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Driving Innovation In Large Corporations I: Challenges Faced by Large Corporations

Driving Innovation In Large Corporations I: Challenges Faced by Large Corporations

Apr 20, 2010

Harnessing the Power of Proven Entrepreneurial Techniques to Drive Innovation in a Large Company.

By William K. Aulet (MIT Entrepreneurship Center), Ricardo dos Santos (Qualcomm, MIT Sloan MBA’97), Stig Poulsen (Danfoss Ventures) and William R. Wagner (Hewlett Packard, MIT PhD’83 Course V).

Innovation is the key to sustainable competitive advantage, and its pursuit is the holy grail of most companies with global ambitions.  Innovation comes naturally to most small, entrepreneurial companies because it is vital to their survival and growth.  Innovation in large companies presents more significant challenges, since they tend to be more financially driven and less tolerant of risk.  In this paper, we look at this issue and how three companies, Danfoss1, Hewlett-Packard2,  and Qualcomm3, have stimulated innovation in a relatively short time period by harnessing the power of the business plan competition, a concept that was leveraged from the world of entrepreneurship.

The Power of Entrepreneurship

The power and impact of entrepreneurship is becoming increasingly evident.  In February 2008, a report released by MIT and the Kauffman Foundation4 on the impact of entrepreneurship arising out of MIT alone revealed stunning results.  Nearly 26,000 currently existing companies have been founded by MIT alumni. These companies have created approximately 3.3 million jobs and generated approximately $2 trillion dollars in annual revenue.  To put this achievement in perspective, as a standalone economy these companies would comprise the world’s 11th largest economy, positioned behind Brazil and ahead of Russia.  It is readily apparent that entrepreneurship is a powerful engine that is driving economic growth.

The Needs of Corporations

Corporations are continually seeking organic growth by building new businesses and reinvigorating existing ones, looking to innovations in products, business models, processes, and customer experiences as the source of growth. Many of them are looking for new practices to spur innovation.  Innovation and intrapreneurship (i.e., the entrepreneurial spirit to create new businesses within existing organizations) have become mantras often expressed by top management.5 They look enviously at the often explosive growth created by entrepreneurs and wonder how they can harness this powerful force for their company’s benefit, with the goal of opening new markets, refreshing existing products and being more globally competitive.

Inhibitors to Innovation at Large Companies

While companies want to innovate and become more entrepreneurial, they face five major obstacles in attempting to do so:

  1. Fear of Cannibalization– As documented by Clayton Christensen6, companies with existing revenue streams are reluctant to risk cannibalizing them by creating new products whose market performance is uncertain.    As a result, new ideas are not pursued with the same passion applied by entrepreneurs when starting a new venture.
  2. Structural Obstacles to Invention– As highlighted in Howard Anderson’s work in articles such as “Why Big Companies Can’t Invent.”7, the traditional model of research in large companies is failing for structural reasons.  Henry Chesbrough agrees and offers other solutions8, but the point remains that with large corporations, structural inhibitors to innovation are commonplace.
  3. Desire for Predictable and Consistent Results– Mature companies have investors with large amounts of deployed capital who value and expect predictable, consistent financial results.  As could be deduced by logic and evidenced in the experience at 3M Corporation, this expectation conflicts with the inherently unpredictable and disruptive nature of innovation.9
  4. Lack of Training – Traditionally, the employees of large, mature companies are trained and expected to manage existing businesses rather than to create new businesses.  They gain proficiency in the practices of gaining market share, adding incremental new product features, and leveraging and optimizing existing competitive advantages.  Entrepreneurs, on the other hand, learn to create new markets, to create entirely new products, and to build competitive advantage from a clean canvas.
  5. Personal Risk/Reward Profile – In large companies, failure is often not well received.  Career advancement most often results from the careful management of successes and avoiding association with conspicuous failures, for which the penalties can be severe. As in scientific laboratories, entrepreneurial ventures use experimentation and failure as an important part of the innovation process.  There are large potential financial and personal rewards, and correspondingly high risks, associated with entrepreneurial ventures. In large companies, the potential upside financial benefits are not commensurate with the downside career risk that can accompany failure, a situation that inhibits the pursuit of innovation.

This resulting situation creates a dilemma within large companies. The innovation that is necessary for growth is inhibited by the very nature of the enterprise.  The question is how to meet this challenge.  Described here are three case studies in which major corporations have experimented with repurposing a proven technique from academic and other entrepreneurial environments – the business plan competition – to promote innovation and “entrepreneurial spirit.”

Business Plan Competitions – Definition and a Brief History

Business plan competitions first started in the early 1980’s with the University of Texas at Austin Business School’s Moot Corp® competition10, built to emulate the existing moot court competition of its law school.  In 1989, Moot Corp became a national competition, and others began to emerge in business schools around the world. Today, the MIT $100K Entrepreneurship Competition11 is celebrating its 20th year. It has attracted thousands of participants and has resulted in the creation of more than 120 companies.  They have over $10B in aggregate market capitalization, have raised over $700 million in venture capital funding, and have created over 2,500 jobs. The business plan competition concept has been embraced outside the halls of academia and has many close cousins run by various private and public organizations.12

Where the business plan competition has been adopted, the benefits are typically threefold:

  1. Create New Companies – The competitions can create new ventures as a result of the motivation created through financial or recognition incentives.
  2. Foster Enhanced Skill Development– The competitions serve as both motivators and tools to enhance overall business acumen and entrepreneurial behaviors.
  3. Build Cross-Functional Teams– The competition can be a platform whereby people with different skills and the common goal of creating a new venture can meet and become partners.  The resulting social and professional networks enhance the ability of individuals to realize their goals.

 

Continue reading Part II: Three Case Studies, or Part III: Lessons Learned and Conclusions.

This article has been written jointly by William Aulet (MIT Entrepreneurship Center), Ricardo dos Santos (Qualcomm), Stig Poulsen (Danfoss Ventures) and William R. Wagner (Hewlett Packard). It belongs to a series of 3 articles on the subject of Driving Innovation In Large Corporations.

  • William K. Aulet is the Managing Director of the MIT Entrepreneurship Center.
  • Ricardo dos Santos (MIT Sloan MBA’97) is the Sr. Director of Business Creation & Development, Qualcomm Innovation Network / Qualcomm Ventures / Corporate R&D.
  • Stig Poulsen is the Vice President, Danfoss A/S, & General Manager of Danfoss Ventures A/S.
  • Dr. William R. Wagner (MIT PhD’83 Course V) is the New Business Program Manager, HP Imaging and Printing Group.

References

  1. Danfoss is a Danish manufacturer of valves and fluid handling components for HVAC and industrial applications with approximately $5B in annual revenue (www.danfoss.com).
  2. Hewlett-Packard Co. is a global provider of IT products and services, with 2008 revenues of $118B (www.hp.com).
  3. Qualcomm  is a developer of  advanced wireless technologies, products and services with 2008 revenues of approximately $11B (www.qualcomm.com).
  4. http://www.kauffman.org/newsroom/mit-entrepreneurs.aspx
  5. The 12 Different Ways for Companies to Innovate. Mohanbir Sawhney, Robert C. Wolcott and Inigo Arroniz, MIT Sloan Management Review, Spring 2006 Vol. 47 No. 3
  6. “Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail”, Harvard Business School Press, 1997.
  7. Reference MIT Technology Review, May 2004.
  8. “Open Innovation”, Harvard Business School Press, 2006.
  9. See BusinessWeek, June 11, 2007, “At 3M, A Struggle between Efficiency and Creativity”
  10. http://www.mootcorp.org/
  11. http://mit100k.org/
  12. The best known example may well be the X-Prize competition (www.xprize.org)

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