Can big companies be radical?

Radical innovations almost invariably come from outsiders – revolutionary entrepreneurs whose style, culture and management are inimical to large, stable organisations. Kieran Levis illustrates how these kinds of organisations encourage the kind of divergent thinking that produces dramatic breakthroughs

John Kearon is right that big companies are not good at the kind of innovation that creates new categories and markets, (see Market Leader, Quarter 4, 2010, p20). But the problem is broader than marketing science and the pursuit of short-term shareholder value.

Big companies very rarely sustain the kind of divergent thinking that produces dramatic breakthroughs. They are much better at the convergent thinking and analysis that finds solutions to clearly defined problems, and can be highly effective at incremental improvements to existing products and technologies.

Radical innovation, however, almost invariably comes from outsiders – the heretical, revolutionary entrepreneurs identified by Joseph Schumpeter a century ago as the main agents of economic progress. They do much more than dream up a brilliant new product – they develop radically new markets, organisations and business models.

In my research for Winners and Losers, I sought to establish the attributes common to businesses that had either created new markets or transformed existing ones. Of the 20 organisations I studied, the vast majority were recent start-ups such as Amazon, Google, Ryanair and Cisco. The main exceptions – BSkyB and Nokia in the 1990s and Apple in the last decade – were ardent practitioners of creative destruction. Like all market creators they had an outsider’s iconoclastic mentality.

All my market creators were driven by a radical idea that turned out to meet a big market need. For Apple, it was ‘insanely great’ products; for Google, ‘organising the world’s information’; for Amazon, becoming ‘the world’s most customer-centric company’; for Sky, breaking the oligopoly that used to control British broadcasting. Conventional wisdom nearly always dismissed these ideas as irrelevant to what ‘real customers’ wanted.

The most important attribute of these businesses was developing, largely through trial and error, a set of organisational capabilities that none of their competitors could easily copy. Nobody has ever been able to match Apple for innovativeness. For years, no other search engine was remotely as good as Google’s. Amazon survived the dotcom meltdown – when its share price plummeted from $100 to $6 – because its customer service really was the best. After a shaky start, Sky became the best-managed television company in Britain.

These distinctive capabilities enabled them to make uniquely compelling propositions to customers. If you’re the only business able to offer it, you have something approaching a monopoly for a while. That’s the prize that market creation offers, but it’s nearly always a perishable one. Sooner or later, others will learn to match the capabilities and make comparable customer propositions.

These attributes are all rare – and they’re not the only ones – but they are particularly difficult to achieve in large, successful organisations. They have too much at stake in defending the existing order against creative destruction. Their cultures don’t encourage them to question existing ways of doing things and try new ones, many of which are bound to fail.

They are optimised for execution not exploration and experimentation. They are not natural entrepreneurs.

Perhaps the most difficult attribute of all to achieve is the one I call disciplined entrepreneurialism. Few organisations, big or small, achieve this elusive balance between entrepreneurial spirit and management discipline. There’s an almost inevitable tension between the often anarchic forces of creativity and originality and those of order, efficiency and professionalism. Creative people and organisations are frequently hopeless at practical tasks, while the highly practical often lack a creative spark. Too much brilliance with no discipline means products don’t get delivered on time and costs run wild. Too much emphasis on efficiency and control crushes originality and inhibits experimentation.

Not always a paragon

Apple is now a paragon of disciplined entrepreneurialism, but in the 1980s it went to both extremes. From the start it had been a magnet for the brightest computer engineers in the country, much as Google became 20 years later, the place to work in Silicon Valley. But shortly after a sensational IPO in 1980, Apple’s co-founder Steve Jobs engineered the dismissal of Mike Scott, the CEO whose tough management style had ensured the effective launch of the Apple II, against all the odds, but had ruffled a few feathers.

Regis McKenna, a board member who had done more than anyone to burnish Jobs’s public image, later felt that this was when things really fell apart. He says: ‘Looking back, he was Apple’s last chance to institute some kind of order. After that, the culture became so overwhelming that even the toughest manager would come in to shake things up – and instead find himself two months later lounging on a beanbag. The mistake everyone makes is assuming that Apple is a real company. But it is not. It never has been.’

In so far as anyone was now in charge it was the 25-year-old Jobs, who veered between being Apple’s greatest asset and its evil genius. The company was almost torn apart by feuds between rival fiefdoms, with Jobs urging his team to be pirates and openly pouring scorn on the ‘bozos’ working on the Apple II, still and for years to come the company’s cash cow. He championed two brilliantly innovative new products which both flopped – the ludicrously over -priced Lisa was a commercial disaster and the ‘insanely great’ Mac won endless plaudits but nothing like enough customers.

Before it achieved that, there was another boardroom struggle that failed to produce an effective leader. In 1983 Jobs had insisted on appointing as CEO John Sculley, a marketing professional who never quite grasped the dynamics of technology markets. But when Jobs tried to rectify his mistake and oust Sculley, the board, exasperated by the excesses of its sacred monster, backed Sculley and in 1985 Jobs himself was ousted.

Sculley could now turn Apple into an organisation with more of the disciplines of Pepsi-Cola, but the computer industry was a deal more complex and volatile than soft drinks.

Many of his decisions were eminently sensible and premium pricing certainly helped to make Apple profitable for a while, but proved disastrous in a market commoditised by ever-cheaper clone PCs. Apple found itself marginalised by Microsoft and every year its market share got smaller. Sculley surrounded himself with professional managers rather than innovative technologists who might pose a threat to him. Despite eventually succumbing himself to the curse of the beanbag, he came close to squeezing the creative soul out of Apple.

Under his even less-inspirational successors, morale and profits sank steadily, and in 1997 market share hit 3% and losses $1.6bn. It was at this darkest hour that the former enfant terrible returned, having learned in his 12 years away how to lead creative companies. Not only did Jobs give Apple its soul back, with the help of a superb chief operating officer, Tim Cook, he built highly effective teams. Universally acknowledged as the most innovative company in the world, its supply chain management is now ranked the most streamlined in the world.

Execution versus Exploration

Only extraordinarily talented companies could risk modelling themselves closely on Apple. The beanbag may have been banished, but it is still not exactly a real company. One lesson is clear: no business can afford to let either wild creatives or hard-nosed suits rule the roost entirely.

Balanced management teams are probably the single most important ingredient in disciplined entrepreneurialism. This is often encapsulated in partnerships between complementary individuals – Jobs, Wozniak and Scott in Apple’s first flourishing, Jobs, Cook and Ives in its second; Ibuka and Morita over four brilliant decades at Sony; Omidyar, Skoll and Whitman during eBay’s growth period; Page, Brin and Schmidt at Google; and most recently Zuckerberg and Sandberg at Facebook.

It is comparatively easy for fast-growing young companies to acquire professional management: the challenge is to avoid it squeezing out flair and creativity.

Creative companies are oriented towards exploration and discovery. They make progress through trial and error, through pursuing many options simultaneously, through making lots of little mistakes and learning from them – what Eric Beinhocker calls deductive tinkering.

That is immensely difficult for mature companies, however many innovation initiatives they launch. They are optimised, not for exploration and experimentation, but exploitation and execution: they want to measure progress, eliminate redundancy and avoid mistakes. The more they are optimised for handling well-structured operational problems the less likely they are to be able to tackle major creative challenges.

Radical ideas threaten the status quo, are risky and seem to offer at best uncertain returns. The more successful the organisation has been in the past, the more the culture resists unorthodox ideas and points of view. It fails to learn.

As well as these cultural and existential obstacles to truly radical innovation, there are also strategic ones, particularly for technology companies. The author Richard Foster – when he was a senior partner at McKinsey – first showed that when the underlying technology of an industry changes, new entrants almost invariably have the advantage over incumbents. This is essentially the concept of the disruptive technology, later made famous by Clayton Christensen.

Incumbent firms concentrate on continuous improvements to the technology they and their customers know and like, on sustaining innovation. The opportunities in radically new technologies rarely look as attractive initially, and it is mainly outsiders who develop them and the organisational capabilities to commercialise them. The founders of these new firms are often individuals who leave large incumbent companies in frustration, and later become devastatingly disruptive competitors to them.

It was outsiders to the main IT industry such as Intel, Microsoft and Apple who produced most of the innovations that created the personal computer. IBM played an enormous part in making these strange toys respectable for businesses, but its PC venture was led by a maverick, Don Estridge, who refused to play the corporate game. IBM’s top management persisted in viewing the PC as a sideshow to the mainframe, and failed to see that it was steadily overturning the familiar competitive landscape, where IBM had enjoyed such enormous competitive advantage.

Shining exceptions

Fortunately there are some shining exceptions to this rather depressing general picture, and IBM is one of them. In the 1990s it developed an entirely new and very profitable line of business, namely computer services, thanks to which its sales are still significantly larger than Microsoft’s. Sony’s invention in 1979 of the now-defunct Walkman was an inspired hunch, but built on longstanding capabilities and technologies.

For four decades it was arguably the most innovative company in the world. The most extraordinary exception to the general rule about big companies and radical innovation was Nokia. In 1992, Nokia was on the ropes, an unwieldy, 130-year-old conglomerate, with 187 ill-assorted businesses, best known in the Nordic countries for its Wellington boots and toilet paper. In the 1960s it had started investing in electronics and telecoms, but 30 years later most of its revenues still came from rubber, paper and cables. After a disastrous diversification into TV sets, the suicide of its CEO, and the collapse of the Soviet Union, Finland’s biggest trading partner, it was facing financial disaster.

Powerful shareholders wanted to sell off the new-fangled, hi-tech businesses that were burning cash. But the board decided to appoint as CEO the man who had just imposed some order on the chaotic mobile phone division.

Jorma Ollila came up with a strategy that stunned them. If mobile was to realise its growth potential, it would need enormous investment and the tightest focus. Ollila decided to apply creative destruction to the whole company – ditch all those old businesses and concentrate on mobile phones. He calculated that, by the end of the decade, sales could rise nearly fourfold to e12bn. The board was sceptical, but in fact revenues hit e30bn by 2000. And Nokia became one of the top ten brands in the world.

Unlike Motorola and Ericsson, the established leaders, Nokia saw that this was something completely different from previous generations of mobile phones.

Digital technology made possible very much faster network growth, and tiny handsets, affordable by a mass market. Nokia had been the first to master this technology, but also the other capabilities demanded. This market would be dominated by consumers, wanting a variety of phones to meet their particular needs and tastes.

Nokia made itself a master of sophisticated design, branding and market segmentation. For the first time, it was a phone maker, not the network operator, who had the closest relationship with customers.

But, as happens to most innovators, Nokia became the complacent incumbent, being blindsided by new players it hadn’t considered. Even Samsung, a former subcontractor, was creeping up on it with the first camera phones and clamshell designs. Now that components and software could be bought off the shelf, the barriers to entry were lower. Nokia was no longer the leading innovator, and it was slow to recognise demand for new kinds of phones. Since then, the BlackBerry, the iPhone and Google’s Android have posed even greater challenges.

The crucial quality Nokia had in the 1990s was the ability to master entirely new capabilities, one shared by all the market creators I’ve studied who established industry leadership that lasted for a decade or more. But it’s exceedingly rare. The only companies who stand a chance of coming up with new categories and brands are those that consistently cultivate new capabilities.

Kieran Levis is the author of Winners and Losers, Creators and Casualties of the Age of the Internet, Atlantic Books, 2009. www.kieranlevis.com [email protected]

Radical innovation almost invariably comes from outsiders. They do much more than dream up a brilliant new product – they develop radically new markets      

Creative people and organisations are frequently hopeless at practical tasks, while the highly practical often lack a creative spark

As well as cultural and existential obstacles to truly radical innovation, there are often also strategic ones, particularly for technology companies. New entrants almost invariably have the advantage over incumbents

Nokia was in a position to recognise that digital technology would allow products that were completely different from previous generations of mobile phones – and it realised that tiny handsets would become affordable to a mass market