Innovation Isn’t Tied to Size, But to Operating Rules

I have to admit that I see red whenever I see people pick on big firms for not being able to innovate, or celebrate startups alone as “getting it”.

I teach and advise entrepreneurs (from Stanford, in Silicon Valley, et al) and I’ve advised and worked with some of the best global Fortune 500 firms in the world. I’ve been an operating leader on both sides, unlike so many who comment on this topic. From now 20+ years of operational experience in the trenches , I can say with 100% confidence that either point of view is a form of ignorance and bigotry.

This piece which I first shared this morning on the Harvard platform address the bigotry head-on and pointing out that the bigger need is to figure out how to be adaptable to market conditions.

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You can find plenty of people who disregard bigger enterprises, stating they are not the future. Plenty of people — including on Harvard’s blog — espouse the theory that big companies can’t innovate.

This argument is both old and wrong. Joseph Schumpeter, the noted economist, said — in 1909 — that small companies were more inventive than large ones. But then, in 1942, Schumpeter reversed himself and argued that big companies had more ability and incentive to invest in new products. Today, there’s a similar bias; people assume that small companies are creative and big firms are slow and bureaucratic. A look at any performance measure shows that innovation can come from either size, and that both arguments are oversimplifications.

The key for every firm — regardless of size — is to figure out how to consistently create value in a demanding, ever-changing market. That is hard no matter what size you are, no matter what industry you’re in.

If we’re to actually get better at innovation, we need to understand the operating conditions that lead to it and move past the bigotry and biases. To do so, let’s look at two distinguished firms side by side to see how innovation is entirely independent of size and more a function of different operating rules.

IBM and HP are two amazing companies with long and meaningful histories. Both CEOs are notable in what they have done, and are doing to lead their companies and both companies rank highly on the Fortune 500 List. HP is #10 on the 2012 list, and IBM is number 19.

At HP, CEO Meg Whitman has had the unfortunate situation of following a string of CEOs who’ve had short runs at the company and appear to have moved the company in the wrong direction. That said, her first decision when she returned was to “stay the course”; that involved keeping its PC-making personal systems group because that “product line allowed better supplier cost negotiation with Intel, Seagate and others.” The logic was “together we are stronger”. Another of Whitman’s first actions was a cost-cutting exercise to “fix” HP. She aimed for 29,000 employee cuts, which would bring the number of HP layoffs to 120,000 over the past decade. And earlier this month, she shared plans for revenues and profits to decline for another year to then return to growth in three years, with the key to the turnaround being “stability”.

IBM has gone through its own turmoil. Back in 2002, when Sam Palmisano took over, IBM had four main businesses each organized on a global basis: hardware, software, services,such as back-office outsourcing, and personal computers. (The parallels to HP can easily be seen). They focused on a shift that was described as moving “the center of gravity” away from IBM. Customer-facing teams around the world were asked to deliver IBM’s solutions in myriad markets. To help frame the thinking of these dispersed IBMers, a three-day, 24-hour on-line town hall was held for some 150,000 employees — IBM called it a Jam — to define the values by which IBM would be operated and its people held accountable. IBM’s Smart Planet Initiative is said to have come from these jam sessions involving 200 universities from 40 countries.

The new CEO, Ginny Rometty has been quoted as saying that IBM believes it needs to persistently reinvent the value proposition and “take new things on.” And the CEO sees enabling a culture of collaborative innovation as key. “Culture,” Rometty has also said, has “become the defining issue that will distinguish the most successful businesses from the rest of the pack.” And “strategic beliefs may be more important than strategic planning when thinking about how you keep the long view,” she said. “Clients say, ‘What’s your strategy?’, and I say, ‘Ask me what I believe, first.’ That’s a far more enduring answer.”

Innovations are not a function of size or even industry-specific strategies, but an embodiment of a set of ideas.

Let’s go through the key distinctions as evidenced by HP and IBM and how the distinction between those ideas plays out in today’s Social Era:

1. Trying to Preserve Market Position vs. Cultivating the Ability to Adapt. While it’s true that size once created competitive barriers and correlated with market power, it no longer does. HP holding onto its PC division because it will help them manage supplier negotiations suggests that they are trying to preserve a cost position, rather than innovate on value. Research shows that what was once a sustainable competitive advantage has shifted from 30-40 year arcs to 12 years in most industries, and five years in the tech sector. Instead of worrying about power over their suppliers, HP needs to be focused on leaping to their next opportunity, which is what IBM persistently does. Organizations must acknowledge that any advantages are short-lived, and the thriving business is one that figures out how to persistently reinvent their product lines, and business models.


2. Seeing People as “Production Units” vs. Essential to the Success Equation. As HP continues to burn-n-churn people, they are signaling that people are cogs in the machine — dispensable and easily replaced. Imagine what that does to recruitment, let alone energetically to the people who work there? In the Social Era, the greatest asset isn’t the stuff you lock up — like the building or manufacturing capabilities — but the people who walk out the door each night still thinking of creative solutions and ideas that will make a difference. The role of leadership is to unlock that talent, just as IBM has done when they jointly built a shared understanding of “why we’re here” and connecting people through purpose. Culture, Talent, and Purpose matter crucially when what you are making is a function of creativity and ideas. Who we are is what we make, and if we treat talent like Kleenex, innovation doesn’t happen.

3. Organizations are Open to New Ideas vs. Closed. A vast portion of our economy is now freelance (the US range is between 45-50%), which shows that “work is freed from jobs.” In all the examples I give about Social Era, it’s clear that value can be created independent of “a job” and by the very way we structure innovation, we can pull in ideas from anywhere. By engaging with others — regardless of whether they work for or in our firms — we engage new ideas. I’ve written extensively about this, and so have others, so I’ll avoid repeating the case studies here… but the crux of the issue is that organizations need to stop thinking of who creates value as the people who work “for us.” Often new ideas and innovations can and do come from outside the perimeter of an organization — especially from people who, without vetting or permission, create unexpected value. Open is more than a way of thinking about crowdsourcing or open innovation, it’s a way of thinking about who is allowed to create value. IBM embodies this as their Smart Planet, Watson, and digital initiatives show (comprising about 20% of their revenue stream); HP continues to limit who is allowed to create value for the firm.

Here’s the bottom line.

IBM has recently reached the highest stock valuation in its 100+ year history. HP, on the other hand has lost 35% of its value since its new CEO and over 70% since 2010 — over $90 billion of value from its peak.

These outcomes are a result of a set of principles, not the commentary of one industry titan outsmarting another in product moves. In truth, strategies change, market moves happen, and industries change. But if an organization knows what principles of innovation work, then innovation follows — regardless of size.

It seems that HP believes one set of ideas and IBM another. This makes HP more a patchwork of people and products inside some corporate buildings, and IBM more a centrifugal force. Which is not to say that one will inevitably continue to thrive and the other decline. But it is true that the organizations using the right operating principles will continue to thrive.

 

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As is always true for my writing that I create with my editor over at Harvard, please leave comments there so I can manage 1 conversation. This honors the work I do with Sarah Green AND preserves my sanity. ;-)

http://blogs.hbr.org/cs/2012/10/innovation_isnt_tied_to_size_b.html

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