Balancing Large and Small Firm Capabilities

by Ralph Ohr

Balancing Large and Small Firm CapabilitiesAs outlined in earlier posts, organizations need to balance exploitation (i.e. development of existing business) and exploration (i.e. creation of new businesses) in order to thrive on the short and long term. The corresponding integration of incremental and radical innovation can basically be achieved in different ways:

Building ambidextrous and lean startup capabilities

Established organizations with larger size usually target at extending their core business by incrementally innovating their existing business model. This focus, however, often hinders them to explore new businesses, to drive radical innovation and to respond to disruptive shifts in their environment. Steve Blank puts it straight:
After growing past their scrappy startup roots, large companies trying to master disruptive innovation face the ultimate irony; “the Innovator’s DNA” that’s needed has more than likely been purged from the organization. Mastering disruptive innovation in a large company requires:
– different people
– different processes
In fact the people a large firm needs for this kind of innovation looks suspiciously like startup founders and the processes needed look like Customer Development [and Lean Startup].

In order to establish an integrated innovation capability “under one roof”, it’s crucial for established organizations to build an ambidextrous setup, leveraging explorative experimentation capabilities (including appropriate structures and resources).

Teaming up with small firms or startups

As there are very few firms being good at both exploration and exploitation activities, some innovation experts claim that established organizations should focus on their inherent exploitation strengths. Here’s Karl Ulrich‘s take to give an example:
A lot of companies suffer from intense organizational angst that they are not pursuing radical innovations, the seeds of future growth. This angst is largely misplaced. Most investment in innovation can and should be made in incremental innovation – delivering solutions to customers that are better, faster and cheaper. An existing customer base is like a rich vein of gold ore. It should be mined thoroughly and efficiently.

Two empirical truths support this strategy. First, pioneers – those that explore for new opportunities – rarely profit from their discoveries. The first on-line book retailer was the Ohio bookseller Charles Stack, entering the market four years prior to Amazon. The iPhone, one of the most heralded innovations of our time, was a nicely implemented version of touch-screen smart phones pioneered several years earlier by IBM, Palm, Nokia and others.

Second, the capabilities required to explore for truly radical innovation opportunities are almost completely distinct from those required to exploit proven opportunities. The capabilities that allow Coca-Cola to deliver millions of cases per week of its soft drinks make it essentially unable to invent an entirely new category of refreshment. That’s not bad – it just means that the company must scan the horizon for innovations developed by others that can be exploited by its considerable capabilities.

A smart innovation strategy focuses first on delivering value to existing customers, and second on carefully monitoring the exploration activities of pioneering firms. Once a new opportunity has been proven by others, the strategic innovator can either acquire or imitate. Rarely can an established firm profit from pursuing truly radical innovation, and its resources are better invested in incremental innovation and in following others.

A quite obvious approach for established firms to complement their innovation capabilities may therefore be to partner or build innovation ecosystems with small firms. This can be particularly indicated where startup companies tend to cluster, e.g. in industries favored by venture capitalists (like biotechnology or information technology) or ones where there are relatively low barriers to entry. The value of those partnerships has been put in a nutshell by Roland Harwood from 100%open:

Large + Small = Ideas + Impact

Whereas startups and small firms naturally aim at searching and validating a novel business opportunity, large organizations are primarily designed to execute and scale a proven business model. Roland Harwood also points out the benefits for either of the partners well:

Benefits for small firms/startups

The benefit for small firms is the opportunity to rapidly scale their business, which in turn creates opportunity to access new markets and build their brand through association. Often small companies have great ideas and capabilities but lack the channels, investment and infrastructure to implement them at a global scale. In addition, many growth-orientated small companies become overly focused with securing expensive equity investment which definitely has a role to play, but only in the minority of cases. Much more frequently the route to market for their products and services is best delivered through partnership with a larger organisations. Small companies can of course go it alone and become the big players of tomorrow, however the vast majority of small company exits are through trade sales to larger customers.

Benefits for large firms

In many ways large companies need small companies more than vice versa, and it certainly wasn’t always that way. Most large companies need to sustain a minimum level of growth to satisfy their shareholders, which becomes more difficult the bigger they become. This is partly because operating at scale leads to risk aversion; but also inflexibility and homogeneity that inhibit innovation. And so the innovation comes increasingly from outside – from customers, from suppliers, and from non-competing partners. If done well this becomes a much better, faster and cheaper way of innovating than through traditional methods. As well as revenue and growth opportunities, working with small companies can have tremendous uplift on other aspects of the business such as building a buzz around their brand, and creating creative and entrepreneurial opportunities for staff.

Due to these mutual benefits, more and more large companies tend to create startup incubators and engage in systematic corporate venturing activities to strengthen their innovation portfolio, in particular with regard to radical and disruptive purposes. Interestingly, research has proven corporate venture backed startups to be more successful than startups backed by independent VC firms. From my point of view, this tendency to complement capabilities and individual advantages is likely to increase in the time to come. Both, large firms and startups realize that it’s becoming increasingly difficult to innovate and succeed on their own.

Takeaway

Building lean startup capabilities and establishing partnerships with startups or small firms can be two promising, maybe even complementary ways for established companies to increase their exploration success. Depending on a particular company’s industry, culture, organization and strategy, one or the other approach may turn out to be more appropriate. Anyway, we will notice both of them to become increasingly embedded in corporate innovation management. Integrating large and small firm capabilities is the way to go!

image credit: en.wikipedia.org
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Ralph OhrDr. Ralph-Christian Ohr has extensive experience in product/innovation management for international technology-based companies. His particular interest is targeted at the intersection of organizational and human innovation capabilities. You can follow him on Twitter @Ralph_Ohr

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