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How Organizational Aging Affects Innovation

(originally published by Booz & Company)

When a company is threatened by an innovative technology, should it rush to embrace and develop it? Not necessarily. The organizational response to innovation changes as a company ages. Older companies tend to be better at incremental innovation — developing products from an existing patent portfolio or knowledge base. But as a company matures, it loses much of its ability to respond directly to rapid and radical innovations. Aging companies must assess their capabilities before reacting to market disruptions.

Established firms excel at wringing new product lines and line extensions from existing assets, and selling into markets pioneered by others. They are more efficient at creating patent portfolios, for example, that can protect new product lines and create future licensing revenues. They also have existing distribution channels and marketing relationships that help get products into customers’ hands quickly. Diversified companies can combine the skills and technology of different operations. The Sharp Electronics Corporation, for example, invests a third of its R&D projects across divisional lines. This approach led to Sharp’s development of handheld devices that use the Microsoft Windows CE operating system.

However, older companies’ organizational factors — such as bureaucracy, poor communication among divisions, work forces that don’t have the skills or knowledge to respond to new opportunities, and inflexible resource allocations — inhibit fast responses to radical innovations. In the early 1990s, for instance, combinatorial chemistry transformed drug discovery from a labor-intensive process to a computerized exploration of molecular compounds. Startups became the pioneers in this area, but big pharmaceutical companies couldn’t pounce on the opportunity, in part because synthetic chemists felt threatened by the new technology. Politics prevented the allocation of significant resources to this new research, which made it difficult for big pharmaceutical companies to recruit combinatorial chemists with leading-edge knowledge.

Established companies have pursued expensive, distracting strategies, such as skunkworks and corporate venturing, to become as nimble as startups. But in many cases, the operations either failed to innovate or could not capitalize on their breakthroughs. Similarly, the Xerox Corporation for years did not capture value from such innovations as graphic user interfaces and laser printers developed at its Palo Alto Research Center.

Nevertheless, older firms can use their wisdom and age to trump speed and youth if they:

• Remain patient. Startups, backed by impatient venture capitalists, feel pressure to rush their innovations to market; older companies can wait for evidence of long-term disruptive effects. In e-tailing, this scenario has played out repeatedly: First-movers established technology standards and market visibility, but couldn’t generate profits. The Webvan Group Inc., incorporated in 1996, spent $1.2 billion to build grocery delivery services to households in the United States before going out of business this year. Royal Ahold, the Dutch owner of Stop & Shop and other grocery chains, waited until 2000 before acquiring a majority stake in e-grocer Peapod Inc., and has since acquired the entire company, all for less than 10 percent of Webvan’s lifetime losses. Royal Ahold already had the brand and infrastructure to support an online operation. Now it benefits from others’ investments in refining tools for e-commerce site construction, a glut of technology workers, a larger base of online consumers, and accepted standards for online customer service.

• Ally or buy. Alliances or acquisitions give older companies the chance to become players. Eli Lilly and Company, for example, bought its way into combinatorial chemistry with its 1994 acquisition of the Sphinx Pharmaceuticals Corporation. By then the technology had proved its value for drug discovery.

• Use existing strengths. Some companies, like the Sony Corporation, create disruptive technologies, whereas others are technological followers that compete on their distribution and marketing prowess and other resources. Sony’s rival in consumer electronics, Matsushita Electric Industrial Company, has built its Panasonic brand through its sales operations and advertising, rather than technological innovation.

Aging is a fact of life, and companies need to assess their strengths, weaknesses, and options honestly before responding to external changes. Clearly, aging companies can benefit from disruptive technologies, but their responses don’t have to be, and should not be, the same as those of younger companies.

Toby E. Stuart,
Toby E. Stuart is the Fred G. Steingraber–A.T. Kearney Professor of Organizations and Strategy at the University of Chicago Graduate School of Business.
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