Why Corporates lose the battle of Innovation against startups!

To ignore innovation is to play a dangerous game—especially in an ever-changing digitized world. Customers interact through digitization in new ways, which also leads to their expectations changing rapidly. At the same time, it has never been easier to setup a new business in the new world and therefore market-entry barriers to nearly all types of businesses decreased significantly. And the numbers are proving it: the average lifetime of an S&P 500-listed company has decreased to under 20 years, down from 60 years in the 1950s. One of the main reasons companies are losing on the market is a lack of innovative activities. Thus, innovation is becoming increasingly critical for the long-term success—and at times for the survival—of companies.

So what's the problem? There are multiple reasons why very large companies have issues with innovating. For a company to innovate successfully, it needs the ability to explore and exploit. Exploitation focuses on the refinement and the selective improvement of existing knowledge or products whilst exploration focuses on discovering new business opportunities. As exploration is concentrating on improving existing knowledge, exploration centres on learning acquired through experimentation. Though both exploitation and exploration refer to a company’s way of learning, the logic of processes and the mindset needed for exploration is completely different for exploitation.

Because large companies focus on efficiency, incremental improvements are advocated in support of exploitation only and this also is manifesting deeply in the roots of its culture. The use of proven practices and continuous use of existing knowledge naturally prevents companies from innovating and this leads to established companies discouraging innovation.

An additional aspect that should be considered is the fact that traditional companies are focusing on minimizing risk and thus face difficulties when dealing with uncertainty. However, new ventures and thus innovation go hand in hand with uncertainty. This where start-ups have an advantage: they are much better at coping with uncertainty. Compared to listed companies, they do not depend on creating immediate shareholder value but rather focus on long-term value creation for their investors. Also, start-ups in their nature operate with a minimum of capital and human resources, aiming thus to create a venture quickly and go live on the market as soon as possible - also minimizing the risks associated with a new venture.

Sounds reasonable? Or do you completely disagree? Let me know your thoughts!