New initiatives that do not closely align with existing (“core”) businesses are penalized when it comes to allocation of scare resources. This institutional bias against innovation is deeply rooted, with human nature (fear of the unknown, and a desire to preserve personal stature) playing a significant role.
The Palo Alto Research Center, founded in 1970 as a subsidiary of the Xerox Corporation, is a useful case study. Despite developing or refining a number of breakthrough technologies (including the computer “mouse,” laser printing, the Ethernet, the modern graphical user interface (GUI), and ubiquitous computing) Xerox largely failed to capitalize on these innovations, instead allocating resources to its core copier business.
In most organizations, a manager’s power is directly correlated with the resources he or she controls, and the success of the products or initiatives with which they are linked, creating a disincentive for managers to redeploy their assets to new (and potentially more valuable) initiatives. Within most companies, there is a monopsony for new ideas; that is, all ideas, no matter how big or small, must work their way up the chain of command to senior management, thus penalizing ideas that originate at the bottom of the organization and must work their way past a greater number of gatekeepers. The level of uncertainty (and hence risk) associated with truly novel ideas does not match well with the traditional process for allocating resources, which demands a level of certainty about volumes, costs, timelines, and profits. This “novelty penalty” ensures that managers are rarely penalized for continuing to invest in existing businesses.
Create multiple markets for new ideas within organizations, providing “sellers” of new ideas with alternatives to traditional process. Create mandates for innovation (i.e. set targets for sales from new products a la Google). Remove financial disincentives for “self-cannibalization” (i.e. profits lost due to cannibalizing existing initiatives or products are made whole when calculating compensation).