“Why bother?” That was the question posed by a manager after hearing me describe how very hard it is for even the best run incumbents to successfully create new growth businesses. “If historically the success rate has been less than 20 percent,” the manager continued, “shouldn’t I just leave this game to start-ups?”
It is a provocative question. After all, markets often punish companies that diversify into non-related industries, because individual investors can get the benefits of diversification by investing in different industries themselves. Are companies similarly wasting their time — and their investors’ money — when they try to invest in innovation?
Maybe established corporations should solely focus on exploiting what already exists, leaving the creation of what doesn’t to start-ups. Of course, not investing in innovation ultimately will consign a company to failure, but hey, that’s what creative destruction is all about.
There is no doubt that the innovation struggles of incumbents lead to significant waste. Companies spend billions of dollars developing fatally flawed products and services. They give advertising agencies billions more to convince people to want things that they really don’t.
An inefficient incumbent innovation market has spurred the ascendancy of the venture capital industry. Venture capitalists earn substantial fees attempting to fix this market inefficiency by providing capital to startups. Similarly, growth-seeking incumbents pay investment bankers handsome fees to advise them on acquisitions to plug the growth holes created by their innovation struggles.
However, we strongly reject the view that incumbents should eject from the innovation game. Incumbents have tremendous assets at their disposal. They have whip-smart developers with ample resources to invent cool, new things. They have economies of scale that can help them operate efficiently. They have partnerships that can help accelerate the development and deployment of new growth initiatives.
Read the rest on Scott's Harvard Business blog, Innovation Insights.