The Truth About Innovation Resistant Companies

2/16/10Follow @b_frei

The bigger the company, the tougher it is to innovate. There are two main pillars to this “innovation resistance” that seem common in large, profitable organizations.

1. Fear that innovative products will cannibalize existing revenue streams. The bigger the product line revenue, the more resistant that product group is to innovation that would threaten its growth.

Consider the post by former Microsoft exec Dick Brass in the New York Times Op-ed section, titled Microsoft’s Creative Destruction:

“At Microsoft, it has created a dysfunctional corporate culture in which the big established groups are allowed to prey upon emerging teams, belittle their efforts, compete unfairly against them for resources, and over time hector them out of existence. It’s not an accident that almost all the executives in charge of Microsoft’s music, e-books, phone, online, search and tablet efforts over the past decade have left.”

There’s a lot going on in this Microsoft example, but the undesirable effect of cannibalizing existing revenue streams is a substantial contributor to resisting innovation. As an example, e-mail built into a social networking app could threaten Exchange revenue, so naturally the Exchange team might lobby to restrict that feature on behalf of revenue protection. (Note: there is an increasing percentage of people that leverage Facebook’s messaging capability as their primary e-mail service.)

2. Product re-invention means throwing away deep feature lists. Market-leading products measure their dominance by revenue and feature depth. Feature depth broadens their relevance to a wider array of customers. So, adding functionality and features to a product trumps re-invention.

Clayton Christensen’s explanation of the impact of “disruptive technology” is a straightforward summary on why this is so common. One part of Christensen’s theory states:

“Low-end disruption” occurs when the rate at which products improve exceeds the rate at which customers can adopt the new performance. Therefore, at some point the performance of the product overshoots the needs of certain customer segments. At this point, a disruptive technology may enter the market and provide a product which has lower performance than the incumbent but which exceeds the requirements of certain segments, thereby gaining a foothold in the market.” (from Wikipedia)

Microsoft is a prime example of products that have improved beyond most people’s ability to adopt those improvements. Let’s consider the basic tools used to track and manage work throughout a company.

Excel: Spreadsheets are the crescent wrench of software tools. They are our sales pipeline tool, our inventory list, our expense tracking system, and on and on. We use the basic math and text management features. However, very few of us use the =fx(STDEV(number…)) function, much less the gamma line suppression or binomial distribution capabilities. In fact, the vast majority of users haven’t used more than what was available 10 years ago.

As specific business application needs begin to stretch the range of Excel’s native abilities, we turn to the most basic features in other richly engineered products. New tools, new user guides, new price tags.

MS Project: When the many moving parts of our project exceed our willingness to manage formulas in Excel, we turn to Project for simple task hierarchy, assignment, and dependencies. We generate the Gantt chart, then seldom venture into resource leveling, advanced materials management, or sophisticated rate set structures.

MS CRM: Excel works initially to coordinate our customer list, but not once the team accessing it grows and the number of touch points, documents, and discussion notes increase. MS CRM enables multi-touch custom management as soon as you configure it, trains your sales team on a common process, and ensures that all the needed data is routinely provided by everyone involved.

SharePoint: Excel is incapable of wrangling all the files and unstructured collaboration notes, so, enter SharePoint. A platform originally developed to enable teams to collaborate and share documents, it now offers components that address no fewer than six distinct product categories. Beneath this mountain of IT service-enabled capabilities, the majority percentage of users refer to it as “the place we share docs.”

Small businesses and IT dependent teams within larger companies shoulder the load of more applications, because that’s what Microsoft’s dominant product teams have ordained.

What would happen if a team within Microsoft built a compelling service that combined the most heavily used functionality from the four applications above and priced it 95 percent beneath the current offerings? Would it see the light of day? Not if it was viewed as a threat to the large, existing revenue streams.

So, naturally, innovation happens elsewhere—like within the work management company I co-founded, Smartsheet.com. We don’t have to appeal to the MS Project team to be allowed to incorporate a Gantt chart into our project spreadsheet. We don’t have to lobby the SharePoint product manager to permit including document storage and sharing. We don’t have to navigate the MS CRM team to structure a simple sales pipeline manager. And, most importantly, we don’t have to overcome the CFO’s objection to cannibalizing 95 percent of the existing products’ price points.

Funny enough, one of the main questions we fielded when raising our Series A round of funding was, “Aren’t you afraid Microsoft is going to tackle this area?”

Brent Frei is the co-founder and executive chairman of Bellevue, WA-based Smartsheet.com, an online work management software company. Follow @b_frei

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