Just Released Report Shows Large Companies Out-innovate Start-ups by a Factor of Nearly 3 to 1

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Outthinker (http://www.outthinker.com), a leading growth strategy consulting firm, releases fresh findings from its innovation study showing how and why large incumbent organizations out-innovate smaller start-ups and are behind 22 of the 30 most transformative innovations of the last three decades. Companies that leverage 4 advantages produce 2x growth rates, greater shareholder returns, and higher economic value added (EVA).

Outthinker Large Company Innovation Report

Large companies have historically out-innovated start-ups

Contrary to commonly accepted dogma, large companies have historically out-innovated start-ups. Outthinker (http://www.outthinker.com), the leading growth strategy consulting firm, with clients such as Microsoft, J&J, L'Oreal, McDonald's, BNY Mellon, TIAA, and Wal-Mart, just released the finding from a multi-year innovation strategy. The findings challenge several long-held, well-accepted beliefs about innovation and disruption.

Outthinker analyzed the 30 most transformative innovations over the past 30 years, as judged by a panel of professors from Wharton Business School, culled from about 2,000 submissions (see: http://knowledge.wharton.upenn.edu/article/a-world-transformed-what-are-the-top-30-innovations-of-the-last-30-years/). The list includes DNA sequencing, MRIs, e-mail, and the internet. For each we researched (a) who conceived of the idea (was it an incumbent or an entrepreneur), (b) who developed the idea into a working innovation, and (c) who scaled the idea. The results offer two counterintuitive conclusions. First, incumbents, not start-up entrepreneurs, have conceived of the vast majority of ideas (73%) that have most impacted humanity. Second, these companies then fail to scale the idea, allowing most innovations to be taken over by competitors and other external players.

On one hand, as companies grow large they hinder innovativeness. They establish bureaucracy, narrowly define tasks, tightly monitor behavior, and develop a risk-averse stance. But if they manage scale well, they experience a renewed ability to innovate because four factors come into play:

1. Scale: Larger sales forces, valuable brands, production, and distribution capabilities give them a platform on which they can scale innovations more rapidly than smaller firms. Amazon.com’s unparalleled scale at operating servers and e-commerce technology gave it a formidable advantage in entering cloud services. Its Amazon Web Services (AWS) offering grew into a $10 billion business in just seven years.

2. Capabilities: They build unique capabilities that they can leverage to give them an advantage into new businesses. For example, Disney’s capabilities around storytelling and character development, established through animated movies, gave it an advantage in entering into theme parks.

3. Innovation resources: With a core business producing more cash than it needs to reinvest, they can funnel resources (both financial and human) into new opportunities to a degree smaller companies can only dream about. The most innovative companies today invest between 5% and 20% of their revenue in innovation. Even Apple, recognized as investing relatively little in R&D relative to other innovative firms, has an annual innovation budget of over $8 billion.

4. Ability to diversify innovation risks: While start-ups must put all of their innovation eggs in one basket, larger companies can diversify. They can thereby create more predictable returns. Jeff Bezos wrote in an investor memo that “Given a ten percent chance of a 100 times payoff, you should take that bet every time.” If you can make ten such bets, you can statistically expect a 10x payoff.

A macro study of Intrapreneurial Intensity ("II"), the frequency and degree with which employees adopt entrepreneurial behavior, show a correlation between II and firm performance. Companies that increase internal entrepreneurship:

  • Grow 2x faster
  • Improve economic value added (EVA)
  • Increase total return to shareholder (TRS)

But most "Most Innovative Company" lists assembled by companies like Fortune, Forbes, and BCG fail to analyze the drivers of innovation fully. Companies that appear on such lists may grow faster but are not shown to be more profitable or more valuable than their peers. Instead, to understand what it takes to "out-innovate" the competition, requires understanding three sets of drivers:

1. People: identifying and activating would-be internal innovators (intrapreneurs who act and behave differently that entrepreneurs)

2. Structure: the formal organizational barriers that hinder innovative behavior

3. Culture: the informal norms and values that limit the freedom to innovate

Large incumbents such as Amazon, Mastercard, Microsoft, and Whirlpool, show the potential of large companies to leverage their unique scale and unlock intrapreneurship to out-innovate entrepreneurial start-ups.

Read the full report here: http://outthinker.com/wp-content/uploads/2016/11/Unlocking-Value-through-Intrapreneurship-Outthinker.pdf

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Kaihan Krippendorff
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