By Vijay Govindarajan for Harvard Business review
Some business pundits today believe innovation ignites better in startups than in large, established corporations. They believe big companies are weighed down by their own success, too invested in the past to create and execute new ideas. They say, “You can’t teach an old dog new tricks.” I disagree.
In fact, a lot of big companies have proven they are better positioned than emergent firms to create and execute innovation, however on-fire a startup may be. Consider, for example, Hasbro’s evolution from a product company in the 1990s into the brand experience powerhouse it is today by leveraging its core brands (for example, spreading Transformers across multiple platforms including toys, movies, theme park rides, television shows, digital gaming systems, and comic books; the venerable New York Times, published since September 18, 1851, reinvented itself in the digital age as New York Times digital; General Motors, in partnership with Lyft, plans to test a fleet of self-driving Chevrolet Bolt electric taxis on public roads to lead the transformation of the auto industry; and at barely two decades old,Google is a comparative youngster but has leaped from the web to the street with tangible new products, such as its self-driving car and betting on new technologies such as artificial intelligence and robotics.
Corporations like these have the assets, resources, and capabilities necessary to fuel innovation. Startups may be generously armed with venture capital but they have nothing along the scale of, say, Vanguard’s war chest.
Vanguard carved out a niche by managing low-cost index mutual funds in 1975. The company now has more than 20 million investors in 170 companies and, as of the end of last year, manages more than $3 trillion in global assets. And yet, Vanguard is a newcomer to the nascent field of automated, web-based robo-advising, debuting its Personal Advisor Services only last year. Pure Internet-plays Betterment and FutureAdvisor launched in 2010 and Wealthfront in 2011. But Vanguard’s robo-advisor platform hit the ground running in its May 2015 debut and by the end of the year had $31.1 billion in discretionary assets under management — more than the above competitors combined.
I chalk up the success of Vanguard’s Personal Advisor Services to several factors. First, Vanguard is a big company with the financial muscle to underwrite just about any innovation it chooses. Second, Vanguard tested the waters before diving in. Experimentation is a critical component of creating the future. The company delayed entering the robo-advisor market until it had results from two years of testing. Third, Vanguard used the hybrid organizational model, creating a dedicated team that could borrow key capabilities from the core business while not tied to its dominant logic. Like its competitors, the company uses algorithms and software to manage investors’ portfolios automatically but then adds a human touch: a team of advisors available by phone or video chat to assist clients with their investments, answer questions, and offer emotional support when the market terrain gets rocky.
GE is another firm that has committed its size and deep pockets to innovation. The company’s 136-year journey has taken it from power through transportation, appliances, health care, finance, media, and industry leaps. Last year, GE’s first “brilliant factory” opened in India. The system allows “equipment and computers [to] talk to each other over the internet in real time, share information, and make decisions [to] help ensure top-notch product quality and avoid plant shutdowns.”
The brilliant factory is part of CEO Jeffrey Immelt’s mission to ensure GE’s leadership in the industrial Internet of Things (IoT). In keeping with this mission, last September the company created GE Digital, a unit that brings together all the company’s digital capabilities to help GE and customers connect to the industrial IoT. Rather than “spinning out” new and innovative ventures, GE’s strategy is to create dedicated teams in house and power their efforts with the company’s considerable resources, as Vanguard did with its Personal Advisor Services. GE Digital has built software capabilities, very different from the people GE has in its core businesses. Dedicated teams like these benefit from the company’s core business, its Performance Engine while they create future opportunities. GE Digital, while it is a Dedicated Team distinct and separate from the core, is still linked to GE’s transportation, healthcare, and energy businesses. After all, GE’s hardware products — the CT Scanners, gasoline turbines, aircraft engines — collect lots of data that the GE Digital can convert into information products using Big Data Analytics. Take, for instance, GE’s locomotive business. If its customer, Norfolk Southern, can increase its velocity from 22 miles per hour to 23 miles per hour, it can increase profits by $250 million. GE locomotives have hundreds of sensors that collect tremendous amounts of data in every trip. GE Digital can use Big Data Analytics to use that data to help its customers such as Norfolk Southern improve its velocity by scheduling better, lowering downtime, and improving maintenance.
Startups do have one advantage over long-lived, big companies. They have no past — or at least, very little past. Past success can trap companies into believing what they have done is a blueprint for what they should do. In that sense, the pundits are right about big companies. But not every big business falls into this trap, as the corporations I mentioned have demonstrated. The key is to build a dedicated team that is connected to the core of the business.
The world faces many complex problems. Big companies, such as GE, with historic global presence and valuable resources can help to tackle some of those complex problems. Emergent firms would do well to follow their example.
First appeared at HBR