Why big companies fail to innovate «disruptively»

Ever wondered why Warner, Sony or Universal were not able to invent Spotify? Why Encyclopedia Americana or Britannica were not able to invent Wikipedia? Why Yahoo was not able to invent Google? And Google not able to invent Facebook? And Facebook not able to invent WhatsApp? Or why big taxi corporations were not able to invent Uber? And why big financial institutions will not be able to invent their future?

The most common answer is wrong

It seems to be clear. Big companies do not dare to cannibalize their own business. They are blinded by their own successes. They underestimate change. Their managers just optimize existing businesses, do not think out of the box and are not willing to take big risks.

This answer is too simplistic – and does not address the inherent characteristics of «disruptive» change. When the time is ripe for major innovations, leadership and employees of big companies are actively discussing new business models – and often are trying to innovate timely and with initially much larger budgets than most of the finally successful «disruptors».

Disruptive innovations need hundreds of failing entrepreneurs

mass-extinction_1077_600x450Big companies are in competition with hundreds of start-ups trying to invent the next big thing. Remember Napster, Kazaa, eDonkey? Remember WebCrawler, Lycos, Excite, Altavista? Remember America Online, Geocities, Classmates, Friendster, MySpace? These are only some of the more prominent failures.[1]

And it is not only the sheer number of start-ups, trying simultaneously different ways to «disrupt» an industry. Each start-up consists of totally dedicated, self-exploiting and often bright entrepreneurs, early employees, investors and fans. Each of these start-ups itself has fast iterations of trial and error, copycats and continuous improvements.

Even if a big company would mandate several teams competing with each other on inventing the next big thing, they would be outnumbered by a significant factor from outside competition. And even if a big company would invest in these several teams, it could not compete with the inflowing venture capital financing the most promising start-ups. And such a big company would probably not find the kind of entrepreneurs within their ranks who are needed to be successful. And it could not incentivize these individuals with a potential outcome as big as being founder of a successful start-up.

Last but not least, the greatest assets of large companies prove to be one of their greatest liabilities: customers. Customers expect unsurpassed quality, consistency and sustainability from most large companies. A German engineer from one of the most admired car brands once told me: “This is so unfair. A video of a Tesla self-driving in the roadside ditch gets thousands of likes. The same video with one of our cars would cause a shit storm.” You can hardly experiment and fail, a pre-requirement of disruption, within the same brand.

Potential strategies for big companies

Big companies pursue different strategies:

  1. Waiting till an innovation has proven successful and then investing heavily to internally copycat that innovation and leveraging internal assets. (Microsoft before 2000, e.g. Windows, Internet Explorer, MS SQL, X-Box, Internet Information Server).
  2. Having a fully independent «gaming zone» for innovation that has almost unlimited resources and brilliant employees with a bold vision. (Google X to develop science fiction-sounding solutions like self-driving cars.)
  3. Buying the most successful start-up as late as to be sure of the success but as soon as you still can pay whatever insane valuation it asks for. (Facebook acquiring WhatsApp for 19 billion USD – but failing to acquire Snapchat for 3 billion USD.)
  4. Whenever you do not have enough fire power to do one of the strategies above, you probably have to upgrade the operating system of your company to take advantage of the aggregated wisdom of all of your «ordinary» employees. (Still not proven to be successful – but trying.)

[1] More comprehensive list of start-ups

  • in online music: Internet Underground Music Archive, Ritmoteca, Napster, Gnutella, Freenet, Kazaa, LimeWire, Scour, Grokster, Madster, eDonkey, eMusic, Cductive, Listen, Rhapsody, Pandora, Last FM. Big companies launched Duet, pressplay, MusicNet.
  • in internet search: Archie, Veronica, Jughead, W3Catalog, Wandex, Aliweb, JumpStation, WebCrawler, Lycos, Magellan, Excite, Infoseek, Inktomi, Northern Light, AltaVista.
  • in social networks: Usenet, ARPANET, LISTSERV, bulletin board services, America Online, Prodigy, CompuServe, ChatNet, The WELL, Theglobe.com, Geocities, Tripod, Classmates, PlanetAll, SixDegrees, Makeoutclub, Hub Culture, Friendster, MySpace, LinkedIn, Bebo, Orkut.

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