3 Major Reasons Established Companies Find it Difficult to Innovate

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New technology, change of consumers’ behavior, or aggressive emerging competition. Why do established companies often struggle to respond to major discontinuities in their operating environment? Where does this lack of strategic agility come from?

1. Bureaucracy

A bureaucratic environment prevents organizations from anticipating new opportunities. A slow decision-making process and lack of relevant information are two common symptoms.

During a talk at the London Business School, Jack Welch emphasized that ‘at GE we hate bureaucracy’ because it makes decision-process burdensome. Robert Townsend, former CEO of Avis, recommended that instead ‘all decisions should be made as low as possible in the organization’.

Bureaucracy impedes employees from spotting opportunities. This is dangerous. Ben Horowitz, a famous Silicon Valley VC, highlights that ‘free- flowing information is critical for the health of the company’. Innovations often come from the front line. If the information is too distilled, the management will miss decisive opportunities.

2. Structural Inertia

As a company grows, it develops all kinds of commitments with its suppliers, its investments, and its own worldviews. Structural inertia is a symptom of success. Everything seems to go well so the company does not reassess the situation.

Polaroid was trapped in its formula for success. As former CEO DiCamillo remembered: “We knew we needed to change the fan belt, but we couldn’t stop the engine.”. Polaroid’s worldview was that everyone needed hardcopies. The whole organization was built on this belief that was no longer true. Unable to change, the company went bankrupt in only a few years.

3. Lack of Focus

Lack of focus hinders the company’s ability to foresee opportunities of growth. Having experienced a tremendous growth from the 1990s to 2000, Nokia ended up with a very large product portfolio. Employees did not know what was Nokia’s core value proposition. They kept improving technology instead of creating a better user experience. In 2007, Nokia was competing for every segment of the mobile market from professionals (BlackBerry) to fashionable (iPhone) to low price (Asian brands).

Looking for more strategic agility, a company should reduce its portfolio. This is a bold decision that is rewarding on the long term. In 2013, Google did a spring cleaning, bringing its portfolio to 70 products. The idea is to “focus its efforts on building great products.” Apple embraced a similar move when Steve Jobs returned in 1996.

Take Away

Three main reasons impede established companies from being innovative: bureaucracy, structural inertia, and lack of focus. But large companies do not have to stick to slow motion. They can also achieve strategic agility.