I was recently interviewed as part of a research project into corporate innovation by a group seeking to establish how large corporates could create new service and product lines. It was early in the morning, so I was at my most blunt.
Me: “Tell them not to waste their time and money.”
Me: “Corporates cannot innovate.”
Nothing ground breaking here; nothing to see, move on, move on. I’ve taken a side in one of life’s eternal arguments; I’ve occupied the space for years. Corporates cannot innovate.
Respondents to the ‘can corporates innovate?’ question usually results in people taking binary positions; of course the reality is more subtle. My less-blunt view is complex: corporates will always struggle to compete as innovators, particularly if they seek to innovate ‘from inside’, yet they can enable significant innovation – and the challenge for them is how they benefit rather than suffer as a result.
I am a shareholder. If I am honest, I don’t care if the listed businesses I invest in continue to do what they are doing or change business lines entirely (within limits of what is morally and ethically acceptable to me) – as long as they make profit. This places me at odds with the vast majority of people employed within the companies I invest in; corporates employ people who are (I hope) process experts – they should drive the hell out of the business models the company operates to create shareholder equity for myself and my fellow shareholders. They do this because, I’d always hope, they enjoy it (or the remuneration for doing something they don’t particularly enjoy adequately compensates them for the inconvenience). I don’t want livewires employed in these businesses – not livewire innovators – yes, I’d want inspiring people from the top down, but I don’t want too much free thinking.
Why? Because I invested in the business because I like the results of what it’s doing and I don’t want to upset the apple cart. I don’t want any of these highly paid executives using their salaries to indulge themselves as start-up gurus (in their heads, at least). Yes, Unilever can buy a new food line, or a new deodorant line, or even design their own – but if I read an annual report that said they’d set up a team to create an Amazon competitor I’d be upset.
My position builds from my conceptualisation of ‘innovation’. A few years into my career a guy I went to university with told me about his work in the innovation function of a major bank: they were implementing Salesforce.com across the sales teams. At that point Salesforce.com already had a $20bn market capitalisation, and I observed that I didn’t really consider implementing tried and tested software products from major vendors as ‘innovation’. I accept today that from the banks perspective it was innovative, but not innovation as I would consider it – they were making an incremental change to process (which as a bank shareholder I would have been happy to see happen), but coming from a background of innovation I felt the term was being abused. I don’t consider incremental process improvement to be true innovation – true innovation disrupts the status quo; improvements are not a disruption but an inconvenience to business as usual (no matter how the process people feel!).
True innovation requires major disruption to business processes and practices, and this means that – rather than supporting these – the vast majority of corporate entities, and particularly listed ones, will actively oppose innovative activity. Consider some examples of why resistance will take place:
- Sales team incentivisation structures. Going back to Salesforce.com, what CRM consultancy sales director in 2005, with a remuneration package based on big ticket Seibel deployments, would have been able to switch to selling the low cost, out of the box Salesforce.com option? Whilst the client’s bank balance and cash flow would have felt a benefit, his or her bank balance and personal cash flow would have felt quite differently. Similarly, corporate sales teams incentivised to sell the same big ticket items will have no desire to take several years of financial pain to sell disruptive, lower cost options.
- Earnings growth. Earnings per share has to be one of the key metrics considered by investors looking at listed companies, and personally I want to see stability (potentially with some growth) over time. True Geoffrey Moore-style from-the-bottom-up-value-chain-disrupting innovation tends to have a significant impact on the way in which companies earn, and in the short term are likely to significantly reduce earnings per share (EPS; consider the Saleforce.com versus Seibel example given previously). Only with the most understanding shareholders in the world would the CEO of a company be able to hold onto their job whilst explaining to the market why they appear to be introducing innovation that’s ruining the company’s EPS track record. I would suggest that the vast majority of CEOs do not want to have to do this, and the vast majority of shareholders do not want to hear such apparent insanity.
- I have experienced these throughout my professional career; the empire might consist of a professional and their secretary, or involve offshore teams with hundreds of operators diligently executing to improve existing processes. As a social animal, most people are externally driven – and perception is incredible important – empires ‘improve’ how executives are perceived. Having built up a position of power over others, how many executives would have skin thick enough to reduce their empires to dust in order to drive improved shareholder performance? It will take the most extreme pressures to induce such change (and we often only see this in firms who are themselves feeling the earnings impact of innovation brought to market by other players).
All business people have, knowingly or unconsciously, experienced these situations and others. The conservative, innovation-resistant agencies in a shareholder owned business are brought to bear on to resist change. However, many businesses also know that they must embrace change – the question is ‘how?’. How do I benefit from innovation, remain relevant, grow this business for my shareholders, and create long term value?
My ideas on how listed companies can innovate will be addressed in a future post.