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Company Size Matters

January-February 2015

Illustration by Pete Ryan

Because she has spent decades writing about how businesses manage innovation, Rebecca Henderson calls it a fitting coincidence that, before moving to Harvard in 2009, she spent many years as the Eastman Kodak professor of management at MIT’s Sloan School. It was, after all, the monumental shift from film to digital photography that sent Kodak into bankruptcy.

“I work with firms that are worried that they are going to be Kodak,” the McArthur University Professor explains. She has found that companies that innovate successfully are skilled at anticipating consumer needs, managing the research and development of new products to meet those needs, and constructing business models that include new offerings.

But recently she has focused on one of the most globally consequential shifts in history—from an economy based on fossil fuels to one based on alternative energy—and she is finding that some past lessons about innovation may need to be reconsidered.

Under most circumstances, Henderson has found, small start-up companies may be better equipped to launch and cope with “disruptive innovation”—changes that set off a sea change (see “Disruptive Genius,” July-August 2014). A large company’s assets can limit its ability to maneuver. “If you’re Kodak, for example, some of the assets that kept you in business for so long include unbelievable manufacturing ability in film, so one of the constraints as you attempt to innovate is keeping your existing assets, which are a huge source of advantage, but not letting them trap you into models that don’t make sense.”

Among those existing assets in large, successful firms are employees with “skills and capabilities that support the pursuit of operational excellence”—but this is “often a quite different set of skills and approaches than one that generates innovation and experimentation,” she says. Start-ups, on the other hand, often work without restrictive mental models that can stifle creativity. And, she adds, smaller firms in many industries see a greater return, dollar for dollar, on their research investments. A start-up’s lack of cash can be a problem, but it can also force a company to be nimble: “It’s a great advantage because you have to really hustle. If a project doesn’t work, you take it down and start again.” Big firms need to act like small, creative ones to innovate significantly, she says, acknowledging that this is a difficult proposition for a large, tightly run company.

Yet Henderson—who also co-directs Harvard Business School’s Business and Environment Initiative—says small companies don’t necessarily have an advantage in alternative energy “because the capital requirements for energy are so great.” Large, established companies have guaranteed revenue streams, and cheaper access to capital. Yet, as in other sectors, those companies are often deeply invested in their traditional businesses, with little incentive to move into carbon-free technologies.

Still, “There are a number of very large firms making aggressive and exciting moves in this space,” Henderson reports, citing Walmart, which draws 25 percent of its energy from renewable sources, as well as Amazon and Google, which have made “massive investments in renewable power” to run their server farms. BP, she adds, has invested significantly in plant-based biofuels, and General Electric’s Ecomagination initiative includes a large investment in wind power.

But making real progress in clean energy, Henderson points out, requires establishing a fair price for carbon: increasing fossil-fuel prices to cover the costs of their use beyond harvesting, refining, and transporting them. Coal, for example, is cheap only if you don’t count its effects on human health and the climate. Higher, more realistic prices, she asserts, would motivate businesses to use alternatives such as nuclear, geothermal, solar, or wind power.

In her course “Reimagining Capitalism: Business and the Big Problems” (also the topic of a forthcoming book), she discusses the power of business to foster solutions to large-scale social problems such as climate change, access to clean water, and inequality in education. She sees both “enormous economic opportunity and significant risk” in tackling such problems. “One of the things I say to my students is that running a business in such a way that it both generates great returns and tackles the big problems is difficult, since it requires paying constant attention and balancing multiple goals. But I also suggest that, in many ways, it’s much more satisfying.”

Ultimately, though, she believes corporations will accept these challenges because it’s smart business practice—it involves employees in the enterprise of innovation. “Firms that have goals that are pragmatic, but focused on really making a difference,” Henderson says, “can generate a sense of purpose and commitment in the workforce, among their suppliers, and within the communities they work with, which can dramatically increase the creativity and productivity and engagement of the firm.”

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