Companies Don't Innovate; Markets Do

Companies are temporary organizations whose function is to  exploit opportunities identified yesterday from the trading and recombination of ideas.

The evidence...shows that while there is a tremendous amount of innovation and change in the economy at the level of markets, there is much less change at the level of individual companies...change in the economy is driven more by the entry and exit of firms than by the adaptation of individual companies...It is this dynamic pattern of entry and exit that explains [a] somewhat paradoxical finding that as a group, the long-term survivors in the S&P 500 underperform the average.  It is the constant entry of newcomers that keeps the average up.

Though they may start out full of entrepreneurial zeal, once firms or bureaucracies grow large, they become risk-averse to the point of Luddism.

Look under the hood of what seems to be a successful, monolithic large corporation, and you are likely to discover an engine composed of a portfolio of relatively independent market experiments.  In all but the rarest circumstances, the fruits of past success attract bureaucrats, sybarites, and other parasites who ultimately cause irreversible stagnation.  Notwithstanding large or otherwise established firms attempts to embrace and apply the logic of Open Innovation, very few (if any) have been able to do so.  Ultimately, companies' hierarchical command-and-control structures inhibit substantive adaptation.

The more I think about it, the term Open Innovation is redundant.  Innovation is inherently open.  Without the exchange of ideas and trade, there is no innovation.  To the degree that a company becomes insulated from the market, it loses it's capacity to participate in the process of innovation.  As firms grow, bureaucracy replaces the market, and organizational pacing slows.  That may not be a terrible thing in a slowly changing environment, but it hinders direct participation in the nurturing of successful innovations.

Start-ups are fraught with risk (but so are established businesses).  Nevertheless, they remain the most likely conduits for nurturing prospective innovations.  Over the last several years, my colleagues and I have attempted to be a conduit between individual inventors and established, branded consumer products companies.  However, the most promising path to successful commercialization is via companies we created (e.g. TrashCo with the support of WM, an industry outsider) or facilitated (e.g. Mopion).

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Comments

[Boris Pluskowski]

Whilst I like a lot of what you're saying in this article (and especially with regards to the redundant nature of the term Open Innovation) - I'm not entirely sure I agree with your main statement. I'm not sure you can discredit the individual innovative capabilities of companies because, as an industry, the collection of companies that inhabit a market have collectively, a bigger portfolio of innovations and thus impact.

It seems equivalent to saying that inventions come from the human race and not any one inventor. Which, I suppose is kind of true - but it's because of the individual talents, capabilities, and ideas of the individuals that the human race was able to do anything.

In the same way, markets rely their innovative capability on the innovative ideas brought into it by its constituent players. The fact that those players typically don't continue to be innovative ad infinitum is neither here nor there.

Best

Boris Pluskowski
http://www.completeinnovator.com

[Dave Bayless]

Boris, thank you for sharing your thoughts. You wrote:

The face that [the constituent players in a given market] don't continue to be innovative ad infinitum is neither here nor there.

I tend to disagree. On the one hand, I would concede that the absence of perpetual innovation on the part of industry incumbents doesn't mean much. What I do think is notable is that the innovative lifespan of an incumbent firm seems to be quite limited on average. Let's assume, for the moment, that assertion is true--the innovative capacity of incumbents degrades relatively quickly. Might not we better off if our innovation investments were to target aspiring firms, which may have a relative advantage when it comes to innovation?