The Innovator’s Dilemma – why companies still don’t get it

Why do so many Fortune 500 companies fail with their innovation programs? Because they don’t address the three things needed for success – Keeping start-up “founders” involved, transparently managing internal politics, and being patient as the business scales.

Clay Christensen's seminal work, "The Innovator's Dilemma" (Harvard University Press, 1997) posited that companies have difficulty recognizing and dealing with disruptive changes to their business model because the efficiency built to scale their primary business is so efficient it creates a significant barrier to transformative innovation.

While there has been some criticism of his methodology, since its publication in 1997 we have seen several additional examples of companies that couldn't deal with disruptions that ultimately undermined their core business; Kodak, Borders and Nokia are just three that come to mind.

Many of these disruptions are the result of Internet and digital technology, and the pace of change in those industries has spiraled into an even faster pace of change across a host of businesses ranging from hospitality to media.  For example, in just the last 15 years the music industry’s dominant revenue stream has moved from selling CD's to individual songs online to now selling music as part of streaming services like Pandora and Spotify.

The question is, since Christensen's work is well known by CEO's, how come so many companies, from the Fortune 500 on down, continue to have a woeful success rate in scaling new businesses to address innovation in the marketplace? 

Having successfully worked as an intrapreneur launching start-up businesses or channels for most of my career, including stints at 3 Fortune 50 companies (GE, Citigroup, and MetLife), I’ve seen that  most big companies are pretty good at creating new products and processes to address changes in the marketplace.  This is particularly true for companies founded on technology and innovation, such as Xerox creating the first Graphic User Interface and the Mouse (built on work done at Stanford), and Kodak inventing digital photography.

The issue most company’s face is in selecting and scaling start-up businesses or channels.  Companies (particularly those in the Fortune 500) have had groups dedicated to innovation for decades, and had the resources to buy smaller companies which threatened their core business.  The problem arises when they try to scale the start-up or new company by integrating it with existing business units built for scale with a strong entrenched interest in maintaining the core business model.  Like anti-bodies that ward off a perceived disease, these vested interests, which are measured by delivering efficiency and the yearly P&L, are deep in the organization and they fight the flexibility and resources required to scale the new business.  

One example of this resistance to change was the reluctance to add a URL to Citi Cards Direct Mail so people could respond online to a card offer.   The Direct Mail marketing team thought that if the URL was added to the Direct Mail pieces, it would suppress response, as potential customers would be unsure if they should send back the application, call-in, or go online.  It took a year of testing before the individual Credit Card business units would allow the Internet team to make this change, but within 2 years 50% of Direct Mail response came through the Internet without suppressing overall response rates.

To successfully scale new businesses and channels to address disruptive change, CEO's need to do more than staff and fund an innovation group and then mandate when it should move over to the appropriate line of business.  They must take three actions while exhibiting patience to nurture new business opportunities through their start-up to scale adolescence:

1.    Keep Start-up Management/Founders Involved - While the creators of the new business or channel may not be the right people to help scale it, they need to help guide its evolution to insure that the essence of the new opportunity isn't watered down as compromises are made for the sake of efficiency or expedience.  This is particularly true when leveraging technology and operations, which at most large companies lack the flexibility and nimbleness needed to iterate new businesses. Many start-ups within large organizations outsource technology/operations to 3rd party vendors for that very reason. As the technology and operational infrastructure are brought back in house, features and functionality can be compromised to the point of ruining the start-up's effectiveness.  Steve Jobs was famous for insisting that new products, which he was often personally involved in developing, not be compromised as they scaled, despite the economic inefficiencies sometimes caused by staying true to the original vision. 

2.    Transparently Manage Internal Politics - Managers of core businesses are often baffled when precious resources - which could be used to incrementally improve their business with a more profitable return - are diverted to the start-up. When the start-up is moved to the core business to scale, this resentment can result in under-resourcing the start-up or forcing it to work within the core business' processes and procedures.  One way to avoid this is to track and incentivize core business managers to grow the start-up, even at the expense of investing in the core business.  This was done at NBC to help raise awareness of and interest in CNBC by providing media inventory on the network. To get the Citi Cards business units to allow marketing a new debt consolidation product to their cardholders (which threatened their highly lucrative revolving balances but which were being picked off by competitor products), I moved the P&L for the new product to the Citi Card business it came from.  For example, if I marketed to an AAdvantage cardholder, the Citi Card AAdvantage business unit got the financial benefit if the cardholder took the new product.  This aligned business interests internally, enabling the business to triple in receivables in consecutive years. 

3.    Be Patient - Growth Isn't Linear- For most companies, the new business inherently will take time to become "meaningful" compared to the core business, and will have setbacks.  At Citigroup, I had a manager dismiss the growth of the Internet channel, which went from 0 to 10% of new loan originations in less than 3 years, because its impact in the company’s P&L was "a rounding error".  A few years later, the Internet was significant contributor to Citigroup's business and an anchor for its banking business.  By rewarding year over year growth, celebrating milestones, and tracking results for the new business as part of yearly financial and strategic reviews, the momentum for the start-up can continue as it matures.  It is also critical to understand that without some failure, you cannot truly innovate or scale a start-up business.  The Direct to Consumer business at MetLife took several years to scale, but when two new products were launched based on customer feedback and learnings from previous setbacks, the business saw a marked step change in growth.

As any parent knows, adolescence is a difficult time when children establish their own identity distinct from the rest of the family.  Scaling start-ups is equally difficult and companies may lose patience as core business process and procedures look to absorb and inadvertently smother the new product, channel, or process. Companies must address and overcome The Innovator’s Dilemma by recognizing that scaling is even more crucial (and difficult) than starting a disruptive innovation, and requires an abundance of nurturing, patience, and protection.  After all, only as an “adult” can the start-up meaningfully contribute to the growth of the company and offset declines in legacy businesses.