Why Startups out Innovate Big Companies and How Big Companies Can Respond

Highlights

  • All companies recognize that innovation is a powerful source for market disruption, company differentiation, competitive advantage, accelerated revenue and high profits.
  • Startups routinely convert that recognition to results. Big companies, not so much.
  • Startups bypass incremental advancements to pursue order of magnitude results. Big companies more often pursue incremental innovation. That includes things like product and process improvements, but generally fails in any type of transformational or disruptive impact.
  • But it doesn't have to be this way. Knowing why startups succeed, and big companies don't, provides actionable takeaways for big companies to do better.
Johnny Grow Revenue Growth Consulting

I started my consulting career at Accenture, then spent 18 years in 3 startups before returning to big company consulting and spending a decade with IBM. I witnessed a lot of differences between startups and big companies. But no contrast was bigger than how each approaches innovation.

Many executives have never been part of a successful startup. That makes it difficult to truly understand and appreciate the differences. And that's why I'm creating this post.

Big Company Versus Startup Innovation

How Startups Innovate

We hear the repeated stories of nimble startups that use innovation to upend large incumbents.

From my experience with startups their five biggest advantages are passion, culture, pace, agility and perseverance; in that order.

They also benefit from what they don't have. There are no lethargic hierarchies that require advance approvals to begin. No turf wars or political fiefdoms to pacify. No bureaucratic approval processes to slow down the journey. No in-company managers who will view new ideas as a threat to their reputations, performance, domains or career path.

There is no change management that must be planned and managed.

Startup Innovators

With fewer resources they are quick to internally align, interlock, collaborate and develop small but highly productive teams.

Teams are successful not because they are small but because they are focused on the right things. And because of their culture.

Teams at startups often appear disorganized when compared to big company teams. The later often appear to collaborate. But that appearance can be deceiving. Many times, the members are performing something phycologists call status management.

They are figuring out who is in charge. They are sizing up the other members. They are identifying group norms, determining whether its okay to criticize other ideas, or wondering if somebody will criticize theirs.

It's a behavior that permeates large corporate cultures. It also reduces contribution, encourages tacit compliance and groupthink, dodges risk, and avoids perceived criticality. Instead of focusing on the task, they focus on each other to figure how to align and jockey for the role each desires. They spend so much time managing status that they fail to tackle the challenge of free-flowing ideation or creative thinking.

Compare that with startup teams. The members are not interested in sizing up others, determining the pecking order or competing for status. They are not concerned if they make a mistake, and they are not worried about being criticized.

They don't dodge risks they expose and tackle them. They don't view change as undesirable. They view it as a requirement for transformation. The members are self-starters that work energetically without much pretense.

When they spot problems, they interject without delay or asking for permission. They are more productive not because they are smarter or more skilled, but because they work together in a smarter way. They demonstrate why culture trumps skills and knowledge.

For startups, culture is the biggest enabler or innovation. For big companies it is more often an obstacle to change and transformation.

Here are the reasons startups out innovate big companies every time.

Click to Tweet

Why Big Companies Seldom Innovate

Larger companies have more customers, resources, specialized skills, intellectual property, mature processes, brand recognition and investment. But even with all that very few can compete with startups.

I consistently hear that startups begin with great ideas that don't come naturally to big companies. That's not true for either. It's a fallacy to think startups start with great ideas. They start with good ideas that become great ideas over successive iterations. Big companies routinely show they can also develop good ideas. Unfortunately, they struggle to bring them to fruition.

Innovation Startup Versus Big Company

What big companies say and do are often quite different.

Despite their words to the contrary, their actions show they prefer the status quo and do not act to disrupt business as usual unless they have certainty. They fail to acknowledge there is no certainty.

They want business growth but fear risk. They are risk averse and will create excessive or unnecessary obstacles to delay, wear down or prevent innovation. They understand that risk and reward are opposing forces but fail to understand that growth and comfort do not coexist.

That's why they take a wait and see approach, or a cautious approach, or what many like to call a measured approach. Whatever it is called, it's a halfhearted pursuit with a built-in fall back contingency so when the innovation doesn't work out, they can snap back to their comfort zone.

Their risk aversion seeps through all facets of an innovation program. Risk creates a covert opposition to new ideas. It introduces a near limitless number of concerns and flaws to ideas. It empowers the pessimistic experts and creates a problem for every solution.

Risk trumps innovation and is the built-in inertia to discourage, disparage or deteriorate ideas.

Their inertia extends beyond their ideas.

Startups benefit from agility and speed. They can agree to make decisions in minutes or hours. Large companies prefer consensus decision making that takes days or weeks.

Big companies delay by design with procedures, progress gates and other reviews.

They want formal budgets, clearly articulated business strategies and governance or oversight to guard their investments. Their desires are not unreasonable, but they also are not in line with startup know-how and execution. Startups know there will be many iterations and changes to assumptions. They know that no budget or strategy would be accurate for more than a week.

Whatever you call them, investment safeguards or innovation blockers, procedures delay and deteriorate progress. Usually until failure.

I've found this comes as a shock to some executives, who just can't fathom unchecked execution. They use phrases like "signing a blank check" and believe no sane business would operate that way. They also clearly have no visibility to how successful startups routinely operate this way. They usually work for companies that create incremental improvements but haven't created anything transformative for as long as anybody can remember.

If big companies enter a new market at all, they enter at the early majority or late majority phase of the chasm. Maybe a better late than never strategy works for some. But by that point of entry initial market share has been acquired and margins reduced.

A focus on risk, sluggish processes, multiple cascades of approval, micro-governance and long decision-making cycles create inertia and impede success. When combined with the lack of success factors consistently shown by startups - passion, culture, pace, agility and perseverance – transformation has little to no opportunity for success and should not even be attempted.

And that becomes the path pursued. Either through recognition or a history of failures, big companies view innovation as discretionary and instead apply their institutional focus to things like improving existing business processes or fixing points of customer friction. The thought of future high growth revenue streams takes a back seat to reality.

Their decision to minimize or forego innovation also results in failing to keep up with their customers. They gradually drift apart and often don't recognize the loss of customers that have moved on to more innovative products and competitors.

But it doesn't have to be this way. Big companies can learn from startups and capitalize on their unique strengths. By shifting their dynamics, big companies can innovate.