Today's blog post grapples with Maxwell Wessel's HBR article "Why Big Companies Can't Innovate", available here (http://blogs.hbr.org/cs/2012/09/why_big_companies_cant_innovate.html).
The Irony:
When reading the article I had a few observations that could best be summed up as "ironic". A big company, due to its size should be in a superior position to innovate relative to a start up. What they lack in agility they most certainly can make up for with pure firepower. A large company would have more cash, more talent, more means of production, more distribution channels, more branding, more advertising, and all of the other things anyone could ever need to detect a problem, engineer a solution, and bring it to fruition. So they most certainly CAN innovate, they are just told not to, and this only compounds the irony. The shareholders and "the street" want large companies to stay safe, to grow revenue, protect/grow margins, and generate earnings per share. The reason this is ironic is that the population [uniquely] positioned to reap the biggest rewards from innovation are actually the shareholders who are discouraging it. This reinforces the argument made in a Whole Foods article that I analyzed earlier about customer focus. Whole Foods has gotten away from "shareholder focus" and embraced "stakeholder focus", with customers as a key stakeholders and the highest priority. If firms were less beholden to "the street" then they could conceivably usher in new growth opportunities once their investments start to yield returns. One of the tenants of American Capitalism is that it takes money to make money, and innovation usually takes money, so why not use the money to make more of it?
The Flawed Premise:
Part of the allure of the article's thesis is that it is extremely seductive to our intuition and dare I say to our naivete. There is a tremendous amount of appeal to the notion of a scrappy underdog overcoming the odds and growing into a powerhouse. Alternatively, one may view a start up as "untainted" by "the street" and able to perceive actual problems beyond the annual report to shareholders. Last but not least, also appealing is the intuitive notion that a young and small firm can be more adaptive and more experimental in its approach and as a result more innovative. All of these are valid reasons why a small firm or a start up may be innovative, but the most compelling reason is also the simplest; a start has to be innovative in order to survive and eventually thrive. Amazon, Apple, Google, Oracle, Microsoft, Facebook, and so many more companies that are inspirational to start ups and entrepreneurs were once small shops that perceived a problem and proposed a solution (the core of entrepreneurship). If you do not have the critical innovation necessary to entice venture capitalists and take your target market by storm how in the world does your business plan ever become a multi-national blue chip on the Fortune 500? Barring anomalous circumstances, a start up can not hope to compete (and win) based upon price so it must offer something that competitors can not, especially new entrants into established industries. That something that the competition does not have is the fruit of innovation.
So if small companies innovate because they must not because they can where does that leave big companies that want to innovate? Mr. Wessel used a single example (Gerber) to forge his axiom so I will use a single example to not only counter it but also demonstrate how a company can succeed if it surmounts the resistance generated by the irony explained above. My employer, CVS Caremark, is by most definitions a big company, and yet it is an innovative one. Back in 2007/2008 CVS Retail merged with Caremark a PBM to create the world's first retail pharmacy-pharmacy benefits management hybrid company. This was a grand experiment and until recently "the street" was no fond of the conglomerate and encouraged it to revert back into two distinct enterprises. The street was only concerned with financials and metrics, it was not interested in new pharmacy benefits and synergies like "Pharmacy Advisor", "90 Day At Retail", "Maintenance Choice", and so on. The street was transfixed on comparing CVS Caremark to Express Scripts or Walgreens, not realizing that neither comparison was valid, since CVS Caremark could do things that neither of those companies could hope to accomplish, as we like to say, "CVS Caremark is an industry of one". In short the street was more concerned with next quarter's cash flow instead of the long term prospects and ROI for this risky (innovative) venture. Now the shareholders are excited and now the street wants to see what we do next as we continue to innovate pharmacy and healthcare, as we continue to "help people on their path to better health". Tom Ryan (former CEO) once said in a speech that he eventually wanted people to look at CVS Caremark and say that "CVS 'gets' pharmacy, that CVS 'gets' healthcare", it's taken about 4 years but I think people are starting to finally say that.
CVS is currently in high gear for innovation. The entire company has been challenged by our current CEO, Larry Merlo to innovate. So here is CVS, 18th on the Fortune 500 with innovation not being considered a nice pet project, but an integral component of its multi-year strategy. That is just a single example, but there are more all the way up and down the Fortune 500 and beyond.
Gerber and the Entrepreneurial Lesson:
Gerber's innovation did not fail because Gerber is a huge company, Gerber's innovation failed because it did not innovate hard enough. You can not pour baby food into a larger jar and call it adult food, that is not even innovation that is laziness. Had Gerber attacked the adult food market with actual adult food it could have leveraged its massive resources to go toe to toe with Swanson in the pre-made dinners market. Gerber would have been known for wholesome and nutritious, after all who would feed their baby nutritionally void garbage right? If Gerber was good enough for your child it would certainly be good enough for you. Instead of making real adult food Gerber made bigger jars of baby food, completely missing the point of both products. Babies do not have refined palettes or teeth so they need liquified food, adults have teeth and refined palettes so they do not want mush, this is so obvious it is painful to type. I have no idea why the author decided to use this as the for why large companies can not innovate, this is a much better piece of evidence for do not innovate lazily.
While the author's point about bureaucracy, infrastructure, and "the street" can certainly add inertia and friction to innovation one example of one failure at one company does not an axiom make. I am going to take this thesis in a completely different direction and apply to entrepreneurism; go big or go home. Gerber is a warning about failed innovation not because Gerber was big but because Gerber was simply not innovative enough. Aspiring entrepreneurs try solve problems, successful entrepreneurs solve them with viable and desirable solutions. Gerber perceived the problem but delivered a terrible solution, so the axiom that I would extract from the Gerber story is to innovate thoroughly and deliver a desirable solution. Do not give the market more baby food and call it adult food; get out of your comfort zone, get outside of the box, shift those paradigms and solve problems the market has with solutions it actually wants! That is the axiom here; that is the lesson for entrepreneurs, the lesson is not that big companies can not innovate. Not only are they perfectly capable of doing so, but they are extremely well equipped to do so.
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