Why is Innovation so Difficult For Privately Held Businesses?

There are times when larger companies have a distinct competitive advantage as a function of their systems or scale. It is intuitive to entrepreneurs that their advantage is driven by their ability to adapt and drive innovation. Yet, on the path to innovation, the structure of a smaller company can be limiting.

What is true in all companies (large and small) is that they are typically organized in functional departments (such as accounting, engineering, and sales). It is the objective of each of these departments to create systems and processes that further the effectiveness of the status quo.  So how can Vistage members overcome these inherent limitations and be best-in-class in terms of innovation?

Clearly smaller businesses are more impacted by resource constraints than larger organizations that have entire departments dedicated to strategic planning, R&D and innovation.  Further; the strength of functional managers in solving operational problems can be a weakness when it comes to innovation. For example, a company may spend a year or more implementing lean manufacturing  which may be game changing in terms of profitability but does not revolutionize the business or open it to new markets.

Recent articles written by Kotter (author of Leading Change) and Kahneman (Thinking Fast and Slow) suggests that people and organizations have two parallel tracks of thinking: one that is left brain (logical and detail oriented) and right brain (more innovative and intuitive)[i].  Further, the structure of organizations puts these two tracks in conflict.  In other words, it is impractical to believe that people who are responsible for preserving a company’s existing competitive advantage are capable of leading the charge to reshape it.  The theory is not an indictment of the capabilities of managers, but of an environment where people are working at or above their capacity, and on many initiatives at once.

Kotter calls for companies to operate “two systems”, one building out the capabilities within the core business and another tasked with exploring external opportunities. For most entrepreneurial companies, it is all hands on deck in terms of growing the business within a core competency while satisfying customers and remaining profitable.

Thus, it is incumbent upon the entrepreneur to drive innovation and to be purposeful in doing so.  Such thinking only reinforces the need to have strong C-level management (such as COO’s and CFO’s) so that the CEO can lead forward thinking initiatives that transcend incremental improvements (such as implementing a CRM or ERP).

Another issue is brain trust (reinforcement of the need for peer groups like Vistage.)  If you do not have innovators within your business, you may need to create a group of confidants (like those in your Vistage group, your Vistage chair and other advisors) who can assist with the formation of your strategy.

Once these resources are in place, the team responsible for innovation must have a forum for research, vetting new ideas and seeing through various opportunities so that they can be incorporated into the business.

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