In 1885, a 24-year-old cigar salesman named William Durant took a monumental leap of faith when he traded in his stogies for horse-drawn carriages and later horseless vehicles. The latter was an especially gut-churning move given that Durant himself was leery of the smelly, loud, dangerous machines, even refusing to let his daughter ride in one. He wasn’t the only one; the public hated them. But he didn’t let that stop him: His outsize vision of building a mass-market car industry eventually transformed $2,000 in start-up capital into a $2 million global empire.
Fast forward to 2009. Durant’s General Motors, a company ranked No. 1 on the Fortune 500 a staggering 37 times, plummeted from a market capitalization of $50 billion to $1 billion in nine short years. The company filed for bankruptcy and was subsequently re-organized as part of a government bailout, one of the largest corporate Chapter 11 bankruptcies in U.S. history.
While GM’s implosion was unprecedented, its path to get there was neither shocking nor unfamiliar: A scrappy upstart upends the market with a bold new product. The product and consumers dance the happy dance of mutual admiration. Profits skyrocket, enabling the company to buy other companies, widen the scope of its product offerings, and take on a board of directors, shareholders, international plants and global production. In time, sheer size stalls decision-making and efficiency while innovation takes a backseat to accountability.
In contrast, competitor Tesla Motors has barely made it past the first mile marker on its corporate journey. It is sexy, young and bold, far more exciting to the consumer than GM. It has been driven by pressure to hit a home run on its first swing, chief designer Franz von Holzhausen told Fast Company – pressure that has fueled its innovation-focused culture. "Most companies' main bread and butter is gasoline-powered cars," von Holzhausen said. "Working with a company like Tesla where 'getting rid of fossil fuels' is your sole purpose, you've pushed all your chips into the table and you're betting on them."
While there’s little chance of getting any Fortune 100 company to bet the house, there is a lot giant corporations can learn from underdog startups about taking risks, adapting, inspiring employees, and getting more useful feedback from consumers on the road to innovation.
Lesson #1: Don’t Be Afraid to Take Risks
A big corporation has well-established products, customer bases and revenue streams. So not surprisingly, when existing products bring in millions or even billions of dollars in revenue, few companies are willing to rock the boat.
But shying away from risk has a domino effect that begins with deprioritizing innovation in ways large and small. This leads to a loss of competitive advantage and eventually to lower overall sales and a smaller market share.
It’s not a simple matter of maturation, either. Every company sees varying degrees of innovation during its lifespan, but there tends to be an inverse relationship between the level of innovation and the size of the company. For a big corporation to stay competitive, it needs to place innovation at the core of its business strategy and weave it into the company’s DNA. Employees must be encouraged, empowered and rewarded to question the status quo, take risks and get comfortable with failure.
Some of the ways larger companies have tried to emulate startups and create a risk-friendly culture include pairing an executive mentor with an internal entrepreneur who drives the growth, as Google does, and creating innovation labs within their companies. To be successful, though, companies need to set up an environment that essentially is a startup, independent of the larger organization.
“When doing disruptive innovation, that type of work has to have different rules,” says Trevor Owens, co-author of “The Lean Enterprise: How Corporations Can Innovate Like Startups.” “There needs to be autonomy, and employees need to be compensated with equity. The rules of engagement are different—it’s the Wild West.”
Lesson #2: Be Willing to Be an Entirely Different Company Tomorrow
PayPal was not founded to be the online payment service that it is today. It was originally envisioned, founder Max Levchin told “Founders at Work” author Jessica Livingston, as a cryptography company, then later as a means of transmitting money via PDAs. It took several years of trial and error, however, for PayPal to find its calling as an online payment system. Today, it has more than $8 billion in revenue. “You see an incredible number of people who have disappeared because of global competition and because they stuck with what they thought were their cash cows, only to find that those things became commodities,” John Ryan, CEO of the Center for Creative Leadership, told Chief Executive magazine. Companies that refuse to adapt – Kodak is a prime example – fail to hold on to their market-leading status.
It’s a problem common to large corporations, where one of the most frequently heard phrases in any business division is “This is how it’s always been done.” Companies need to banish this phrase from the corporate lexicon and follow the lead of startups. The most nimble and adaptable ones encourage employees to challenge the status quo by examining and analyzing core business operations and giving them the autonomy to implement improvements that improve efficiency and productivity.
Lesson #3: Recruit and Cultivate Top-tier Talent
The ability to give your employees the freedom to take risks and turn existing business operations upside down, of course, hinges on hiring amazing people in the first place, employees you trust implicitly to make smart, independent decisions on the company’s behalf. Fostering a culture that encourages continuous improvement not only weeds out waste and complacency but also leads to more innovative product development, services and processes.
Startups have realized that it isn’t always the person with the most expertise who can get the job done. Hiring strong, smart generalists and giving them the support to figure it out as they go can be more effective in situations with a lot of ambiguity or uncertainty. It also certainly beats waiting six months to fill a role.
Lesson #4: Keep Your Competitors Close — and Your Customers Closer
The most obvious way to learn and improve is by listening to customers, and yet many large companies fail to do just that. In big corporations, the voice of the consumer often gets lost within the layers of hierarchy, and executives can feel too insecure to pass along negative feedback.
It’s impossible, however, to lead effectively if you don’t have your eyes and ears close to the ground. Tesla, for example, built a free Supercharging station right in front of its design studio. “Customers come by and talk with the team. We can get that feedback and be back at our desks in two minutes,” says van Holzhausen.
Customers don’t always know what they want – or what they will want a month or a year down the road. The most successful companies, of any size, innovate constantly to provide the products and services customers might not yet want or know they want. Only a company culture that promotes risk-taking and innovation can make this happen.
Large corporations need to stay hungry, agile, efficient and curious to maintain their competitive advantage. Only by encouraging and championing disruptive innovation – and allowing their employees and customers to help guide their journeys – do they stand a chance against the yet-to-be-invented startup that’s already coming after them.