Why can't big companies innovate - unlike startups?
Big companies are really bad at innovation because they're designed to be bad at innovation.
Take a story plucked from the pages of Gerber's history. In 1974, the company's growth potential was waning. In order to grow profitability and fight margin pressure, Gerber executives turned towards a market they hadn't successfully penetrated for decades: adult food.
Luckily for a company adept in sourcing and processing vegetables and fruits, tens of millions of busy Americans were spending more time at work and fewer hours in front of the stove. Gerber's team knew if they could develop a quick, healthy meal for adults, they had an avenue into meaningful growth.
When Gerber launched its product targeted towards this opportunity, it flopped disastrously. It's no surprise: Instead of developing a novel line of food suited to the needs of busy Americans with distinct branding and its own distribution strategy, Gerber slapped a new label — excitingly named "Gerber Singles" — on existing pureed products and shipped them out for placement in a different aisle.
Needless to say, working Americans weren't busting down the doors at Safeway to pick up the latest, greatest flavor of Gerber Singles carrots. In three months, the product was pulled from all grocers and returned to the company.
For those who would admonish Gerber for their approach to transformational innovation, it might be wise to consider that the company did exactly what it was designed to do: create operational efficiency. This deeply-rooted tendency goes all the way back to a corporation's typical life cycle. In it's infancy, it's designed to bring innovation to the market. A start-up's success is not gauged by earnings or quarterly reports; it's measured by how well it identifies a problem in the market and matches it to a solution. If venture capitalists think entrepreneurs have identified a big problem with an interesting solution, they'll fund the start-up. If those entrepreneurs match and improve this solution, they'll see growth in revenues and, ultimately, profitability.
But that's not what life is like within a mature organization. When corporations reach maturity, the measure of success is very different: it's profit.
Once a business figures out how to solve its customers' problems, organizational structures and processes emerge to guide the company towards efficient operation. Seasoned managers steer their employees from pursuing the art of discovery and towards engaging in the science of delivery. Employees are taught to seek efficiencies, leverage existing assets and distribution channels, and listen to (and appease) their best customers.
Such practices and policies ensure that executives can deliver meaningful earnings to the street and placate shareholders. But they also minimize the types and scale of innovation that can be pursued successfully within an organization. No company ever created a transformational growth product by asking: "How can we do what we're already doing, a tiny bit better and a tiny bit cheaper?"
It's only natural that Gerber executives created a product for adults that looked and felt just like its product for children. The product design allowed them to use their existing processes for sourcing and distributing food as well as empowered them to use excess manufacturing capacity. It was product development in an operationally-efficient fashion.
This was their biggest barrier, not a lack of vision. Companies like Gerber don't struggle to identify the next great idea. It may seem like a foolish endeavor at first, but Gerber for adults wasn't destined for failure. The idea had merit, and the trends the executive team noticed were real. Just look at any smoothie section in your local grocery store. Naked, Odwalla and Innocent sell hundreds of millions of dollars of product addressing the same problem that Gerber identified with a very similar solution.
But Gerber faced the internal pressure of its organization, the need to operate efficiently, to deliver billion-dollar growth businesses every year, to satisfy existing customers — and to do all this without threatening existing net income levels. The problem wasn't the idea; the problem emerged from the relentless pursuit of incremental profit within mature organizations. It's a pursuit that drives us towards incremental wins by leveraging underutilized assets. And you know what's wrong with this pursuit? Nothing. That's the paradox.
At the end of the day, corporations exist to make money. So pursuing profit isn't a problem at all. The issue arises when corporate leaders fail to acknowledge the limits of the organizations they've put in place. They hear about the advantage of disruptive innovation or step-out innovation and decide that their organization should do "some of that." But their organizations are designed to do something else very well. Namely, what they are already doing.
For executives who want to secure growth through innovation, the answer lies in recognizing the limits of their organization and empowering groups to function with very different goals and operational metrics. To allow teams the freedom to create Odwalla Smoothies as opposed to forcing them through a mold that outputs Gerber Singles.
For those executives who aren't willing to engage admit to their organizations are built to be bad at transformational growth, the other option might as well be to give up. It worked for GameStop: the company accepted their impermanence and simply returned profits to investors in the form of dividends, achieving remarkable success in the process.
Take a story plucked from the pages of Gerber's history. In 1974, the company's growth potential was waning. In order to grow profitability and fight margin pressure, Gerber executives turned towards a market they hadn't successfully penetrated for decades: adult food.
Luckily for a company adept in sourcing and processing vegetables and fruits, tens of millions of busy Americans were spending more time at work and fewer hours in front of the stove. Gerber's team knew if they could develop a quick, healthy meal for adults, they had an avenue into meaningful growth.
When Gerber launched its product targeted towards this opportunity, it flopped disastrously. It's no surprise: Instead of developing a novel line of food suited to the needs of busy Americans with distinct branding and its own distribution strategy, Gerber slapped a new label — excitingly named "Gerber Singles" — on existing pureed products and shipped them out for placement in a different aisle.
Needless to say, working Americans weren't busting down the doors at Safeway to pick up the latest, greatest flavor of Gerber Singles carrots. In three months, the product was pulled from all grocers and returned to the company.
For those who would admonish Gerber for their approach to transformational innovation, it might be wise to consider that the company did exactly what it was designed to do: create operational efficiency. This deeply-rooted tendency goes all the way back to a corporation's typical life cycle. In it's infancy, it's designed to bring innovation to the market. A start-up's success is not gauged by earnings or quarterly reports; it's measured by how well it identifies a problem in the market and matches it to a solution. If venture capitalists think entrepreneurs have identified a big problem with an interesting solution, they'll fund the start-up. If those entrepreneurs match and improve this solution, they'll see growth in revenues and, ultimately, profitability.
But that's not what life is like within a mature organization. When corporations reach maturity, the measure of success is very different: it's profit.
Once a business figures out how to solve its customers' problems, organizational structures and processes emerge to guide the company towards efficient operation. Seasoned managers steer their employees from pursuing the art of discovery and towards engaging in the science of delivery. Employees are taught to seek efficiencies, leverage existing assets and distribution channels, and listen to (and appease) their best customers.
Such practices and policies ensure that executives can deliver meaningful earnings to the street and placate shareholders. But they also minimize the types and scale of innovation that can be pursued successfully within an organization. No company ever created a transformational growth product by asking: "How can we do what we're already doing, a tiny bit better and a tiny bit cheaper?"
It's only natural that Gerber executives created a product for adults that looked and felt just like its product for children. The product design allowed them to use their existing processes for sourcing and distributing food as well as empowered them to use excess manufacturing capacity. It was product development in an operationally-efficient fashion.
This was their biggest barrier, not a lack of vision. Companies like Gerber don't struggle to identify the next great idea. It may seem like a foolish endeavor at first, but Gerber for adults wasn't destined for failure. The idea had merit, and the trends the executive team noticed were real. Just look at any smoothie section in your local grocery store. Naked, Odwalla and Innocent sell hundreds of millions of dollars of product addressing the same problem that Gerber identified with a very similar solution.
But Gerber faced the internal pressure of its organization, the need to operate efficiently, to deliver billion-dollar growth businesses every year, to satisfy existing customers — and to do all this without threatening existing net income levels. The problem wasn't the idea; the problem emerged from the relentless pursuit of incremental profit within mature organizations. It's a pursuit that drives us towards incremental wins by leveraging underutilized assets. And you know what's wrong with this pursuit? Nothing. That's the paradox.
At the end of the day, corporations exist to make money. So pursuing profit isn't a problem at all. The issue arises when corporate leaders fail to acknowledge the limits of the organizations they've put in place. They hear about the advantage of disruptive innovation or step-out innovation and decide that their organization should do "some of that." But their organizations are designed to do something else very well. Namely, what they are already doing.
For executives who want to secure growth through innovation, the answer lies in recognizing the limits of their organization and empowering groups to function with very different goals and operational metrics. To allow teams the freedom to create Odwalla Smoothies as opposed to forcing them through a mold that outputs Gerber Singles.
For those executives who aren't willing to engage admit to their organizations are built to be bad at transformational growth, the other option might as well be to give up. It worked for GameStop: the company accepted their impermanence and simply returned profits to investors in the form of dividends, achieving remarkable success in the process.