Why is it so hard for big companies to successfully innovate and launch new businesses? This has been one of the most popular questions in management theory for decades. Despite deep pockets and armies of innovators, big companies still fail 70% – 90% of the time, making their odds of new business survival no better than micro-businesses and startups. Consider that for a moment: multi-billion dollar companies with tens of thousands of highly trained, well-resourced employees have the same batting average as newbie “Mom and Pop” restaurants, flower shops and dry cleaners. Thomas Edison had this problem. Google has this problem. Every big company has this problem. What’s the deal?
The biggest source of frustration cited by veteran corporate innovators is… the parent company. The big, rigid, highly structured innards of a corporate machine are bad places for small, fragile innovation efforts that need to be fast and nimble. This mismatch between the needs of big mature parent companies and their small, new innovation efforts is the oldest chestnut in the field.
Despite this consensus, most big companies still have a blaring capability gap when it comes to launching new growth businesses. They simply have no systematic way to manage small, early businesses that need lots of permanent operational autonomy.
Wait a second (you may be thinking), big companies have tons of incubators and accelerators for growing small disruptive projects away from the core. Well… yes, they exist… but no, they don’t typically get the job done.
This diagram illustrates the capability gap that’s been the Achilles heel of big corporate innovation:
Large companies like to be highly integrated when it comes to operational processes. There’s often efficiency in unifying corporate systems to create consistency and to eliminate redundancy. So when businesses don’t need special autonomy, they’re easily managed through the “business as usual” ordinary processes of the corporation.
When big businesses need temporary autonomy, there are often large corporate reorganizations while a mega-business is transitioned from one part of the org. chart to another. Similarly, large acquisitions are often given a one or two-year “grace period” during which they’re gradually merged with the processes of the acquiring company so the transition can be eased.
When small, new businesses need temporary autonomy, they’re often managed within a corporate incubator or accelerator. Not all big companies have incubators or accelerators, but it’s become relatively standard in the Fortune 500. Sometimes incubation groups are centralized, other times they’re run separately by major business units. The autonomy they provide new businesses is temporary, with the goal of ultimately “transitioning” those businesses out of the incubator and into the parent at some point of maturity.
The challenge with corporate incubators and accelerators is, despite being typically designed to create new “disruptive” growth innovations, the overwhelming majority of these projects fail. Instead, corporate incubators tend to produce highly incremental innovations that are closely tied to the parent company’s core (not the groundbreaking blockbusters they were supposed to hatch). While disruptive growth opportunities are funded by incubators, they typically fail to transition back into the parent company and are instead shut down or spun out in a fire sale.
What should companies do to create new growth blockbusters? The first thing to remember about these businesses is they usually need high amounts of permanent autonomy, not just a little temporary autonomy. By definition these opportunities are usually ill-suited within their parent companies, which is why they’re so attractive in the first place – they break the mold. Often they’re designed to compete with the parent company itself, as a hedge against unorthodox competitive rivalry. While these are the growth efforts everyone wants, big companies lack the management structure to nurture them.
Specifically, big companies overwhelmingly lack an organizational structure to manage portfolios of small, early businesses that require permanent autonomy. These businesses aren’t going go be transitioned back into the parent someday. They need perpetual autonomy, and while many companies have solved this management challenge in the past, almost none have created processes to do this repeatedly as a matter of practice.
This isn’t to say big companies never successfully manage small new projects with perpetual autonomy. Actually, companies used to be far better at this than they are now, and some companies are even remembering how to do it all over again. However the exceptions are a rounding error compared with the rule, which is worth restating yet another time: big companies don’t know how to manage small innovation investments that require permanent autonomy.
…And this is precisely the capability needed to consistently produce the high growth, blockbuster new businesses they’ve been trying – and failing – to replicate for a century.
It isn’t “easy” to create the right management structure to let big companies manage small, new disruptive business units with permanent autonomy. However it can, and has, been done many times with great success. What’s far harder is for a big company to miss its growth goals by stuffing these innovations into the wrong org. structures and watching them die like flies year after year.
Big companies don’t lack talent, creativity, persistence, expertise or resources. They’re just trying to have it both ways – they want huge new disruptive businesses, and they also want to pretend existing management structures will get the job done. Meanwhile those who continue to face reality and create the capabilities for managing portfolios of permanently autonomous growth initiatives will leave them in the dust. Fixing this problem isn’t rocket science. It isn’t even a mystery. The biggest bottleneck for big company growth is a silly org. chart gap. They’re simply standing in their own way.