Innovation is an over-rated distraction

Daylight filters through the glass structure in this interior view of the Confluences Musee which is located on the southern tip of the peninsula where the Rhone and Saone rivers join in Lyon December 23, 2014.

Blue sky thinking is not always the answer Image: REUTERS/Robert Pratta

Daniel Mahler
Partner and Head, Americas, Kearney
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This article is part of: World Economic Forum Annual Meeting

Desperate for organic growth, many big companies are now trying to innovate like small startups. It could be their biggest mistake.

Yearning to innovate like far smaller companies is a rational response to what is happening in the marketplace. Across many consumer categories— be it beauty or beverages or food —the great growth stories increasingly seem to belong to small, nimble players. Size, once an unquestioned strength, now feels like a liability. Access to prestigious retail channels, for example, has traditionally been a prime source of competitive advantage for the biggest players in consumer.

But in the digital age, even the smallest competitors can sell direct to consumers online, via an ever-expanding proliferation of channels. Meanwhile, their small scale and entrepreneurial leanness provide the liberty to fail fast and often, bringing lots of fresh ideas to market.

Storm clouds over blue sky thinking

Many large companies have responded by trying to reinvent their R&D, setting up firewalled organizations with the freedom to behave like a startup, or building a branch in Silicon Valley, so their managers might breathe that rarified air and suddenly become pace-setting entrepreneurs.

Large companies increasingly divert their most creative talent into “blue-sky thinking” and “bubble-up innovation”, or try in vain to recruit and retain innovative thinkers, hoping that lightning will strike to forge breakthroughs the company can leverage to lead (or even transform) its markets.

However, it is not a large company’s nature to change direction quickly, just as an elephant cannot fly like a sparrow. Of course, it is also true that the sparrow cannot charge like an elephant. Innovative startups often struggle to commercially scale their innovations and sustain profitability over time.

The reality is: big and nimble rarely coexist. When big companies try to innovate the result is often little more than incremental improvement to existing products, resulting in a proliferation of line extensions that only increases complexity and bureaucracy, making nimbleness all the more elusive.

There is another choice. Don’t even try to be innovative. Admit that your attempts at innovation have been more a distraction than a growth panacea.

Lessons from big beer

A few large companies now concede that innovation is not and never will be their competitive strength. They focus instead on what they truly do best. The archetype of this approach is 3G Capital, the powerful private equity investors behind global beverages powerhouse AB-InBev and the mega-merger that formed food giant Kraft Heinz.

3G is great at efficiency. Across the companies in their portfolio, they streamline decision making rules while taking away the pressure to innovate, choosing to grow through overwhelmingly superior execution, cost efficiency and scale rather than through disruption.

For example, while many big players in the beer industry have been rattled by the rapid proliferation of small craft beer brands, AB-InBev has doubled down on the advantages of size. They have scaled their brands by aggressively expanding into new markets, commanding retail shelf space, and sustaining a dominant promotional presence, all while generating the superior cash flow that lets them add great budding brands to their portfolio, to which they can then apply their skill at profitably scaling and commercializing brands worldwide. This unambiguous mission clarity has made AB-InBev a dominant force in the global beer market.

Investors believe in the formula, helping 3G portfolio companies earn very favorable multiples in the stock market, because it is a proven path to shareholder value creation.

“Play your strengths to the hilt”

Admittedly, focusing on superior cost efficiency, scale and execution is not as glamorous as generating a startlingly disruptive innovation. But there is something to be said for knowing who you are and what you do best, then playing those strengths to the hilt. So if you find yourself declaring: “We will be market disrupting innovators and deliver market leading productivity,” you may want to re-evaluate your direction, particularly if your investments in homegrown innovation are not delivering clear results.

If a large company feels compelled to be disruptively innovative, rather than just commercially dominant, it can use its superior profitability and free cash flow (including funds freed up through elimination of non-producing bubble-up innovation efforts) to “buy” innovations from the most creative minds in (and beyond) the marketplace. The company can then leverage its expertise at scaling up great ideas to drive further profitable growth, creating a virtuous cycle that does not include costly and futile attempts at homegrown innovation.

In sum, growth is essential, but innovating like a startup is not the only way for a big company to grow. A clearly viable alternative is to

1. Clarify your true core competencies and relentlessly focus on them, eliminating the distracting desire to innovate when it is simply not your nature.

2. Radically simplify your organization to get the most from what you do best.

3. Use the freed up resources to fuel inorganic growth and/or get great roll-up from “bought” innovation.

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