Thursday, 17 March 2011

Big firm innovators: What large companies can do to be just as innovative as small entrepreneurial ones

Big companies are thought to rarely be the real innovators in an industry. Usually, radical change – whether a new technology or an entirely new business model – comes from outside the industry, and is introduced by an entrant into the field. On average that is true – research confirms it – and there are various reasons for that. It pertains to a phenomenon I called “collective inertia”; established players often seem paralysed when significant, paradigm-busting change is sweeping through their business.

Why big firms are often slow to adapt

That is because those existing players usually do not see an interest in destroying their own business and competitive advantage; newspapers were reluctant to move into on-line media because it cannabilised their existing business, traditional airlines were reluctant to embrace the low-cost model, and steel companies shunned away from minimill technology. These new technologies and business models ate into their current business and therefore they were not keen, to say the least.

There is often also a softer, almost psychological component to it. It pertains to phenomena such as the success trap, escalation of commitment, and the Icarus paradox in business. Years of continued success have wedded the firm to its own proven formula and business model, and the new, initially often inferior technology is not something they believe in and particularly want to get involved with.

Hence, we see that existing players in an industry usually are not the inventors of radical new innovations and often even late adopters – often too late… Quite a few of them do not survive the transformational turbulence in their business as a result of their own inertia.

However, Professors Lin Jiang and Marie Thursby from Georgia Tech and Justin Tan from York University discovered that there are some exceptions to this rule, and some incumbents do manage to be inventors during the stage of technological dirsruption. And that is pretty interesting, because those firms teach us what existing players can do to prevent missing the boat, and becoming obsolete when their environments change – a problem that clearly bugs many of them.

Big firm innovators

Lin, Justin, and Marie examined the semi-conductor industry, where the initial reliance on vacuum tubes was replaced by bipolar technology, which in turn was replaced by complementary metal-oxide semiconductors (CMOS). At present, that technology is under threat from nanotechnology. Using extensive patent analysis, Lin and colleagues examined which existing players did not succumb to the new entrants, and were able to contribute to the new technology. And they found three key, related characteristics:

First, the firms that were able to contribute significantly to fresh knowledge in the new and emerging domain had forced themselves to continue to scan for new technological areas. They had not just rested on their laurels, trying to make the most out of an existing technology. In spite of the technology not being under threat yet, their R&D engineers had continued to scan the environment for new, substitute technologies. And now this paid off.

Second, the firms that did manage to be inventors in the newly emerging domain had maintained a broad portfolio of alliances – specifically a portfolio of alliances that consisted of both firms that were pretty close to its current set of activities and firms that were in entirely different domains. Such a combination of alliance partners is thought to assure that the firm is exposed to really radically different things, but at the same time also to things that are more within its own familiar domain of comprehension!

Finally, the successful inventors had always maintained clear ties to sources of scientific knowledge in the public domain, by collaborating with university scientists, reading scientific publications, and so on.

Innovations usually consist of some form of recombination of other, existing sources of knowledge. The aforementioned results show that if existing, successful players in an industry force themselves to continue to access a variety of external knowledge sources – in the form of experimenting with new technologies, maintaining alliances, and accessing university sources – they can not only survive a radical change in their business but even contribute to it. Hence, do keep an active, open mind and door, and let knowledge flow in, even if you think you are currently doing just fine.

No comments: