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10 Reasons Large Organizations Have Innovation Challenges

        posted by , May 17, 2011

It's a story as old as business itself: a company grows, conquers markets and then looses its innovative touch. Large businesses that can't innovate go into a long painful decline. Some companies can't even buy their way into innovation.

There is a fundamental economic reason that large businesses are innovation-challenged: diseconomies of scale — 10 forces that hold big companies down:

1. Communication Complexity

The complexity of business communication grows rapidly with the number of workers. This increases the cost of communication (more meetings) and reduces the quality of communication (misinformation).

2. Top-heavy

Large organizations have a tendency to become top heavy and bureaucratic. Staff may become bogged down in policy, procedure and administrative tasks that are non-existent at smaller competitors.

3. Office Politics

Office Politics — behaviour motivated by emotions, rivalries and personal best interests is more prevalent in large companies.

Employees of large organizations are sometimes isolated from the economic impact of their decisions. A manager could spend an entire career making bad decisions without materially affecting company profits. In a small company — bad decisions are more likely to materially affect profits (reducing bonuses and causing layoffs). Employees in small companies are closer to the economic realities of the business and less likely to make political decisions.

4. Duplication

Large businesses often duplicate efforts at the worker, team or even departmental level. For example: large companies may have thousands of IT systems with hundreds of functional duplications. Big companies may even duplicate expensive enterprise software — it is not uncommon for a big company to have 3 or 4 CRM systems and 2 ERPs.

5. Decision Making Feedback

Decision makers in a large organization are isolated from the results of their decisions. In a small company feedback from decisions flows quickly.

Consider a hot dog vendor who decides to start using a cheaper brand of mustard. He will be able to gage customer reaction right away. A executive at a large firm may have to wait months for the results of choosing a new supplier. In many cases, the executive may never see the results of decisions.

6. Inertia

An old successful company is often resistant to change. Hubris and status quo thinking are a real danger at large firms.

Small companies must experiment and change just to stay alive.

7. Baggage

Large established companies often have a lot of baggage — legacy systems, processes and products. Systems, processes and products tend to become complex with time — until no one understands them.

8. Market Share

A company that has a large market share may be less motivated to innovate. There is little potential to grow sales in a market you already dominate — so the expense of research is more difficult to justify. Business cases for research are more likely to be approved if they promise revenue increases.

9. Core Competency

Many small companies have the luxury of focusing on one or two core competencies. A large firm may have hundreds of products — a situation that is more difficult to manage. It is easier to excel at one thing than hundreds of things.

Put another way: large firms often lose focus chasing growth.

10. Talent Quality

Small yet-to-be-successful firms often attract talent that are interested in the business. If it is a video game company — they can attract video game nerds. If it is a supermarket — they can attract food aficionados or staff that are crazy about supply chain optimization.

Like flies to honey — large successful companies often attract staff who are looking for comfortable employment terms and a fat paycheck. Staff who are motivated by comfortable terms of employment often lack passion for the business.

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