Corporations are always looking to innovate. A Google search for “corporate innovation” easily returns over 1.5M results; Amazon carries over 10,000 book titles that deal with the topic. And yet, despite all the information, resources, and training available on the topic, corporations are derided for their inability to perform in such a critical area, critical to their long-term survival.

But the struggle to innovate successfully stems not from the lack of ideas, talent, culture or systems and models to support innovation; it is a fundamental flaw in how corporations are built.

Corporations can’t innovate because they are not designed to innovate.

In fact, it may be said that pursuing innovation opportunities via external partners and investments may actually be easier than trying to generate the same momentum and success internally. Creating an external entity, i.e. a Corporate Venture Capital (CVC) firm, with a separate set of targets and management expectations, with limited financial exposure and interaction with the money-making units, allows the Board of Directors to simply spin “innovation” out and let it do its own thing — out of mind, out of sight.

But for those trying to innovate within the confines of a corporation, they face multiple uphill battles to get the funding, support and approvals they need to succeed. The search for innovation isn’t about discovering ideas or entrepreneurial employees, it is about figuring out a way to deal with the internal issues below.

  • Corporate Inertia
  • The Overhead Burden
  • Financial KPI Deliverables

Corporate Inertia

“Even if you are on the right track, you’ll get run over if you just sit there.” 
― Will Rogers

Corporate inertia is a term used to describe an established company that remains rigid in its thinking and actions rather than being open to changing industry and company dynamics.

And successful corporations are naturally in a state of inertia.

While a corporation is earning above-average profits, it is difficult and risky to rock the boat. Trying a radically new approach or introducing unproven technologies into the current system would rock the boat. Small ripples at the fringes of the market by startups are not important enough to be noticed, and have no impact on the bottom line, so the companies continues to do the things that got it where it is today: pursue efficiency over innovation.

And while corporations are constantly seeking to improve their product offerings, corporate thinking is more linear than exponential. Clayton Christensen, the academic and writer, has espoused that corporations fail to grasp the potential impact of disruptive technologies because they are focused on serving their existing customers (linear improvements) better while missing the emerging opportunities in smaller market segments (exponential growth).

This state of inertia prevents management from giving internal startups the wholehearted support and resources it requires, because the company simply doesn’t believe that radical innovation is necessary.

The Overhead Burden

“The sparrow is sorry for the peacock at the burden of its tail.” 
― Tagore, Amitendranath

Anyone who has managed a profit-generating unit in a large corporation understands the travails of overhead allocations. While burdensome, they are necessary to distribute the cost burden of support units. The problem arises when the same calculations are applied to the financial projections of radical innovation projects.

Startups are not corporations, yet, however we internal startups are subjected to the same financial assessment as if they were in execution mode rather than search. With the application of overhead allocations, even at a prorated structure, internal startups are not financially feasible and thus cannot justify large-scale investment. Startups in search mode must pursue business model validation at the lowest possible cash burn level, but corporate accounting makes that nearly impossible.

Furthermore, while a startup can entice new employees with promises of stock options and other incentives despite lower initial wages and benefits, corporations are stuck paying market salaries and standard corporate benefit packages to innovation project team members. While startups and corporate innovators are pursuing the same goals, they are not playing according to the same rules.

Standard corporate overhead and compensation packages prevents internal startups from taking off, especially when profitability may be 2–3 years down the road.

Financial KPI Deliverables

“Shenanigans is a financial model on the catwalk.” 
― Toba Beta, Master of Stupidity

Corporations are not inclined to innovate radically; rather they are pressed to deliver incremental improvements on a consistent basis to the Board and their shareholders. Companies are judged based on quarterly and annual growth numbers, and thus managers, departments and employees and incentivized according to related financial KPIs.

But while linear thinking and incremental improvements may help to deliver on those KPIs, it is exponential thinking that will deliver above-average results in the long-term. Companies and employees just don’t give themselves the space to consider the world beyond the next shareholders’ call or the next performance evaluation.

For internal startups to get the investment it needs to succeed, they need to be put on a separate timeline that reflects exponential growth and exponential expectations. The wrong expectations is often the cause of early failure as management is quick to judge sub-optimal returns.

Without a significant mindset shift across the organization, internal startups have no chance to succeed, and will always be struggling to get the financial and time resources it needs to implement radical new approaches.

Do these elements resonate with you and your organization?

Corporation innovation theater is the inevitable result for corporations that can’t deal head-on with these issues, because, the concept of a successful corporation, and the structures and approaches that make it successful, do not apply in the startup concept.

Corporations must provide the freedom alongside significant, risky resources to internal startups for them to have a chance to succeed. They must be separate entities, subject to separate rules and expectations. Then they might have a chance.

About the Author

This article was written by Jason Lau, Partner at Core Strategy. See more.

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