Why boring old companies are sometimes the best innovators

Incumbent companies often have an edge when it comes to commercial discipline, operational excellence, and strategic agility

PUBLISHED : Friday, 06 May, 2016, 2:43pm
UPDATED : Friday, 06 May, 2016, 2:43pm

There’s no shortage of innovative and impressive startups in Silicon Valley. Equally impressive is the number of unicorns—startups that are valued at US$1 billion or greater. Fortune magazine recently counted more than 170 of the mythical creatures, with an average of one unicorn born every week during 2015. Back in 2009, there were just four companies that fit the name.

No less noticeable are ones that abruptly flamed out or being embroiled in crises. Zenefits, an HR software company, once valued at a whopping US$4.5 billion, is now struggling to recover from a regulatory scandal. It was found cheating on the state’s online broker license course. The personal genomics and biotechnology company 23andMe, once valued at US$1.1 billion for heralding the future of home DNA testing, came crushing down in the wake of a regulatory shutdown. Even Snapchat, hailed as the most popular social app among teens, saw its value marked down by 25%.

To be sure, the technology sector is unlikely to experience a meltdown as severe as the housing crisis of 2008. But without a sustainable stream of profits, or even revenues in some cases, many startups obviously have trouble justifying their lofty valuations. Growing too quickly can produce just as spectacular a failure as growing too slowly. Which begs the question: How to avoid being consumed by impossible expectations?

Enter Tencent. Founded in November 1998, the company has since grown into China’s largest and most used internet service portal, and in the process, has also become the world’s largest game company. It owns Riot Games that published League of Legends, competing fiercely with household names like Electronic Arts and Nintendo. Except Tencent wasn’t just about gaming.

Back when desktop computers still reigned supreme, Tencent dominated online instant messaging with QQ service (similar to ICQ). With the rise of smartphones and mobile computing, QQ had failed to capture new users with its mobile application. Top management swiftly established a new team in Guangdong, away from the Shenzhen headquarters, and tasked a small group of engineers to imagine a different social media platform, giving them the carte blanche to cannibalise existing QQ. That was the beginning of WeChat.

Since then, WeChat has been constantly launching new services, from mobile payment to booking doctor appointments, from police reporting to taxi hailing, from video conferencing to mobile banking services. Just last August, WeChat started the international rollout of games—another move to disrupt the core business at Tencent.

That willingness to cannibalise existing businesses, however, is hardly unique to Tencent. Under Steve Jobs, Apple had a track record of cannibalising its own products. In 2005, when the demand for the iPod Mini remained huge, the Nano was launched, effectively destroying the revenue stream of an existing product. And while iPod sales were still going through the roof, Jobs launched the iPhone which combined iPod, cell phone, and internet access into a single device. Three years after the iPhone’s launch, iPad made its debut and raised the prospect of cutting into Mac desktop computer sales. So resolute was Apple’s determination in trading a highly profitable business for an unknown future that Jobs reportedly said: “If you don’t cannibalise yourself, someone else will.”

Other tech companies like Amazon, Google and Facebook have continued to grow impressively, especially considering their already large size. And they all share similar attributes: None has pursued a conservative strategy of trying to protect and extend existing products. They all are developing the next growth engine before the core business begins to show signs of maturity. And most importantly, they embrace risk when experimenting with new products and services.

Industry observers like to bet on the next generation of technology firms to unsettle the old guard, but disruption often happens not as quickly as people normally assume. It turns out existing incumbents also learn, by blending commercial discipline, operational excellence, and strategic agility in a seamless package. The end result is no less magical than a herd of unicorns.

Howard Yu is professor of strategic management and innovation at IMD.