Why Large Companies Can't Innovate

I don't mean to be harsh, but why does everyone look to startups for innovation? Is it because they are small and nimble?

Maybe, but it more likely comes down to incentives at large companies.

Executives are incentivized by making their quarterly earnings targets, so their incentives dictate that they'll always take the low-hanging fruit. Innovation is generally not low-risk nor obvious.

If you work for a large company, you've probably seen brilliant ideas die a slow death. There may be initial interest, and a team may even be assigned to research the market and build a prototype. But when push comes to shove, resources are lobbed behind pumping the existing product over taking a bet on the moonshot.

Executive's incentives are set by Wall Street's expectations

This makes total sense once you realize that an executive at a large company is generally compensated much more highly when the company makes their quarterly earnings estimate from Wall Street.

If you had the choice of taking the low-level fruit of incremental change and receiving a bonus vs. taking a 50/50 risk (on a good day) for a payoff you may not see for years, would you do it? By nature, executives are often groomed to make the low-risk, consistent reward choice. That's pretty anathema to innovation right?

But it doesn't have to be like this. Bonuses could be tied partly to earnings, but could also be steered towards metrics that encourage innovation, experiments and even failure.

Number of experiments (past a certain stage gate) would be a useful compensation metric

If you put metrics in front of a human, they will do everything they can to master that game, sometimes to a fault. We're really good at "gaming the system" once we know the rules, eternal incentive machines we are...

To guard against an executive gumming up a project pipeline with bogus projects, you can design incentives and metrics that only consider product ideas past a certain stage gate like "5 corporate beta-test users identified", "successful/profitable pilot conducted in 3 markets" or "10,000 emails collected on landing page".

Google does the opposite

Google is actually a great example of a company that perhaps isn't so great at incremental innovation, but takes the moonshot principle to heart. It's a company of over 200 experiments operating at any time. Some of these like Calico and SpaceX are literally moonshots.

Now, these experiments (usually the smaller ones) can be shut off at any time ("deprecated") and the team dispersed to other products, but probabilistically, the expected value of all of these projects likely sums to far greater than taking an existing Google product (say "Search" or "Adsense") and trying to tease out and optimize every last penny out of them -- taking the Wall St. approach.

Siloed "Innovation Labs" Lack Political Capital

Many companies have tried to emulate this approach by carving out an "Innovation Lab" or R&D arm that is incentivized and compensated in similar ways. In situ, that's a step in the right direction, but these organizations often run into conflict when lobbying for resources from the greater organization because they have no political capital to parlay or trade.

Try to get legal or marketing to give you resources for a hot new product launch and you'll face an uphill battle against that very powerful 800-pound gorilla product team, you know, the one that generates 80% of the company's profits, the one that the CEO came from last year...

This broader question is a matter of culture and building in incentives throughout the organization. A profit or IP-sharing model could work that incentivizes individual employees and their departments with a greater share in the profits if they ideate and pull off a successful new product launch. In a perfect world, people could be regularly pulled to form cross-functional product teams that can garner support from the entire organization.

Incidentally, this is how most universities incentivize innovation, with the professor and research team, their department and the university as a whole retaining 1/3 of the equity and royalties from new IP generated. It also explains why engineering schools are often very slick and well funded while the history department could use a thorough dusting.

Cross-Pollination as a remedy when the fruit dries up

Because of it's open, rotational culture, Jetblue managed to innovate and completely disrupt the transcontinental US market with MINT - a hugely upgraded service and seat experience (some even come with doors). Other major carriers scrambled to offer competing products and they still haven't caught up.

Other companies, like Jetblue Airways, make a conscious effort to promote a rotational culture, moving rising star performers through a large number of departments so they take a systems approach to aviation and have context and competency in a variety of areas. That's how Jetblue's MINT product got off the ground.

With knowledge more infinitely searchable, companies are better served by hiring generalists and people who can "learn and perform quickly" over a deep specialist. (there are exceptions, but typically these are in spaces that require credentials like law, architecture and structural engineering - not exactly areas you're hiring someone to be innovative...)

The more you can promote cross-pollination, even by just merging where multiple teams sit day-to-day (Engineering next to Marketing... gasp!), the more context you'll give everyone and the better chance that you'll see a big idea get off the ground at a big company.

That's something to tell Wall Street...