The New Era of Corporate Innovation

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The New Era of Corporate Innovation

Since the mid-1970s, small firms and entrepreneurs have enjoyed a huge advantage compared to large corporations. Unburdened by bloated bureaucracies and rigid R&D structures, start-ups have been flexible enough to pursue game-changing ideas that aren't even on the radar screens of established competitors.

But all that is changing today, and the advantage is shifting back to corporations. To understand why, we must begin by briefly tracing the history of innovation through four major stages beginning prior the Industrial Revolution and continuing right up until today.

As Scott Anthony, the managing director of Innosight Asia-Pacific, points out in his Harvard Business Review1 article titled, "The New Corporate Garage," the first stage consisted of the lone inventor. From Gutenberg's printing press to Thomas Edison's lightbulb, most innovations developed until about 100 years ago were created by individuals.

During the second stage, which corresponds to the "Mass production era" and lasted until about 40 years ago, corporations took the lead in innovation. Due to changes in manufacturing, such as assembly lines and automation, production became more complex and hence more expensive. Large companies developed the innovative products of this stage, including DuPont's nylon, Procter & Gamble's Pampers, and IBM's mainframe.

The third stage started in the 1970s and lasted until very recently. It was fueled by the power of venture capital, which gave start-up firms like Microsoft, Apple, Amazon, Google, and Facebook the money they needed to create the engines of the Digital Age. More recently, the rise of cheap, networked computing has radically lowered the costs of starting and growing global businesses. Innovation shifted from big corporations back to individual visionaries like Bill Gates, Steve Jobs, Jeff Bezos, Sergey Brin, Larry Page, and Mark Zuckerberg.

At the same time, the success of these start-ups made it increasingly difficult for corporations to compete for new markets because of a dramatic shift in investor psychology. Due to the massive returns from early investments in companies like Microsoft, Dell, and many others, investors' expectations changed. They expected even blue-chip companies like P&G, IBM, and GE to post stellar returns every quarter. Unable to gamble on new products or take a risk on unproven markets that could cause their share prices to stumble, big corporations focused on incremental improvements and — aside from the notable exception of Apple — left innovation to the upstarts...

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