Does Success Kill Innovation?
Economies of scale as a condition of success is a business maxim. We look for efficiencies and the opportunity to cut costs or spread them over a wider base. We seek the leverage that size brings, the power to overwhelmingly position ourselves in the marketplace and against competitors.
Every entrepreneur’s dream is to become the next powerhouse in his market space. Every venture capitalist demands that the companies in which he invests have the potential to become dominant players.
And yet. And yet. With very few exceptions, large companies innovate at the margins, producing the next rev in a product continuum. Generally, true revolutionary innovation comes out of the “little guys,” not the companies with the apparent resources, personnel, and power. Industrial, commercial, and communications revolutions have come from below, not above. (One exception, of course, is Apple. It remains to be seen, however, if this remains so without the entrepreneurial genius of Steve Jobs.)
More typical are two previous industrial giants: In 1876, for example, Western Union had the opportunity to buy Alexander Graham Bell’s patents for the telephone. And rejected the offer as of no value to them. In 1908, AT&T bought Western Union. (It sold it in 1913.) And in 1969, AT&T declined to bid on a contract to develop a critical component of what came to be known as the Internet. In the 1980’s, AT&T was still fighting the digital revolution, maintaining that analog technology was just as good. These 19th and 20th century giants are, for all intents and purposes, on the sidelines of the economy in the 21st century.
Yet the “little guys” keep chugging along. Without the “economies of scale,” without political leverage, without vast resources, small companies and individual entrepreneurs find ways to do things better, smarter, more efficiently, more creatively, ways that will engage the marketplace.
Power and marketplace dominance like a steady-state universe. They are already at the top of the heap. Change threatens their position. And steady-state management is risk averse. But for the small companies, the only chance to sustain growth and become increasingly prosperous is through change, to aim for that revolutionary breakthrough that will take them to the top.
So we have a conundrum. As small companies find acceptance in the marketplace and grow, they have an increasing need for economies of scale, cutting costs, and running their business more efficiently. And each time they succeed in achieving these very necessary goals, they diminish their ability – and their leader’s visceral need – to innovate.
It seems to be an immutable law of history that social and political revolutions come from below, not from the top. Is it an immutable law of commerce as well? Is achieving “too big to fail” status a failure for the economy? Can companies retain or attain the culture that will allow them to sustain innovation?