Startup Strategy – Innovation in a big corporation

We’ve heard the corporate battle cry, “innovate or die!” Countless books tell us that innovation is at the heart of our economy. Those companies that innovate prosper, while those that don’t are doomed. We accept that to be innovative, especially in a corporate sense, is akin to pure virtue. So why are large companies so awful at new and sweeping innovation?

Big companies aren’t nimble. They don’t react to changing market conditions. They become buried in bureaucracy, stuck in their ways, sluggish, inefficient. Phrases like these reflect around the media echo chamber all the time. This imagery appeals to our love of the underdog especially when considering startups versus large companies, David versus Goliath, virtue versus brute strength. While this imagery is appealing I don’t think its true.

It’s important to understand the dynamics of innovation in large companies if, when creating a startup, we hope to harness the shortcomings of large companies to become successful. Too many startups believe they can succeed by virtue of being a startup, relying on the ‘fact’ that large companies are incapable of being “nimble” or innovative. I think this is fundamentally untrue, although clearly there is something at work that allows startups to succeed. Bureaucracy and inefficiency are serious problems inside large institutions but I don’t believe this fully explains the lack of innovation.

Looking at the case for innovation in big companies, I have a unique perspective. I spent time at one of the big minicomputer companies that are frequently wheeled out as a warning to those that don’t worship at the altar of innovation. DEC, Wang, Prime, these are the scary bed-time stories of the mini computer companies that went to their grave oblivious to the changing world around them.

There were lots of interesting historical footnotes to this ex-minicomputer company that I worked for. They had long ago abandoned the minicomputer and were developing some pretty cool and cutting edge computing systems (why I had chosen to work for them). I learned that at one point they’d developed one of the first true laptops, with battery power, dual 3.5 inch disks, LCD screen, all in 1984. Their implementation of the Unix operating system was frequently hailed as quite stable and innovative. They created a new disk storage subsystem (which eventually led to their being purchased by another company). When I started at the company, one of the business units was developing stackable, lego-block-like internet appliances for ISPs. Wandering the halls I found a wireless, handheld, WindowsCE based, touch-screen LCD, “clipboard” that was being thrown away. Apparently this “clipboard” had been developed somewhere between ’97-’99 and then canceled. In short, lots of really neat and innovative things had happened and were happening in the company, yet it was still considered a minicomputer company incapable of innovation.

There’s a famous quote attributed to Ken Olson who was CEO of DEC, “There is no reason for any individual to have a computer in their home”. This quote is cited frequently in support of the innovation myopia afflicting large corporations. Again I think the soundbite and the imagery it evokes are more appealing than the truth, Ken Olson himself had a computer in his home.

[That interpretation of my comment] is, of course, ridiculous because the business we were in was making PCs, and almost from the start I had them at home and my wife played Scrabble with time-sharing machines, and my sixth-grade son was networking the MIT computers and the DEC computers together, hopefully without doing mischief, using the computers I had at home. Home computers were a natural continuum of the “personal computers” that people had at work, in the laboratory, in the military.

The original quote was aparently taken out of context where he was discussing home automation (whether a computer would *control* your home, turn your lights on and off, fix your meals, etc…). Mr. Olsen defended himself on numerous occasions saying he fully understood the importance of the PC. It could be argued that he was just back peddling, but I don’t believe it.

Minicomputer companies died, it is said, because they failed to see the “strategic inflection point”, “paradigm shift” (or pick whatever sweeping term you want) of the personal computer revolution. I don’t think the innovations occurring in the company I worked for were isolated and probably occurred in all the old minicomputer companies. These companies are filled with exactly the engineers and innovators who see these trends. So they were indeed innovating. That, however, leads to the more interesting question of why weren’t any of these innovations successful?

The foundation for my understanding of innovation in a startup versus a corporate behemoth lies mostly in an excellent business book on innovation, “The Innovator’s Dilemma” by Clayton Christenson. It is a book I highly recommend all technology entrepreneurs should read. Its the closest thing I’ve found to an engineering approach to understanding the force of innovation and how it relates to big entrenched companies versus startups.

Christenson divides innovation into two broad categories, sustaining and disruptive. His theory is that big companies are amazing at the former and terrible at the latter. Sustaining involves improving on current technology such as increasing data density on a hard drive platter. Disruptive technologies are “fringe” technologies that are usually “low end” (or at least initially so) the PC versus the minicomputer.

The key to understanding this is that large companies ignore disruptive technologies because it is the right thing for them to do. All of the business structures, processes, culture, and institutions will have been rightly structured to maximize profit and growth for the company. Disruptive technologies, by their nature, will produce little initial profit and revenue (relative to the large company) and will only cater to the “worst” low end customers of the large company.

I mean “right thing to do” from a classic business standpoint. Its the driving requirements of profit and growth. Improving the current technology by adding features, power, or general “goodness” are what allows the company to satisfy its most important and high profit customers. Clearly catering to your best customers is a good thing. A disruptive technology, like PCs during the minicomputer era, would have been interesting to the visionaries in the company but would not have satisfied the requirements of the “good” highest profit customers. Even if the minicomputer company had tried to supply this new “low end” product, all of the internal structures of the company would have been aligned against it. Not because it didn’t have the potential for great future success, but because in the present it was diverting effort from the highest profit, highest margin business, and from a “bottom line” standpoint any profit and growth would have seemed trivial.

Startups have two primary advantages. The first advantage is that the profit and growth generated by a disruptive technology, while trivial to a large company, will be quite interesting to a startup. The second advantage is that startups are directly coupled to the market for their disruptive technology. Startups will do anything to make that disruptive technology “fly”, leading to the sense of nimbleness that is really mostly borne out of desperation. Where a large company will cancel a disruptive technology project after several quarters of “insignificant” revenues, most startups will see that same income as great success and carry on.

How are the “Goliaths” toppled? Over time the “sustaining” innovation factor continues to apply to the new “low end”, disruptive technology. This disruptive technology begins to become good enough for more and more of the market originally satisfied by the large incumbent. As the disruptive technology eats at the “low end” of the big companies market, this “squeeze” forces them to focus more and more on the highest profit/margin cstomers. Eventually, the large incumbent innovates itself right out of its own market via “sustaining” development, while the new technology now satisfies all the needs of the market at a lower cost. The key is something Christenson says a few times in his book, that good companies can fail by doing everything right.

From a strategic standpoint startups should follow a few basic guidelines. These aren’t new, but I think make more sense when understood in the overall startup versus large corporation context.

  • Don’t try to build a better X, where X is something dominated by a large company. X can be an operating system, personal computer, car, whatever. I think Be Inc. was a classic example of this (great computer/OS but crushed by incumbents)
  • Don’t build something that could be a feature for one of the X above. Chances are the big company will re-implement your feature. (Apple Dashboard vs Konfabulator)
  • Create something new in a “niche” market. This something new can have amazing future potential, but it should by niche-y enough to be ignored by the large players, at least until its too late
  • Become self sustaining as quickly as possible. The lower cost structure of a startup allows the revenue from new technology to be significant. This allows the startup to enter what Christenson calls the “sustaing innovation” part of its curve. Thats where all companies want to be.

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