By D. Murali, C. Ramesh

As companies grow larger, they seem to find it more difficult to foster innovation. Examples are legion, especially in the IT sector, where startups and smaller, nimble companies most often lead the way in innovation.

Prof Vijay Govindarajan says that after extensive discussions and interviews with hundreds of executives in Fortune 500 Corporations, he has identified five barriers that prevent large established companies from engaging in breakthrough innovations.

Prof Govindarajan is Professor at Tuck School at Dartmouth, in the US, and co-author of ‘Ten Rules for Strategic Innovators – from Idea to Execution’ from Harvard Business School Press. Currently, he is working on his next book, tentatively titled ‘Innovation Olympics’, on barriers to innovation.

Speaking to Business Line, he said that the five barriers are: too much focus on current operations, lack of a “tolerance for failure” culture, not embedding innovation as an organisational capability, too much of a silo mentality, and lack of a global mindset.

Elaborating on these barriers and his rationale for identifying them as barriers, Prof Govindarajan said that leaders tend to over-focus on short-term and operational improvements in the current businesses.

“There are two problems with this mindset: first, excessive focus on operational issues leaves very little time for strategy, which is really about innovation and growth in the future.”

Secondly, he said, the management processes and the organisational DNA that support efficiency in current corporations actually hurt innovation.

“By organisational DNA I mean things like performance measurement systems, incentives, culture and capabilities. For instance, performance measurement systems that are appropriate for operational excellence in stable environments are highly unsuitable for innovative ventures, which operate in uncertain environments.”

He added: “We need ambidextrous leaders who can simultaneously manage the paradox of efficiency and innovation.”

Another major barrier is the lack of tolerance for failure. “Innovation necessarily implies taking risks. As the company grows larger, managers need to take ‘bigger bets’ in order to move the needle. Risk also implies the chance for failure.”

But how many organisations reward managers for failure, asks Prof Govindarajan. Ruing the absence of such a culture in many large corporations, he said that 95 per cent of the business plans written on day one for a breakthrough idea are wrong, “since there are enormous unknowns at that stage. Therefore, it is not the person with the best business plan on day one who wins, but the person who can learn the fastest. Understanding what did not work, learning from it and adjusting the business plan should be viewed as a good thing, not a failure.”

He firmly believes that innovations cannot happen purely by accident, nor should innovations be created only by the CEO.

“Companies must embed innovation as an organisational capability. First, innovation should be viewed as an important responsibility for every employee and second, companies should have a well-understood innovation process.”

According to him, every company should have an innovation playbook that lays out a structure that is conducive to producing innovations that are “predictable, reliable and repeatable.”

Another important step that companies must take is breaking down the silos. Stating that practising decentralisation at one level is a very sound concept, he pointed out that there is a dark side to too much decentralisation.

“It tends to create silos across functions, business units and geographies. For breakthrough innovation to happen, companies must break down the silos, since such innovations usually lie in the white spaces between business units.”

Too many large corporations suffer from problems caused by silos, he added.

“The key is to transform management practice so that companies can harness talent across business units and co-ordinate activities of multiple business units to bring about breakthrough innovations.”

On the lack of global mindset, which is key to fostering innovation, he said this implies companies must understand the differences across cultures and countries.

“They must engage in business model innovation locally to satisfy the unique needs of customers in a particular country.”

Stating that many American corporations tend to export their products to emerging markets, and try to adapt them locally, he said that this approach was unlikely to work because “customers in emerging markets are fundamentally different from those in developed markets, and therefore require fundamentally different products and services.”