Can big companies innovate?

October 5, 2012: 1:25 PM ET

Of course large businesses can innovate. They do so all the time. But it often means they must ratchet down their fear of their own stockholders.

FORTUNE -- On the Harvard Business Review's blog network, researcher Maxwell Wessel offers a framework for how big companies should go about innovating. It's informative and insightful, but also, ultimately, depressing.

In his three-part essay, Wessel, a fellow at the Forum for Growth & Innovation, describes a business world filled with stodgy, cost-cutting managers who are hyperfocused on processes,  always worried about the coming quarterly report, and scared of their own stockholders. He doesn't say this outright, and in fact he's empathetic to those managers and even to companies that have no interest in innovating. "Seasoned managers," he writes, "steer their employees from pursuing the art of discovery and [toward] engaging in the science of delivery. Employees are taught to seek efficiencies, leverage existing assets and distribution channels, and listen to (and appease) their best customers."

And, perhaps more to the point: "Such practices and policies ensure that executives can deliver meaningful earnings to the street and placate shareholders."

What do you want to do when you grow up, Billy? "Why, jeepers, I want to placate shareholders!"

Wessel knows that many such managers (though clearly not all of them) would rather be doing something else with their lives. And in most cases, they have little choice. Even the most staid companies in the most stable industries must seek growth and adjust to changing markets, he notes.

But even in those cases, it takes vision and courage to do innovation right. Wessel cites the example of Gerber's infamous attempt to expand beyond the baby-food market. In 1974, it came up with Gerber Singles, which was just baby food with a different label slapped on the jar, and placed in a different part of the grocery store. It was a miserable, humiliating failure.

Wessel writes that because Gerber (now a subsidiary of Nestle) was institutionally geared toward focusing on marketing its existing products as efficiently as possible, it was "only natural that Gerber executives created a product for adults that looked and felt just like its product for children. This was their biggest barrier, not a lack of vision."

But of course it was a lack of vision, it's just a matter of determining what caused the lack. Wessel says as much: "...Gerber faced the internal pressure of its organization, the need to operate efficiently, to deliver billion-dollar growth businesses every year, to satisfy existing customers — and to do all this without threatening existing net income levels. The problem wasn't the idea; the problem emerged from the relentless pursuit of incremental profit within mature organizations." (On the contrary, the idea was terrible; Wessel says that if Gerber had simply presented the product differently, it could have become the next Odwalla or Jamba Juice. But smoothies ain't baby food.)

Another example he cites is Xerox PARC, the copier-maker's famous research division, which in the '70s developed a personal computer, the graphical user interface, the mouse, and Ethernet, and proceeded to capitalize on none of them. It was a great idea to situate the division's headquarters a continent away in Palo Alto, Calif., to prevent the bean-counters at corporate HQ from paying too much attention. And Xerox (XRX) was truly visionary in anticipating the coming information revolution. This is one of Wessel's main points: "If antibodies already exist within your organization to destroy new endeavors, you need to go outside of the organization to overcome them."

But when it came time to market its PC, the Alto, Xerox simply jammed the thing into its existing sales channels. Rather than marketing to corporate executives and self-employed entrepreneurs (or possibly the home market), Xerox tried to sell the Alto to the same mid-level decision-makers who bought the company's copiers. Massive fail.

But why, given how committed, innovative and smart Xerox clearly was, did it fail on all three counts when it came time to sell its new technology? The antibodies. Just as the PC was being readied for market, Xerox was facing all kinds of competition in the copier market from Canon (CAJ) and others, putting pressure on margins. Xerox rushed the Alto to market to appease investors who were clamoring for profits.

Wessel says Xerox would have done better to employ a "lean approach to experimentation" that would (in the essay's most depressing phrase) "fly under the radar of investors."

But would a "lean approach" have yielded the same innovations? Wessel doesn't make a case that it would have. And clearly, hiding from your own investors isn't an ideal way to do business.

A better approach, in at least some cases, seems to be to tell investors that you're in it for the long haul, and if they're interested only in short-term profits, maybe they should check out interest-rate swaps, or something.

One need only look at the list of big companies that have, at least at one time or another, implemented major innovations, often despite the short-term wishes of their own investors: Apple (AAPL), FedEx (FDX), AT&T (T) (via Bell Labs), Toyota (TM), General Electric (GE), Sony (SNE). Many more. Which is not to say that investing in innovation is risk-free or should be undertaken with wild abandon and zero thought for investors. But innovation rarely arises when shareholder sentiment is the primary consideration.

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