People outlive corporations Is innovation the key?

I recently read that only a tiny fraction of corporations reach the age of 40. A couple of professors concluded this after studying more than 6 million firms. They wrote that despite their large financial resources and significant human resources, the average large firm does not last. The gist of the article was the old adage that what brought you here wont keep you here. This applies to technology companies, and we see it at Corum consistently through our merger and advisory activity.

That saying points out the value of innovation. Most significant technology innovation comes from small companies. Its not that some large companies arent excellent at innovation - Apple and IBM come to mind. To foster innovation requires that a corporation establish a foundation to support it and the true involvement of senior leadership. Why is it that most large firms fail here? One reason is that political forces develop to maintain the status quo, and middle management tries to protect the current status. Managers then begin to think the risk is lower to remain the course than to innovate or be disruptive to their own segments. If this behavior becomes pervasive and is strongly supported through compensation, annual evaluation systems, and other methods, it becomes part of the culture. In the past, IBM suffered from this until leadership missed a number of opportunities. They developed the first commercial router, however, young Cisco capitalized on it and dominated the market. IBM then developed a much more focused approach to innovation lead by prior CEO Louis Gerstner more than 10 years ago.

Even though Apple is only 35, and faced many earlier challenges, they have not been afraid of cannibalizing their own sales and putting the status quo at risk in pursuit of a possible larger wave. The iPhone did cannibalize the iPod, but it created another much larger business for Apple. The iPad also had a cannibalization impact on the Mac desktop and laptop, but is leading the tablet segment. You can point to a lot of companies that have missed the boat due to a lack a strong innovation strategy HP is one that comes to mind and can be illustrated by a number of their missteps in the last dozen years. One example was the HP acquisition of Compaq at the time the PC sector was becoming commoditized. At around the same time, IBM made the tough decision to get out of the PC business and focus on developing and acquiring high margin software and consulting businesses.

My point is that if large technology companies want to live past the ripe old age of 40, they need to formally and aggressively develop an innovation culture that rewards risk and not an NIH (Not Invented Here) culture. Another suggestion is to develop pockets of innovation throughout their enterprises as just a single center for innovation wont work. Final suggestion: have a strong acquisition strategy that looks to the thousands of early stage technology companies, some of which were started by entrepreneurs frustrated with the status quo of their former employers.

Posted by , Chairman on 10 January 2012
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