical negative perception of failed experiments within a core business unit. The risk of innovations increases when established business units launch products without customer discovery and experimentation. Watch our discussion on Uncertainty for more information.

Internal Entrepreneurs Have Unique Skills

Finally, Blank shares that the individuals best suited to search for new business models and conduct iterative experiments aren’t always the same executives who succeed at operating existing business units. Internal entrepreneurs are more inclined to be renegades who dislike following norms, question authority, and have a high tolerance for uncertainty and ambiguity. Instead of appointing entrepreneurial managers to lead innovation processes, major corporations frequently select high-potential managers that have demonstrated execution skills.

Blank’s Five Challenges Of Corporate Innovation

Steve Blank’s bottom line is that launching a new business, no matter how compelling the original concept, is quite different from running an established one.

He has identified five challenges facing corporate innovation:

1. Challenge One: The web has changed everything.
2. Challenge Two: Large companies are dealing with startups that are funded with unimaginable capital.
3. Challenge Three: Investors willingly fund startups to do anything on day one. Anything. Including breaking the law.
4. Challenge Four: In a startup, 100% of the company is focused on innovation and entrepreneurship. In a large corporation, 99% of the company is focused on execution.
5. Challenge Five: In a startup, if you win, it’s a payout of billions of dollars. In a large company, for the individual, there is no such payout.

There’s no question that innovation is essential for large corporations. But it’s also clear that they face significant challenges when it comes to developing new products, services, and business models. Established firms must execute an existing business model, which can be a hindrance when trying to innovate. Additionally, new business models are inherently uncertain, and launching innovative products requires unique skills that are often not suitable for executing current business models. As a result, major corporations frequently struggle to keep up with the ever-changing landscape of technology and consumer behavior.

By understanding the five major challenges of corporate innovation, businesses can take steps to ensure that they’re better equipped to innovate and thrive in the future.

How Large Corporations Overcome The Challenges

The conventional belief is that large, established businesses can’t compete with nimble start-ups. It’s true that corporations have had trouble in the past. However, corporations are challenging this notion by successfully launching new businesses within their larger structure. There are four factors that have helped successful corporations complete this inflection to internally develop innovations.

Four Factors To Overcome The Challenges

First, they establish a strategic intent to pursue two potentially competing goals, efficient execution of their current business model and exploration of innovations directed at new markets.

Second, they apply four innovation methods: (1) Jobs-To-Be-Done (JTBD) model to recognize consumer problem stacks, underserved needs, and viable solutions to these stacks (Watch Jobs to be Done: Part 1 and Part 2) , (2) incubation of a business model hypothesis to determine which ideas may become successful new products or businesses, (3) scaling the innovations, and (4) managing an innovation portfolio strategy.

Third, businesses integrate an ambidextrous organizational approach that distinguishes the exploratory projects from the operational business. Many people believe that corporations become victims of disruption because of innovations they do not see coming. The reality is that disrupted firms like Kodak, Nokia, and Blockbuster all saw the disruption coming and had the technology assets to compete against the disruptor.

Fourth, they develop a distinctly new type of management structure to use innovative methodologies to achieve the company’s strategic intent. These new types of managers are excellent at adapting to change and avoiding the problems associated with innovating within a big corporation. They effectively collaborate with senior management to gain approvals for their work and deliver innovative business models and products focused on organic growth.

JTBD, Incubation, Scaling, And Portfolio Strategies – Entrepreneurial Methods Being Adopted By Corporations

A wide range of methods has been developed to support innovation, including JTBD, creative thinking methods, ideation, incubation, design thinking, lean startup, scaling, portfolio strategy, and business model development. Four methods are particularly important to corporate innovators:

JTBD

The process of innovation is about developing solutions that address unmet customer needs. This requires the identification of jobs to be done by customers, and then the development of products that deliver solutions to underserved customer needs.  Starting with clearly defined customer job requirements helps the innovator focus development efforts on the vital metrics used by customers to make buying decisions.

Incubation

Incubation is the process of validating a business model hypothesis. Incubation begins with a set of hypotheses about the customer’s desired outcomes, the market, and the business model. Innovators evaluate these assumptions with low-cost experiments and iterate until they identify a validated business model, pivot to a new model, or close the development project. Experiments help innovators to analyze customer responses to minimally viable versions of the business model so that innovators can quickly learn and adapt their development efforts. A rigorous set of business experiments can be used to reduce uncertainty around the development of innovation. The desired outcome is to reach a validated low-risk business model to launch and grow the innovative product.

Scaling

Scaling is the third method that is used to turn a verified business model into a sustainable, revenue-generating product. New ventures need access to existing customers and the capabilities of the company. Scaling also requires access to company financial resources. The challenge is to define the right organizational structure and process to efficiently move the innovation from ideation to commercialization. A new type of manager, who is interested in innovation methods and has a network of relationships with functional managers, is often helpful in removing barriers and getting approvals for the innovation.

Portfolio Strategy

Innovation Portfolio Strategy enables a company to have a portfolio of businesses at various stages of maturity, some experimental, others mature profit engines. The key is to separate early-stage ventures from the core business to enable both units to execute strategies appropriate to their maturity. They share a common strategic aspiration but require significantly different operating principles to be successful.

Examples Of Corporate Innovation Success

Nvidia and Microsoft are two examples of corporate innovation success.

NVIDIA Innovation

Nvidia recognized the threat of being trapped in a rapidly commoditizing PC market. The company invested in turning itself into an AI firm even as its market share began to plummet. CEO, Huang realized that Nvidia’s profitability would decline if the business did not pivot. Nvidia’s technology was focused on enabling a computer’s graphic capabilities, and they sold their products to PC makers like Dell or HP.

Chip manufacturer, Intel combined a similar graphics technology with their own core processor technology to deliver a directly competing product that eroded Nvidia sales. Nvidia would have entered a stage of decline without the advent of an innovation pivot.

Financial analysts were skeptical of the AI pivot until the company’s performance suddenly increased sharply. Nvidia has seen significant growth in recent years.

Microsoft Business Model Pivot

in 2015, Microsoft was the world’s largest software company and dominated the personal computer market. It seemed like Microsoft could do no wrong. But in June 2015, Microsoft announced it would lay off 18,000 people. It also announced it would take a $7.6 billion write-down on Nokia devices, which it had acquired the previous year for $7.5 billion. The message was clear: Microsoft was in trouble.

Microsoft CEO Satya Nadella changed the company’s focus away from devices and services after he was appointed as chief executive in 2014.

The following year, Microsoft announced a major business model pivot. The company would now be focused on selling services, not products. This meant Microsoft would be selling subscriptions to its Office 365 productivity suite and its Azure cloud computing platform, rather than one-time licenses for its software.

This innovation of the Microsoft business model has been successful so far. Microsoft reinvented enterprise email with its Office 365 online service, deliberately disrupting its own installed base of exchange servers to create a new suite of product offerings. The company had to overcome the risk of cannibalizing its own product line. In order to make this shift, Microsoft had to completely change its go-to-market strategy for its technology stack, and the company needed to develop new skills in cloud computing and establish new relationships with customers.

The NVIDIA And Microsoft Advantages

Both of these established firms realized that they had advantages compared with disruptive new ventures. They both had resources and capabilities they could leverage, and both had a strong financial position, highly capable people, scalable production capacity, extensive customer bases, and other assets that were beyond those of even a well-funded early-stage firm.

Key Takeaways

1. Corporate innovation is disadvantaged by management structures optimized to deliver consistent profitability from core product lines.
2. Effective managers of innovation exhibit capabilities that differ from effective managers of core business units.
3. Corporations can effectively innovate and generate significant organic growth when applying effective innovation practices and management structures.