Business size and the innovation debate

Innovation is a business topic in its own right, and it also crops up a lot when there are discussions about the benefits and drawbacks of size – or economies and diseconomies of scale, in syllabus terms. This is a rich thread for evaluation, although it’s probably fair to say that poor rates of innovation and change are often quoted as a classic ‘diseconomy of scale’. In other words, big business is supposed to be bad at it.

But more and more big firms are setting out to challenge this view and prove themselves as innovators. The Economist have also recently added to this side of the argument.

Recent blogs have picked up on this view. Back in 2009 I began to revise my views about the supposed merits of small firms, with a blog called Back and Bigger than Ever, followed by a look at how big firms like Google try to foster innovation. More recently I started using a good clip from the BBC about innovation at Microsoft and I posted a blog about the moves PepsiCo were using to try and stay innovative too. Here on T2U there’s also a presentation you might want to work through.

The recent Economist article referred to earlier quotes a new report which concludes that today’s economy favours big companies over small ones. Big is back, and big is clever, for three reasons.

- Much economic growth is centred on intense technological sophistication, and these systems need to be managed by a core company (like Google or Apple) that has the scale and skills to provide technological leadership.

- Globalisation is shrinking the world, so capture the fruits of innovation it is no longer enough to be a big company by American standards. You need to be able to stand up to emerging-world giants, many of which are backed by something even bigger: the state.

- Third, many of the most important challenges for innovators involve vast systems, such as education and health care, or giant problems, such as global warming. To make a serious change to a complex system, you usually have to be big.

So is the “small=innovative” argument out of date? The article seems to think so. American firms with 5,000 or more people spend more than twice as much per worker on research and development as those with 100-500. Big companies have a big advantage in recruiting a most valuable resource: talent. And the boss of 3M, a big firm with a 109-year history of innovation, argues that companies like his can combine the virtues of creativity and scale. 3M likes to conduct lots of small experiments, just like a start-up. But it can also mix technologies from a wide range of areas and, if an idea catches fire, summon up vast resources to feed the flames.

There’s more in the article, and this debate will run and run.