Identifying how a Startup Innovates

Why do start-ups seem to have an easier time than established companies do in coming up with breakthrough innovations? Is it the people, the organizational structure or the culture?

More than anything else it is incumbents’ obsession with “incremental innovation,” say Professor Tony Davila of the Instituto de Estudios Superiores de la Empresa at the University of Navarra in Spain and Professor Marc J. Epstein of the Jones Graduate School of Business at Rice University in Houston in their new book, “The Innovation Paradox: Why Good Businesses Kill Breakthroughs and How They Can Change” (Berrett-Koehler, 2014).

When a company pursues incremental innovation, for example by increasing efficiency here and improving execution there, research-and-development investments actually can end up making companies less able to make breakthrough innovations. That is the innovation paradox.

Building on ideas put forward in their best-selling “Making Innovation Work: How to Manage It, Measure It and Profit from It” (Wharton School, 2006), Davila and Epstein step up to offer advice on how to foster different types of innovation both for times of stability and for times of change.

“Incremental innovation delivers results as long as the industry structure remains stable,” the authors explain, “yet it can fail miserably when unexpected developments redefine an industry.”

The goal is to avoid being left behind, as were Nokia or Blackberry maker Research In Motion, as industries are transformed by paradigm-changing breakthroughs.

The problem is that many corporations fail to realize that there are different types of innovation, and that they require different management approaches.

At one end of the spectrum, incremental innovation usually means reducing costs and adding customers by gradually improving operations and products. Incremental innovation is about managing knowledge effectively.

At the other end of the spectrum, breakthrough innovation is about managing ignorance. Pursuing breakthroughs requires the handling of a high level of uncertainty to build products for markets that might not yet exist, markets such as space tourism, nanorobots or an ageless society. The organizational design that works well for improving operational excellence often gets in the way of the kind of breakthrough innovations that leaders seek in changing times.

Nonetheless, some established companies succeed in defying the innovation paradox. IBM, for instance, completely reinvented itself after facing near-certain death. Apple revolutionized the mobile-device market after having been dismissed as a relic of the past. Nespresso, part of the food giant Nestle, created a totally new market – coffee by the cup – that is now worth several billion dollars.

To help other incumbents defy the innovation paradox, the authors develop a new model called “the start-up corporation,” which identifies the fundamental traits of successful start-ups that large corporations should adopt to foster breakthrough innovation.


People with breakthrough ideas are likely to be found at any level of a company. Effectively managing innovations that come from below the C-suite is crucial.


Breakthrough innovations often come from collaborations with outsiders such as universities, suppliers or customers. Larger corporations usually have more valuable networks, but they need to better leverage those networks to make breakthroughs.


Learn from failures, rather than punishing them. Encourage employees to take calculated risks and to go after hard, high-potential challenges. Leaders of innovative organizations trust their people beyond what many would consider reasonable limits.

Granted, changing a corporate culture and an organizational model is not easy, especially for large incumbents set in their ways. Large incumbents bring their accumulated resources, their networks and their abilities to execute, however. As a model, the start-up corporation is designed to leverage incumbents’ strengths, adding start-ups’ agility to meet future challenges.

The alternative is to cling to a let’s-hope-my-industry-stays-the-same-forever strategy, which opens the door for new or more aggressive players to redefine the rules of the game – or start a new game altogether.

This article was originally posted on Economic Times