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Big, established companies are often viewed as dinosaurs, vulnerable to start-ups with the nimbleness and tech savvy to overthrow them.
That’s not a realistic picture, says J.P. Eggers, associate professor of management and organizations at New York University’s Leonard N. Stern School of Business. In fact, his research shows, incumbent firms are more likely than their smaller peers to go after technological opportunities — and more likely to succeed.
In a working paper co-authored by Eggers with Aseem Kaul of the University of Minnesota’s Carlson School of Management, the authors investigate what managers at large firms need to do to foster innovation, and what makes the difference between failure and success. Eggers and Kaul write that the challenge is that when capable and established firms are thriving, the incentives to change what they’re doing are few, even though they have a high chance of getting things right. The authors also find that, paradoxically, firms that have failed before are the very ones to pursue radical innovations — but often futilely.
MIT Sloan Management Review spoke with Eggers to find out how established companies can avoid creative inertia and instead build on their capabilities to engineer the radical new technologies and ideas that change an industry.
You’ve been looking at the practice of innovation at established companies. Why are we so wrong about the roles and impact of older companies compared with their younger competitors?
The typical assumption, from 20th century economist Joseph Schumpeter’s theory of creative destruction onwards, is that incumbents only do boring, incremental things, while new entrants are the ones that dare to invest radically in new technological areas. Some people believe that that is true from a tautological perspective, that this defines an incumbent — being someone who only invests in incremental stuff.
But what we see in the data is that a large number of incumbent firms are very willing to invest in potentially radical ideas that bring in new information and new knowledge in trying to solve technological problems. And they do this to such an extent that established firms tend actually to be the ones that produce most of the radical new innovations and ideas in any given space. Simply put, established companies are effective and frequent originators of radical invention.
It takes understanding and knowledge to be able to be really innovative in a certain domain and to figure out what would alter the nature of competition in that space. The classic examples are companies like IBM or Apple. Admittedly, start-ups that spin off from established organizations may go into a brand new arena and do something innovative. But for new entrants that try to be technically and scientifically innovative without deep knowledge of the underlying technology, it’s difficult for them to go successfully down that path.
You mentioned “radical innovation,” which is what your research looked at. How did you define it?
For us, radical innovation typically involves the recombination of ideas that haven’t been combined before. We looked at it very much from an upstream, R&D perspective, so our study included any industry in which patenting and intellectual property is a reasonably significant component. We looked at medical devices, pharmaceuticals, computers, semiconductors, and automotive manufacturing.
We identified the most uncommon citation patterns in patent data as a way to identify the most potentially radical ideas. They weren’t necessarily always successful ideas, or ones that revolutionized the industry, but they represented attempts to do something radical by fusing areas of knowledge in a way that hadn’t been done before.
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For those incumbent firms that did innovate, what were the key factors that determined their failure or success?
There were critical differences between motivation, or effort, and success. We found that when firms struggled in implementing innovation, the underlying reason was that they lacked the capabilities, knowledge, and the ability to be successful in a certain arena, at least at that moment.
Paradoxically, the research shows that the motivation to try something new, to try something different and to make a more radical investment, tends to stem from poor performance, or performance below aspirations, or failure. If you look at multi-business firms whose businesses span multiple technologies, what we often see is that when they are struggling technologically in one specific area, they tend to search more radically in that particular area — even though they would be better off investigating other areas where their capabilities were stronger and then shifting their portfolio of technologies over time. Taking big risks in an area where you don’t have strong capabilities tends to produce poor results.
In contrast, highly capable firms have much less motivation to take risks because they’re already so successful. They want to take a conservative path to make sure they get returns from their investments. But they’re actually the ones most likely to gain if they tried to innovate.
So that’s why radical innovation in general is an unusual phenomenon. The firms most likely to be successful at it are the least likely to pursue it?
Yes. In the discussion about why incumbent firms fail to adopt radical technologies — which has been an ongoing research topic and the subject of many popular and academic books — this has been a fundamental question: Are these firms unwilling to do it, or are they unable to do it? What we show in this paper is that they’re certainly able to do it, and they’re typically very successful when they do it, on average.
But this motivational effect holds them back, which we tie to the fact that they are getting positive feedback that reinforces the existing behavior of the firm. It’s the same on an individual level: If you do something and it goes well, you are likely to repeat that action next time you make a choice. The thing is that if this firm is prospering, being incremental and focusing on what they currently know, they are going to continue to do that without ever trying to do the next big radical thing.
What are your recommendations, then? When established companies want to engage in radical innovation, what can they do to overcome internal inertia?
Organizations have to think very carefully about the signals they send their employees and the way they structure what they recognize, what they reward, and what they consider of worth within the firm. Incumbent firms have a big incentive to keep doing the things that made them successful because there’s probably lots of opportunity to make money doing that.
From a feedback-based perspective this makes sense: The behavior that made you successful in the first place is always going to be reinforced by that success, as I said earlier. But if you really want to adapt and be radically innovative and avoid being destroyed by the next wave of creative destruction in an industry, it’s crucial to fight against this feedback-based learning perspective. It’s about being able to invest the money and resources that you need for the short-term easy wins but also generate the long-term benefits by still looking at some more radical things. It’s about being willing at some point to say, “Yes, this worked brilliantly, but we still need to allocate some of our resources to different areas along the way to make sure we have new opportunities 3, 5, or 8 years down the road, and not just the next quarter.”
How can managers help?
We tend to attribute success and failure as a signal of the underlying quality of a person, project or idea. When someone is successful, we may think they’re really very bright and they’re going to be successful, and give them further opportunities. They may have been successful because they really are all those things. Or they may simply have been lucky or in the right place at the right time, and giving them future opportunities and responsibilities may or may not be helpful.
On the counter-side: Many good employees with good ideas may fail at a given effort to produce something innovative, not because they’re bad but simply because of the underlying element of randomness in the process. As a result if we privilege the successful ones and punish the failures no one’s going to want to be innovative because they recognize there’s a real chance that they’re going to fail.
The challenge is that if you reward successes in incremental and radical change equally, employees will all want to do the incremental stuff because the chances of success are higher. It’s just more certain because it builds on existing knowledge and capabilities very effectively. No one will want to do the radical stuff because it’s just too risky.
To get people to step forward and offer ideas that might help to shape the firm, organizations have to be a little bit more judicious in how they allocate credit and blame. This is one of the reasons why businesses have started following the medical practice of doing debriefs after significant failures and even successes in some cases: to try to understand the root causes for why something happened. If something failed, they can figure out whether they should change behavior or if they just got unlucky and can keep doing what they’re doing.
That’s a good policy. Because if we aren’t careful, we fall back on very basic human psychological heuristics that may lead us to misallocate the credit and blame for success and failure.