Digital journal on new era of Consumer Lending and Payments
Incumbents and Innovation
I have led several innovation initiatives at large organizations. Many of the initiatives failed to scale over time due to lack of resources; while a startup launching the same idea made profound impact on the entire ecosystem. I have often wondered why it is so hard for incumbents to innovate?
In my observation company culture is a primary driver behind innovation. Culture is not just how new ideas are embraced but it is also how failures are handled. Sincere attempt at innovation is impossible without some failed attempts. As the saying goes, one who has never failed, has not attempted high enough. Large organizations can be paralyzed by their fear of unknown risk and stay comfortably with known “strengths”. It takes lot of humility and a different mindset to venture into a space that offers potential to significantly change a process but not a predictable rate of 3-year return.
Divisions in large organizations are silos which compete with each other for scarce capital investment, budget and management committee’s attention span. There is often another idea that offers better return in short term over an investment idea that has spectacular long term growth potential but unknown short-term return. We all know about the story of Kodak killing its own digital camera to protect existing film and print business.
It takes vision, risk appetite and an incentive system that rewards, or at least balances long term prosperity with short term cash flow. Unfortunately, focus on efficiency, by either cost cutting or by allocating every last dollar of capital to create most shareholder value in the short term is anathema to everything that is needed to nurture innovation.
Some companies have responded by creating separate innovation lab or division which are more like R&D depts.
Most of these innovation arms help the larger organization find targets for venture capital investment and future acquisition. Successful organic growth by launching product ideas from innovation divisions are rare in large public company domain outside of FATANG (Facebook Apple Tesla Amazon Netflix Google) companies.
Obviously strong balance sheet at these companies helps but many Financial Services companies with excellent balance sheet have failed to innovate like the FATANG companies. FATANG companies are relatively knew, many still have active founders who are disruptors by nature. But most importantly, they have been able to create a product driven culture where customer need drives the product concept, a much-wanted feature gets the resources it needs and is brought to market to either succeed or fail. Product pricing is determined by customer demand and not by return on existing company assets.
This is fundamentally different than deciding most efficient allocation of every dollar by financial models. What is good today may not be same as what could be great in 5-10 years. I wish incumbent organizations in Financial Services and Healthcare would see the inevitable and play for the long term.