Small Companies vs Large Companies in Innovation

David vs goliath is one of those instances that being small does not necessarily means at the losing end. It is how the small companies leverage its advantage over the bigger companies. Below are few factors that small companies may perform better than big companies.

Flexibility
Most small companies adopt a matrix like roles and function. This allows the small companies to perform various roles and functions at any time. In the view of innovation, we are looking at changes to the usual operations of the business. Thus, being able to perform different roles cross functionally proves to be an essential advantage to smaller companies. On the other extreme, big companies generally have a well defined and rigid job structure and functions in view of better management of resources and accountability. Due to this, they are not able to move around effectively during changes in terms of higher cost and longer period to change. Having this in mind, smaller companies may be a disadvantage when there is a fundamental change whereby resources may be insufficient to respond to changes. Large companies on the other hand may have the resources to utilize especially in R&D.

Unlearning
Great thinker like Vijay Govindarajan and CK Prahalad has provided that companies must fundamentally unlearn what they know in order to advance in innovation. This is particularly true as innovation is about changes and moving forward. Companies are not able to innovate effectively if it clings on to their past knowledge. Innovation is not about extrapolating the past but driving the future. Large companies usually have a great pool of knowledge and resources. This will cause them to be less than willing to let go of the past as much of their investments are tied up to their assets (being patent, research and development). On the other hand, smaller sized companies usually have less of their resources tied to the assets. These companies usually utilized the spillover effect from larger companies. Despite not able to compete in a larger scale, they enjoy the ability to exit and enter a new market at lower cost. Thus, smaller companies usually are more willing to let go of the past to fully embrace innovation. Yet, they may face participation challenges as they may be reluctant to invest judging from what they have been doing in the past (capitalizing on spillover effect from larger companies).

Risk taking
When we innovate, we are taking a large degree of risk. Risk remains the most important factor in innovation. As smaller companies have limited downside risk and unlimited upside return, they are more than willing to take the risk as opposed to larger companies. Larger companies also have a larger degree of accountability to stakeholders. They usually try to avoid unnecessary risk. This make sense because they have to satisfy more stakeholders and thus will take a safer choice unless only if it is necessary for going concern issue.

Speed in Communication
In the new era of competition, the fastest usually wins the race. In large companies, there are usually many levels of hierarchy. Thus, any ideas that are thought of are communication to the organization in a longer period of time. This resulted in the ideas losing momentum and gained insufficient buy-in as described by John Kotter as death by delay in his book (Buy-in, Saving Ideas from being Shot Down). Idea losing momentum usually will cause lack of energy to fully embrace innovation. This will result in lack of participation and ultimately good ideas die. This is different in smaller companies as ideas are usually a collective view and the objectives are well communicated with the organization as a whole. This is good in two ways. One is that ideas is communicated when is in at its peak. Two is that bad ideas are able to be determined earlier to avoid resources being used wastefully.

“Success factor in innovation is determined through the ability to repond to changes in a short period of time. This requires a great deal of unlearning the past, communication of ideas and flexibility”

Inspired from: http://www.business-strategy-innovation.com/wordpress/2011/05/innovation-differences-big-vs-small-companies/

Photo taken from: http://aazmin.blogspot.com/2011/04/kerja-selepas-phd-kerja-tempat-belajar.html