For many years, the debate about innovation has centered around the merits of large companies vs small ones. I’d like to offer some of our observations that are based on what we have seen at RDP in over three decades of helping our clients of all sizes maximize the effectiveness of their innovative practices.
The tug-of-war of ideas about what type of organizations excel at innovation, has also spilled into policy debates and innovation policy. Government tax relief and grants at all levels treat R&D expenditures and other innovation costs according to a company’s size. What are the innovative advantages that big and small companies hold over each other?
For one, large companies, which happen to be more established, can conduct longer R&D projects due to their financial flexibility and greater manpower. They also know the regulatory environment better than small companies. Another factor helping large companies is globalization.
OK, we get it. There have been popular backlashes around the world against globalization in Europe and the United States. But let’s face it, the supply chain for most products is spread across tens of countries over many continents, forming a complex eco-system that feeds an equally complex set of large organizations. Many suppliers globally, therefore, vie for being part of this ecosystem and want to secure themselves with a steady flow of demand and revenue.
The Power of Funding
Moreover, according to this pro-big view, most important challenges for innovators involve funding vast operations in different aspects of business such as education, health, R&D and changing regulations due to issues such as global warming. To make a serious and useful dent into a complex system, you need to be big with big funding.
There is also the race toward hiring the best talent. As the Economist magazine points out, big companies have a big advantage in recruiting today’s most valuable talent. We all know that graduates come out of school with high debt; so many of them prefer the certainty of a salary to the lottery of stock in a start-up. Large firms are also getting better at avoiding bureaucratic stagnation: they are flattening their hierarchies and opening themselves up to ideas from elsewhere.
Those Feisty Startups
On the pro-small side of the argument, there are several convincing arguments that call for attention to the superior innovation ability of startups and other smaller sized organizations. Here, speed of decision making and greater appetite toward risk taking come to mind. Large corporations, with their abundance of silos and bureaucratic levels, Lindegaard suggests, often require considerable time to make decisions. Analysis paralysis is not uncommon, with decisions that seem simple to an outsider taking ages to make. Fewer levels of bureaucracy in small organizations help the management team make decisions faster and with a unified vision as opposed to competing visions of a large senior management team vying for dominance.
Risk taking is another oft-cited factor in innovation management debates. Small organizations– startups in particular–have a clear objective: capture market share, disrupt an existing business model, or a combination of both. If they don’t meet their objectives, their business is almost certain to fold. This strong drive toward execution and growth makes them much more open to taking risks. In contrast, large companies have a vested interest in their existing systems, operations, infrastructure, and market dynamics, which make them risk averse.
Another aspect of innovation management is whether organizations are prepared, or willing, to deal with disruption, sometimes sudden forms of it. From resource, capital, and talent perspectives, radical innovation is considered high risk and, subsequently, highly disruptive to a large organization. Startups and small companies, don’t have the large, legacy infrastructure of their large competitors. So lack of a legacy infrastructure works to their benefit.
Split the Innovation Pie
Dividing innovation management into a dichotomy of black and white based on an organization’s size does not do justice to the debate.
Over the years, there have been studies that suggest large firms are better at certain types of innovation and smaller firms better at others. According to Robert Vossen, large companies are most efficient at types of innovation that require material resources, funding, people, and economies of scale. Small firms, however, excel in behavioral characteristics like greater personnel motivation, more efficient communication, and greater organizational flexibility.
When you examine an organization across the business vertical it operates in, innovation can come from their service or product levels, external and internal levels, incremental, or out-of-the-box (disruptive).
Big companies have a stable portfolio of products or services in which they invest dollars in incremental innovation. They have a large budget for open or external innovation for new products or services. They don’t invent frequently and don’t deliver to the market new products and services within short time frames. They, instead, tend to refine their business models with incremental operational innovation.
Small companies, however, have a small portfolio of products or services which they seriously need to take to the market in the shortest span of time possible. Also, small organizations can test business models that could prove disruptive to the established order, create new markets, or fail utterly.
Based on our observations at RDP over a span of three decades of working with leaders and innovators, large organizations excel at process innovation, producing higher quality products using fewer resources, whereas smaller organizations excel at developing new products and services.
In many instances, larger companies often use new products in their process innovation, subsystems and services developed by small companies and startups. So they feed each other within the same ecosystem dynamically. Moreover, government support in many markets has helped the innovation ecosystem by mitigating the risks and burdens on innovators, both large and small.
Arne Luik is Vice President of Sales at RDP Associates. ________________
For a complementary assessment of your organization’s innovation policy and practices, or a brief consultation on the types of innovation funding available for your industry, contact RDP at
(416) 368-9341 or [email protected]