Why big COmpanies struggle to Innovate

You have probably heard the story before; an entrepreneur came up with an innovative idea, builds it and decided to create a startup. Fueled by motivation, quick thinking and swift actions, the business grows, and begins overtaking customers and services from larger corporations in the industry. The innovation drives the growth of this new corporation and it becomes highly profitable. Then the pace starts to diminish. The bigger the company gets, the more sluggish they are. Until, they are just as large and as slow as the companies they over took.
Why is this? Why do so many corporations lose the speed and energy of innovation the bigger they get?

Long chain of command
One factor that accounts for this is their sheer size. As companies grow, they need more employees to handle their operations. This leads to hierarchical structures and a growing chain of command. All of this is generally good for business, except that innovative ideas now have a long way to go from discovery to execution.

The employees closest to the customers are often farthest from the decision makers and have to go through several levels of management to communicate their findings and suggestions to the executive who can pull the trigger.

The result is that the idea fizzles out or the window for execution passes.

Considerations
In other situations, the information reaches the decision makers. However, the potential innovation must face a second hurdle. Approval. Large corporations usually mean shareholders and board of directors who have to deliberate on whether or not to move forward with an idea.

With the board's responsibility to the shareholders to turn good profit at the end of the quarter, many ideas are not approved. Mainly because innovative ventures usually have an incubation period during which significant investments need to be made before they can yield profit

Unwelcome disruptions
Another point that might explain big companies' perceived aversion to innovation is that it can sometimes be disruptive. Both in the strain its execution takes on the systems in place, and effect it has on the current business. Corporations pride themselves on their established processes and procedures to ensure they are functioning like a well-oiled machine, but this is also the biggest barrier for ideation, innovation and employees challenging the status quo.

Consider how Bell Labs buried the answering machine after its discovery in 1934 because they believed it would lead the public to abandon the telephone (which was the core of AT&T at that point). This might be an extreme example, but it illustrates what can happen when big companies come across opportunities that can disrupt their structure or their business, or both.

The solution
In order to thrive, innovation needs the protection of structures. Such structures have to be designed to tackle the impediments that innovation faces.

For starters, a shorter chain of command will foster communication between employees and executives, and thus, improve the speed of innovation. A good structure to imitate is Amazon's two large pizza rule. It goes that every team must only be large enough to be fed by two large pizzas. This keeps the team small and the obstacles to innovation smaller.
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Another solution is to let separate and independent bodies handle new opportunities. This can be through collaboration with smaller companies or in-house teams headed by an executive with enough authority. Small companies lack the bureaucracy that large companies have and can achieve a lot with their simple linear structure. Independent teams would have the same advantages, and still benefit from the resources of the parent company.

Although the independent bodies might be able to feed innovation on a corporate level, a deeper approach however is to give employees the freedom to contribute actively to the innovative process. This could begin with a system where employees are free to voice their opinions without fear of penalty. The Andon system, used as a part of the Toyota production system, is a perfect example of this kind of empowerment. Any worker, at any point, has the ability to stop the production process if they think they've spotted a defect. They further have the "authority" to call for assistance to evaluate the observation. Perhaps the most empowering feature of this system is that if a defect is not found during evaluation, the employee is not at risk of disciplinary action or any other form of detriment. It is instead more preferable that the production is stopped due to a false alarm, than for a defective car to be produced. A system like this gives employees great freedom to think and even greater freedom to act, thus fostering innovation at every level of the organization.

A more difficult solution would be for big companies to swap their short-term profit expectations for more long-term aspirations. Without innovation, there would be no economic and business growth. And even though large companies have a lot of features that keep them from innovating, they have the most to benefit from innovating.