{"id":16738,"date":"2020-11-07T11:52:22","date_gmt":"2020-11-07T15:52:22","guid":{"rendered":"https:\/\/www.shortform.com\/blog\/?p=16738"},"modified":"2020-11-07T13:57:52","modified_gmt":"2020-11-07T17:57:52","slug":"encouraging-innovation-smaller-markets","status":"publish","type":"post","link":"https:\/\/www.shortform.com\/blog\/encouraging-innovation-smaller-markets\/","title":{"rendered":"Encouraging Innovation With Smaller Markets"},"content":{"rendered":"\n

What are strategies for encouraging innovation? How are smaller markets beneficial for innovators?<\/p>\n\n\n\n

Encouraging innovation is a complicated task. You need sufficient opportunities for selling your new product, but going too big too soon is also challenging.<\/p>\n\n\n\n

Read more about encouraging innovation.<\/p>\n\n\n\n\n\n\n\n

Small Markets Aren’t Encouraging Innovation by Big Companies<\/h2>\n\n\n\n

Companies typically get bigger the longer they\u2019re in business. While growth equates to success under normal circumstances, it inhibits companies from transitioning to disruptive technologies. <\/p>\n\n\n\n

As companies get larger, they need to bring in increasing profits to cover growing costs. The larger a company gets, the less it\u2019s able to spend valuable resources on projects with low profit margins. <\/p>\n\n\n\n

Problem: Pressure to Perpetually Grow<\/strong> Isn’t Encouraging Innovation<\/h3>\n\n\n\n

Most executives feel pressured to continue growing their companies for several reasons: <\/p>\n\n\n\n

  1. The growth rate of a company\u2019s earnings drives its stock prices, which makes investors happy, which puts the company in a good position to access capital. Additionally, employees who have stock options are incentivized to continue working hard when stock prices are growing. <\/li>
  2. Growth helps keep top-performing employees in the company, because it creates room for them to move up to higher positions. If the company stagnates or struggles, it risks losing its best employees to other, more successful companies. <\/li>
  3. Growing companies can justify investments in new technologies more easily than stagnated companies can. <\/li><\/ol>\n\n\n\n

    However, perpetual growth creates a conundrum: The bigger a company gets, the harder it is to continue growing and it isn’t encouraging innvoation. <\/strong><\/p>\n\n\n\n

    For example, if a $40 million company aims to maintain a 20 percent annual growth rate, the goal is much easier to attain in the early years\u2014$8 million the first year, $9.6 million the next year\u2014but the figure quickly climbs. The $8 million growth the company needed in the first year more than doubles by the fifth year and nearly triples by the seventh year. By the time the company is worth $400 million, it needs to bring in $80 million to maintain its growth rate. <\/p>\n\n\n\n

    The emerging markets for disruptive innovations are too small to support large companies\u2019 growth needs.<\/strong> But if big companies wait until the disruptive technology\u2019s market is established enough to better satisfy their growth needs, they miss the critical window for entry. <\/p>\n\n\n\n

    Pioneers of Disruptive Innovations Have an Advantage Over Late Adopters<\/strong><\/h4>\n\n\n\n

    When an innovation emerges in an industry, a company\u2019s decision about whether to lead or follow the trend plays a critical role in its fate. <\/p>\n\n\n\n

    On one hand, pioneers can reap the rewards of first-mover advantages, which allow the company to build brand recognition and customer loyalty before other firms enter the market. First-mover advantages are encouraging innovation. On the other hand, followers can avoid costly missteps by waiting to enter a market until the pioneers have encountered and resolved early issues. <\/p>\n\n\n\n

    Research shows that companies that pioneer sustaining <\/em>technology have no early learning advantage or any other substantial benefit over the companies that follow later. <\/p>\n\n\n\n

    However, companies that pioneer <\/strong>disruptive<\/em><\/strong> technology in emerging markets perform significantly better in the mid- to long-term than late adopters.<\/strong> For example, the first disk-drive companies to adopt thin-film technology averaged $1.9 billion in revenues during an 18-year period, while the late-adopting companies averaged only $64.5 million. <\/p>\n\n\n\n

    Late adopters delayed in order to minimize their market risk\u2014<\/em>entering an emerging market with an unproven technology\u2014but the tradeoff was increasing their competitive risk\u2014<\/em>the threat of facing fierce competition if they entered the market later.<\/p>\n\n\n\n

    Solution: Create a Small, Independent Organization<\/strong> Responsible for Encouraging Innovation<\/h3>\n\n\n\n

    When large established firms are confronted with this dilemma, they typically take one of three approaches: <\/p>\n\n\n\n

    1. Try to push the emerging market to grow more quickly<\/li>
    2. Wait until the market has grown <\/li>
    3. Create independent entities to develop and market the disruptive technology, and make sure the entity is small enough to match the size of the market<\/li><\/ol>\n\n\n\n

      As we\u2019ll see in the following case studies, the first two strategies are seldom successful at encouraging innovation. By contrast, the third strategy is the most effective way for a company to tackle a disruptive project. <\/p>\n\n\n\n

      We talked in the last chapter about the benefits of an established firm creating an independent organization to lead disruptive projects<\/a>. When a company creates the independent entities, it\u2019s essential that its size fits the small (albeit unknown) market it\u2019s targeting, because:<\/p>\n\n\n\n