Cultural Barriers To Enterprise Innovation (Part 1 of 3)

I recently wrote a blog post that is a critical review of lean startup training programs from companies like Moves the Needle. In this post, I mentioned deeply-rooted cultural and structural barriers that destroy innovation in large enterprises. I'd like to explore these barriers in more detail, so we can better understand what they are and how they destroy innovation in the enterprise. 

This post is the first of two posts exploring cultural barriers that exist in large enterprises. A subsequent post will describe structural barriers.

Enteprise Innovation

Let's define enterprise innovation, so I'm clear what we are talking about. 

Enterprise innovation is the process, resources, structure, people and systems employed by large, established businesses focused on creating disruptive innovation. By disruptive innovation, I mean Clay Christianson's definition. Disruptive innovations are those that start at the bottom of the market, typically allowing an entirely new population of customers who historically could not access to a product or service. Disruptive innovations are typically simple, elegant solutions that become so useful they have the potential to take over the entire market, bottom and top. As such, disruptive innovations can be a serious threat to large, established enterprises who are dominating the market that is being disrupted. In fact, because the disruption is so simple, large enterprises tend to dismiss them. Think of these large enterprises as the "establishment." If the disruptive innovation penetrates the customers who are traditionally served by the established business, the large, entrenched enterprise may go out of business because it simply cannot adapt to such a quick and dramatic change in the marketplace.

They are many examples of this in the past few years. With the proliferation of the internet, software, mobile and all forms of information technologies, disruption is happening in virtually all segments of the economy. It's not surprising that digital disruption has become such a hot topic in enterprise innovation. Companies are highly-motivated to figure out how to defend themselves from disruptive innovation and how to become disruptive themselves, as a proactive response to emerging threats.

But here's the rub. Enterprises are really not very good at disruptive innovation. They are set up for sustaining innovation, not disruptive. Unlike startups, enterprises have created massive cultural and structural barriers to innovation, which were designed not to disrupt, but to sustain an established business that has been working really well.

Cultural Barriers To Enterprise Innovation

There are many cultural barriers to innovation. I am certain that I'm not capturing all of them in this blog post. After thinking about my experience working in large, Fortune 500 enterprises, I think there are five cultural barriers that are most common, most deeply-rooted and most difficult to change.

1. Fear of Failure

I recently had dinner with the Chief Science Officer at the global consumer packaged goods company. He asked me, "Why aren't enterprises more innovative? What is the real reason?"

Without hesitation, I said, "Fear of failure. The good people who work in Corporate American have been conditioned to be afraid of failure. They live in an execution environment. They are taught that execution is everything and failure is not an option. This belief is reinforced by the hierarchical organizational structure, the corporate incentive system of punishments and rewards and the system that decides who gets promoted and who gets fired. Working in this environment, if they weren't afraid of failure, they would be crazy. Most of them aren't crazy. They just want to do a good job and provide for their families."

So here's the truth if you are an executive at a large enterprise in the U.S.:

We have met the enemy, and he is us!

As with all of the cultural structural barriers, enterprises have difficulty innovating because they can't get out of their own way.

One of the best books on the fear of failure in the enterprise is The Other F Word, by John Danner and Mark Coopersmith. If you work in enterprise innovation, I highly recommend it. 

In addition to Danner and Coopersmith's arguments, which are solid, I think our fear of failure comes from educational institutions in Western societies. In school, we are taught there is a right, and a wrong answer. We are all conditioned to find the right answer and to regurgitate this answer upon request. Students who give the "correct" answer are rewarded with a good grade, honors, awards and accolades from their parents. In some cases, children learn their parents seem to love them more when they get an A in class. If you get the wrong answer, you are punished with a bad grade, labeled a "problem child," are singled out and can be ostracized from the class or the family. This sounds harsh, but I'm exaggerating only slightly I'm afraid. 

What we fear most is being disconnected from everyone else. Unless we can figure out how to get the right answer, our greatest fear could become reality. 

This process continues from about second grade, (6 or 7 years old) until we graduate from college or grad school (22 or 24+). That's a lot of conditioning at a very formative time in our lives! If we are educated in this country, we are institutionalized. 

When I created my first startup, the reinforcement continued. 

"Oh boy, you gave up a pretty good job. I hope that works out for you."

"I'd love to start a business too, but I have a family and a mortgage."

"Well, if it doesn't work out, you can always find a job."

In can't remember too many people that encouraged my crazy, risk-taking nature. It would have been quite different to hear the opposite.

"Congratulations for having the guts to answer your calling and pursue the opportunity you see so clearly in front of you. It doesn't matter if you make money in this venture or not. What matters is that you went for it, and you put everything you had into your attempt to change the world. That fact that you showed up and made your claim without fear means you are already successful."

Hearing something like that would have been refreshing and encouraging. Unfortunately, I never did.

To bring this back to the enterprise, how many people do you know received a promotion after a high profile failure? Can you think of one person? Generally speaking, those who fail in the enterprise are no longer there.

When you are doing something truly new, when you are creating a disruptive innovation, failure is part of the process. It's inevitable. It doesn't have to be permanent. If you don't create and reward a culture of failure, you simply won't have disruptive innovation. I think it's really just that simple.

2. Expected value bias

What is the expected value of a startup on the day you create it?

A few months ago, I spoke with Professor Steven Kaplan from University of Chicago Booth School of Business. I talked to him about my startup track record. I've created six startups so far. After describing what they were, I asked Professor Kaplan, "What were my odds of making any one of these startups successful? I think it's something like 1 in 10,000. Is that right?"

He said, "Oh no, your odds aren't that bad! I'd say they are more like 1 in 2,000."

I'm so glad I never calculated the odds at the beginning of the startup :-).

Let's run with the 1 in 2,000 probability of a disruptive technology startup being successful and apply it to the enterprise. 

Option A: create a new, disruptive innovation that generates a $100 million return in five years.

Expected value is equal to the value of the expected positive outcome times the probability of that outcome. Therefore...

Expected Value of Option A = $100 million * (1/2000) = $50,000

Is $50,000 a lot of money to a large, established enterprise? No.

Let's look at another option for the enterprise.

Option B: add a new incremental innovation that increases profit margin by 5% on our $1 billion business.

Let's assume Option B has a 80% probability of succeeding. After all, we did the same thing last year so 80% seems reasonable, doesn't it?

Expected Value of Option B = $1 billion * 5% * 80% = $40 million

So, the choice is to invest in Option A, with an expected value of $50K versus Option B with an expected value of $40 million. It's a no brainer, isn't it?

Large enterprises have an expected value bias. Because disruptive innovations are difficult to predict and they have a low probability of success, large enterprises consistently understate the value of them. If they accurately stated what will happen if the stars align and the disruption takes over the market, no one within the enterprise will believe them. This visionary, forward-thinking executive will be wrapped in a white suit and placed in a rubber room.

Startups don't have this expected value bias, because they have nothing to lose. There is no Option B for a startup. Option B is just startup failure.

And this is exactly why startups are so dangerous to large enterprises. Startups have nothing to lose. Large enterprises have everything to lose.

To be sure, there are more cultural biases to discuss. I will take on the following biases in my next post.

3. Business case bias

4. Execution bias

5. Alignment bias

Key Insights:

  • Fear of failure is everywhere in the enterprise, and it comes fundamentally from being institutionalized at a young age in school
  • Expected value bias prevents large enterprises from allocating resources to disruptive innovations
  • Startups have nothing to lose. Enterprises have everything to lose.

Next post, Cultural Barriers To Enterprise Innovation, Part 2 of 3