Should Big Companies Give Up on Innovation?

Should Big Companies Give Up on Innovation?

by Scott Anthony  |   10:00 AM March 11, 2014

“Why bother?”

It’s a common question thrown at me by entrepreneurs, venture capitalists, or the more cynically minded corporate leaders.

That is, why bother trying to innovate if no matter what they do, large companies can no longer maintain a sustainable advantage and their life spans are just getting shorter and shorter?  Isn’t it better to hasten Joseph Schumpeter’s process of creative destruction and move capital and employment from inefficient dinosaurs to more vibrant and agile upstarts?

I give them three reasons.

First, timing matters. There’s a difference between recognizing and preparing intelligently for an inevitable transition (or even an inevitable demise) and throwing a still-thriving business away prematurely. Creative destruction carries transaction costs. People lose their jobs. Cities dependent on a large employer suffer. Know-how and other assets carefully built over years or decades are destroyed. Certainly, those transaction costs have to be balanced against the drag created by bloated bureaucracy, and the soul-crushing work that characterizes too many companies. But it is a cost nonetheless. Schumpeter himself posited that creative destruction, which he called “the essential fact about capitalism,” would lead to capitalism’s demise because of a backlash against the chaos it unleashes.

Second, the world of start-ups is narrowly focused. Start-up companies tend to cluster in industries favored by venture capitalists (like biotechnology or information technology) or ones where there are relatively low barriers to entry (like restaurants).

Technology-based companies can drive transformation in many existing markets of course – just look at the battles brewing between traditional taxi companies and Uber, a mobile app that connects passengers with drivers. But other fields, like mining, construction, agriculture, and many types of manufacturing, have been largely ignored by start-up companies. In these markets if existing companies don’t rise to the innovation challenge, no one will.

Finally, certain problems are almost custom-made for global giants. For example, a few years ago we helped Medtronic formulate and deploy a business model to bring pacemakers to patients in India who historically either didn’t know they needed the device or couldn’t afford its $1,000 price tag (since most Indians pay for health care directly).

The model involved an innovative combination of direct marketing through billboards and leaflets; diagnostic camps where technicians would screen scores of patients in an afternoon; changes to the supply chain to lower the cost of the pacemaker for selected hospitals; and the world’s first loan program for an implantable medical device. No start-up in the world — in fact, no other company in the world — had the technology, the knowledge of the Indian market, the ability work with local regulators, and the financial heft to pull it all together.

The program has been a roaring success, helping tens of thousands of patients in India and dramatically accelerating Medtronic’s growth in the market. The integrated business model will be difficult for competitors to copy, but Medtronic knows it has to keep pushing. CEO Omar Ishrak has been adamant that the company will use a portion of its $1 billion+ investment in R&D to dramatically lower the cost of its medical devices to further expand in India and other emerging markets.

That’s not to say big companies should go it alone. A few years ago a start-up team taking the “Design for Extreme Affordability” course at Stanford University’s design school developed an innovative way to incubate premature newborns for a fraction of the cost of the $20,000 machines that populate most Western hospitals. The inspiring idea had clear potential to make a global impact. But how could the team get its Embrace Infant Warmer into the hands of all the hospitals and patients that needed it? In 2010, Embrace entered into a partnership with General Electric to help scale the technology around the globe.

Big company innovation success stories like these are inspiring but still far too rare. Most people continue to believe big companies are where innovation goes to die.

At a conference in Australia last year, I asked the members of a large audience what they would do if they wanted to change the world. The most common response was to start a company, followed by becoming a teacher. In dead last, with only 5% of the votes, was working for a large company.

That’s a tragedy.

Archimedes famously said, “Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.” Big companies have the fulcrum. Innovation can be their lever.

Big companies have the capacity to change the world. And I believe it is well worth it to help them do that. So, that’s why I bother.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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