There are a lot of elements required to make a company great. I’ll save the list of my favorites for another day, but the most important element in my view is change. Companies must disrupt their own business and industry in order be great, or even to continue being good. In short, they need to innovate.
From Booz & Company’s Global Innovation 1000 study, as covered in their publication strategy+business by Barry Jaruzelski, John Loehr, and Richard Holman:
There is no statistically significant relationship between financial performance and innovation spending, in terms of either total R&D dollars or R&D as a percentage of revenues. Many companies — notably, Apple — consistently underspend their peers on R&D investments while outperforming them on a broad range of measures of corporate success, such as revenue growth, profit growth, margins, and total shareholder return.
My hypothesis for explaining this: serious innovation – the kind of stuff that goes down in an R&D lab – scares the shit out of most companies and their leaders. Companies unintentionally (and maybe sometimes intentionally) ignore launching products, services or platforms that are extremely innovative to the point of industry disruption. Most companies are scared of cannibalizing their own business or creating more work for themselves by unnecessarily disrupting an industry they’ve already “figured out”. This leads to two serious problems:
- If you don’t disrupt your own industry, someone else will.
- It’s getting easier and easier for anyone to disrupt any business. The Internet is the greatest democratizing force in decades, maybe centuries or longer. There’s almost certainly a new, more efficient and more effective way to fulfill the need your business satisfies.
- We know governments can’t get anything done. There is no competition and no real reward for governments or policymakers who bring about change or tangible societal advancement. The private sector made up of companies is, conversely, designed to handsomely reward companies and business leaders who provide value to people, and thereby society.*
The takeaway: there is no such thing as unnecessarily disrupting an industry. If you can do it, you must do it. As the Booz & Company piece goes on to explain, company culture determines whether decisions are made in favor of disruptive change.
The results suggest that the ways R&D managers and corporate decision makers think about their new products and services — and how they feel about intangibles such as risk, creativity, openness, and collaboration — are critical for success. As part of this year’s study, we surveyed almost 600 innovation leaders in companies around the world, large and small, in every major industry sector. As noted, almost half of the companies reported inadequate strategic alignment and poor cultural support for their innovation strategies.
Only “almost half”? Probably so low because (1) they’ve lumped “inadequate strategic alignment” (what does that mean?) in with “poor cultural support” and (2) these companies are reporting on their own shortcomings (???). My guess is about 99% of the Fortune 500 have poor cultural support for disruptive innovation. I haven’t studied large cap companies in nearly the depth the authors of this study have, but anecdotally I know it’s difficult to find examples of companies that have ever truly disrupted their own industry (though there’s one company that’s done so twice).
A company must have a culture for change – a culture for innovation. This is what makes innovation from outside a company – whether through one-off services, acquisitions, or external consulting – just as difficult as internal innovation: consultants and small acquisitions aren’t going to change the culture of a company.
* Profitability usually indicates people believe a company is providing value. Of course this isn’t always true, but the vast majority of the time. Even more importantly, companies that are truly providing value are almost always profitable.