Thursday, July 05, 2012

Three reasons why corporations can't innovate

I was reading an article today from Forbes that asserted that the reasons Microsoft has struggled to innovate have to do with "rank stacking" - that is, the evaluation of people from top to bottom, with only the top 20% or so getting good reviews.  Several employees who were quoted said that this evaluation system drove the creativity out of Microsoft.  Perhaps that is the case, but another point in the article drove home why I think large organizations struggle to innovate.  Here's the key quote:

Eichenwald also reveals that Microsoft had a touch-screen e-reader developed in 1998, but Bill Gates nixed it because he “‘didn’t like the user interface, because it didn’t look like Windows,’ a programmer involved in the project recalls.”

While rank stacking may have had something to do with Microsoft's inability to innovate, I suspect that in many large organizations there are three significant barriers to innovation that often permeate management thinking:  hubris about existing products and their importance, the shift from offense to defense and the difficulty switching back to offense, and the inertia that bureaucracies create.

What happens when firms grow large and have an established product portfolio is that they believe the world revolves around their technology.  Microsoft is guilty of believing that Windows is what people want and need, rather than understanding that expectations, wants and needs change.  Microsoft became a firm defending a brand and a product portfolio moreso than a firm understanding customer needs and building solutions that anticipate those needs, whether or not the product or the interface look like Windows.  What Microsoft fails to realize is that while Windows and many of its products are widely used, they are widely disliked.  Many users seek work arounds or reject Microsoft in any instance that they can.  This creates opportunities for innovators.  Meanwhile Microsoft continues to reinforce its branding, its customer experience and its product portfolio on its users rather than seek to understand what customer want.

Shift from Offense to Defense
As firms grow, they shift their focus from creation of new things to defense of what they've created.  That shift signals a shift from growth to profitability.  Historically, when product life cycles were longer and competition was less fierce, a management team could expect to refresh a product like Windows every few years, since innovation wasn't as important.  What many firms have failed to realize is how quickly the markets are changing.  Customer clock speeds are moving far more quickly, and whole platforms are shifting.  The web as presented on a laptop is far different than the web presented on a mobile device.  Systems such as Facebook, built for the stationary web, are now confronted with a significant shift to mobile, just as it was scaling up for profitability.  Further, what worked in the past may not work in the future, but executives and managers remember what worked previously and try to reinforce the past successes, not the future opportunities.

Don't mistake the concept of inertia for lack of energy or passion.  I don't consult to Microsoft but I am sure there are thousands of people with good ideas and plenty of passion about new products at Microsoft.  I also understand how any organization of that size, with that many products at stake, will create bureaucratic decision making processes which hamper innovation.  The amount of risk any firm is willing to bear in its product portfolio is almost always linked to how profitable the product portfolio is currently.  While Windows is riding high, the bureaucracy will do everything to insulate it and protect it.  The meetings, decisions, risk factors, objections and funding mechanisms that a large firm creates to defend its core products create a significant amount of inertia.  New ideas find obtaining "lift off" against that inertia or gravity exceptionally difficult. 

Can large firms innovate?
The question becomes then, can large firms innovate?  Can a large enterprise, with a significant number of products, and high expectations in the marketplace, remain innovative?  I think the answer is "yes", but it requires maintaining a lot of the energy and speed of an entrepreneurial firm, and remaining exceptionally open to customer needs and expectations.  A firm must have pride in its products, yes, but not so much that it fails to understand what customers need and how that may impact the product or create demand for new products.  Andy Grove at Intel once famously said that "only the paranoid survive" and perhaps that is the case.  There may be too much complacency and hubris in larger firms, and not enough paranoia, drive and aggressiveness to sustain innovation.

So, is "rank stacking" the villain at Microsoft?  Is that what impacted its ability to innovate? I'd suggest that rank stacking is a symptom of a larger problem - one I'll call bureaucratitis, which is the calcification of an organization and the beginnings of arrogance and an inability to listen, to change or to confront the commonly held beliefs about the organization.  Rank stacking would not be a problem if Microsoft were cranking out thousands of great new products.  If Microsoft were highly innovative, people would flock to work there regardless of its employee ranking system.  Now, what is being exposed are the issues people have with the organization, now that it is no longer innovative.
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posted by Jeffrey Phillips at 6:23 AM


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