Portfolio magazine has a column by Andy Grove in which he discusses the dilemma faced by large successful businesses: as companies get big, it gets harder and harder for them to grow.
How to overcome the law of big numbers? Grove says:
“…under certain conditions a firm can create a new growth spurt for itself by entering an entirely different industry. The target industry must be stagnant and populated with companies that cling to doing business the way they always have. The corporation that enters this environment with an innovative product or service can shake up the status quo and reap big profits… I call this phenomenon cross-boundary disruption, or XBD for short.”
Grove says that the defining example of this kind of cross-boundary disruption is Apple’s entry into the music business with the introduction of the iPod and the iTunes music store. At the time, Apple faced market saturation in its niche of high-end computers. Since Apple entered the music business, the company’s profit has increased more than 3,000 percent.
Another example cited by Grove: Wal-Mart entering health care with in-store health clinics.
But when you stop to think about it, how much innovation do you see from large companies vs. startups?
As I previously blogged (related to a Sept 2007 feature in the Wall Street Journal), innovation is very difficult to do in most big companies. As Douglas Solomon, CTO of IDEO, described:
“Big companies have resources, but don’t always have the processes, skills and permission to think outside their current business.”
I’m reminded by an article about Yahoo and product innovation. Caterina Fake, co-founder of Flickr said:
“There are tons of amazing ideas in big companies, and no innovation deficit. But the obstacle to getting things built is mostly process. There is one kind of process developed for building and maintaining large-scale products… And the development processes for that are very different from what it takes to build a new product in a short amount of time.”
For the many big companies that are unable to create a culture of innovation and unable to adopt new processes, they are, perhaps, best served by leaving the specialty skill to startups. And then investing or acquiring; or being a fast follower.