Too Big To Innovate?


 


A number of years ago I was asking the President of Coca-Cola in Canada about their new product development program and I got a very interesting and somewhat surprising response.  He told me that they were too big to innovate but instead had a group that spotted trends and innovative brands in the marketplace and either copied them or bought them.  He said their competitive advantage was in their distribution system and they were confident they could either come with a “me too” item and thru the power of their system overpower the innovator or else they would buy them.


 


Recently while reading Amanda Lang’s excellent book, The Power of Why, I go to thinking about why it was so difficult for large companies to be innovators.  When you stop and think about it most companies when they grow to be very large firms cease to be innovators and become refiners of innovative products be it their own or a competitor.  It could be argued for example that the largest company is also the one biggest reputation for innovation, Apple.  However Apple in my opinion, has ceased to be an innovator in electronics but rather is now simply refining their innovations.  iPhone 5 is not an innovative new cellphone but rather a refinement of their existing item, likewise the latest iteration of the iPad is a refinement of their tablet not something radically new and different.  Hence the criticism of Apple for their lack of new products and analysts tying this failure to their declining share price.


 


Apple is not alone in this respect.  If you start to drill down into the “innovation” of other large perceived leading edge firms like Google and Facebook or Consumer Package Good firms like P&G, Diageo or Coca-Cola you find that the vast majority of their “new” items are not things they developed themselves but rather things they acquired by buying other firms.  Whether it is Google acquiring companies like You Tube or Facebook acquiring Instagram instead of developing their own app you find the vast majority of large companies even in markets noted for the need for innovation are not in fact developing or even allowing innovation within their own firms.  The question then is why?


 


Here are, in my view, some of the reasons for this phenomenon:


 


Organization Structure:  As an organization grows its structure becomes more and more what the military would term a “command and control” structure.  There is less cross fertilization of ideas across the organization and more development of organization silos that do not allow for outliers, people who buck the system.  The net result is the famous outside the box thinking is not only discouraged but in fact beaten down and out of the system.  Ms. Lang in her book for example cites the inability of Microsoft to capitalize on innovative new ideas that were initially developed internally but could not be taken to fruition because they crossed silos in the organization and ended up being strangled by arguments as to who would assume responsibility for the project.  The net result was a smaller firm was first to market and was seen as the innovator and in a lot of cases acquired for a huge sum by a large firm.


 


Politics:  Years ago I worked for a predecessor of Diageo, the world’s largest beverage alcohol company, IDV who were praised for their innovative new product development program.  When they started the program they solicited new concepts from anyone in the organization and trumpeted the fact that anyone from a production worker to the Chairman could submit new concepts to the New Brand Development team and they would be evaluated and concept tested.  They were flooded with new brand/product ideas from all areas of the organization and very quickly had to put a filter on what ideas they would prioritize for testing.  Unspoken was the fact that the first filter they applied was who submitted the idea.  Not surprising perhaps was the fact that all Senior Management ideas received top priority and those from lower down in the organization failed to pass the initial screen.  Even more telling was what happened once the Senior Management concepts were initially consumer tested and failed.  Rather than simply abandoning the concept they would go back and rework it.  I know in one case they reworked one concept that had bombed in 4 different tests, including at least 3 market tests before abandoning it.  It was an idea from the Managing Director of the company and in the end it was only killed off when he retired.


 


Corporate Culture:  There is a lot of talk about the need for “out of the box” thinking in large companies but there are not a lot of senior managers or organizations that actually embrace the concept.  Instead one most often encounters the famous “ya buts” as in “ya that is a great idea but we tried something like that in 1987 and it didn’t work out”.  In addition managers are taught to focus on a few things and do them well.  This inevitably leads them to narrow the scope of their work rather than expand it and to narrow the corporate mission rather than expanding the range of their business.


 


Short term financial focus:  One of the truisms is that public companies are less likely to take risks than private firms and most big companies are public firms with public reporting requirements.  They are continually looking at what they have to report to “The Street” or “The City”.  When I worked at what is now Diageo we used to say our short term plan was the next quarter and our long term plan was the fiscal year. 


 


More often than not new ideas and certainly new brands are an expense in the initial years rather than a profit contributor.  In the past I have seen new brand/product development programs budgets cut as the year went on because of a need to make a Marketing Department number.  I have also seen unrealistic goalposts established to measure success of new brands such as the need for a positive contribution to the bottom line in their test market and/or first year of rollout.


 


History shows that innovation is the key to success over time for firms so are large firms destined to fail? 


 


Not necessarily, they can as I suggested at the start, buy their innovation.  If you look at what a lot of the leading firms in a number of fields are doing you see them purchasing their innovation.  From firms such as Google, Facebook and even Microsoft and Apple to consumer packaged goods firms such as Coca-Cola you can see obvious trend here.


 


Likewise you see them doing what the President of Coke suggested to me; they line extend their existing brands into emerging new categories and use the strength of their existing business and brands to coopt the smaller brand.  We talk a lot in marketing about the benefit of being the “first mover” but this is not important for large companies.  What is important is that they identify and capitalize on an emerging trend before it becomes too big for them to copy or buy.


 


What it also says however is that if you want to be an innovative marketer and brand builder you are going to have a difficult time doing it within the confines of a large company.  This is why I suggest that as one climbs the management ladder in large firms you see less and less innovative thinking because for the most part it gets driven out of the company and those who are truly creative and innovative have left to start their own firms.

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