Larry Page took over as CEO of Google in April 2011 and in July 2011 Google went on to announce the impending closure of Google Labs, the company’s experimental playground used to bring new features to users. I remember thinking “is this the beginning of the end?” As it turns out, it could well bookend disruptive innovation at the company.
I was rereading Clayton Christensen’s The Innovator’s Dilemma over the weekend that went a long way in explaining my instinctive reaction way better than I ever could. Prof. Christensen explains that large companies often fail due to incompetent managers and bad decisions. But even big companies with discipline and highly capable managers sometimes fail because they are so good at what they do. Before I go on to explain this, consider this factoid – 50 years ago, the average life expectancy of a Fortune 500 company was about 75 years, then it became 40-50 years and now it’s less than 15 years and declining. Whoa!
Here’s what Steve Jobs had to say about why great companies decline –
The company does a great job, innovates and becomes a monopoly or close to it in some field, and then the quality of the product becomes less important. The company starts valuing the great salesman, because they’re the ones who can move the needle on revenues.
Large organizations are inherently ill-equipped to introduce disruptive technologies successfully because –
- They have trained themselves to listen to their customers. That works well for incumbent technologies (Prof. Christensen calls such technologies “sustaining technologies”) but can be a great big hindrance when it comes to identifying and developing disruptive technologies because such companies are focused on the needs of their best i.e. most profitable customers. Disruptive technologies usually start out targeting either a less profitable or an entirely new customer base – both are a blind spot for big companies.
- The size of such companies is a disability in very real terms. For an opportunity to be considered feasible, they would need to tap into a much larger market. ROI for new projects needs to meet an internal hurdle rate that in absolute terms can be quite significant. Of course, a big part of the reason why is that their stock price reflects a discounted present day value of the company’s future prospects. Following that thread, more growth, higher future profits translates into a better stock price today (as apparent in Amazon’s case).
- Such companies are used to working with well thought out quantitative analyses, crisp ROI calculations, knowledge of customer behavior etc. (a learn-then-execute approach). A new market by definition doesn’t have any of these; a company can only hope to execute and launch with best guesses and discover the answers along the way (an execute-then-learn approach). How many companies do you know that would support the latter approach where failure is a given along the way? Case in point is Honda’s inadvertent discovery of the (hitherto undiscovered) North American dirt bike market in the 1960s while trying to launch road bikes against Harley Davidson and BMW’s powerful road monsters. I don’t remember their “You meet the nicest people on a Honda” campaign – I wasn’t born yet – but by all accounts it was one of the most successful campaigns ever for the everyman.
- Middle managers are conditioned to follow processes and make decisions based on well-researched ideas and failure (intrinsic to disruption) is not an option, the very definition of being risk averse. Do you know where less risk averse managers go? Smaller companies or startups.
- As a result, big companies tend to be followers not leaders in disruption, where first mover advantage is often, though not always, an advantage.
One way for big companies to get around some of these challenges is by encouraging disruption in smaller groups within the parent organization, in part because their internal hurdle rates and market projections are more in line with a nascent market. Notice that Google just turned their back on this approach. Another approach is acquiring disruptive companies but there are inherent challenges in this approach – the danger of subverting the very processes that were considered desirable, losing valuable acquired resources (such as talented employees) etc.
All of this begs the question – how do you know when your market is ripe for disruption?