Fintech, machine learning, big data, automation… these are the buzzwords frequently seen on the front page of websites, newspapers and magazines nowadays. We usually associate these buzzwords with innovative startups and tech companies. Does this mean that traditional big companies are not doing enough to innovate, and are destined to be replaced? Why do we not see much innovation happening at big companies?
Bob Dorf, a serial entrepreneur and the author of The Startup Owner’s Manual, says that companies should find and celebrate mistakes in evolving their products in order to innovate and create new products that customers actually want to use.
Nowadays, a lot of traditional companies’ growth rates are minimal, and often stem from cost-cutting or mergers and acquisitions. Granted, part of the growth challenge is driven by macroeconomic factors, but in order to identify and implement new growth opportunities, companies should consider a ‘trial and error’ method. Dorf argues that big corporations operate in “execution mode”. They put great emphasis on historical figures, not only to measure their performance but also to set up future revenue plans. The problem with this approach is that it is very backward-looking and not future-proofed, especially in a world where startups formed in someone’s basement have the potential to disrupt a whole industry. A startup does not have any of that history, so it begins in “search mode”. It places emphasis on customer discovery and new product testing, where big companies don’t feel comfortable due to the perceived higher risk.
That is not to say that big companies don’t try at all. In fact, it is increasingly common to see an internal startup-like team in a traditional big company focusing on new product development (i.e. a fintech team within a big bank); however, such teams have generally seen limited success. The reasons are three-fold.
Firstly, the rulebook of a big company is usually too restrictive and complicated for these lean teams to succeed or maximize their full potential. Every new initiative must go through multiple rounds of reviews and approvals by senior management, legal, compliance, risk management, operations… the list goes on. Too many stakeholders are involved in this initial process, and everyone wants to add a few line items to the rulebook. Failure is a big taboo, so the team must be able to make the product profitable in a short timeframe and everything must be strictly done by the book to avoid regulatory visits or lawsuits.
Additionally, senior management sometimes has unrealistic expectations on the development process and the end product. They want the lean team to create something amazing with the least amount of time and cost to the company. What they have forgotten is that a truly great product usually requires tweaking based on continuous user research and iterating, and therefore may go over the budget or deadline. Senior management’s lack of tolerance for the unexpected can be detrimental to creating an innovative product.
Lastly, employees at big companies are often not incentivized enough to take the risk of supporting, sponsoring, or jumping into the unknown. This is not a huge surprise since stability and predictability are assumed benefits of working at a large company. Why should I risk my professional capital and reputation on something that may or may not work? There is sizable risk-reward asymmetry when it comes to innovation at a traditional company compared to a startup: a successful product launch at a startup can bring the leading team both wealth (increasing the value of their equity) and fame (coverage of the product by broad media). A big company, however, is restricted by its corporate compensation guidelines which limit the reward it can offer to incentivize employees and foster a healthy environment for innovation.
Every company craves for creating and owning a disruptive product. It is time for traditional companies to put more emphasis on product innovation and cope with the risk, because the alternative may even create higher risk and damage the company’s competitiveness in the long term.