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Inhibiting innovation

Dr Nektarios Oraiopoulos, University Lecturer in Operations Management at Cambridge Judge Business School, on how the organisational structures of large companies inhibit innovation, and what you can do to buck the trend.

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Dr Nektarios (Aris) Oraiopoulos

Innovation in practice requires experimentation. With experimentation comes the inevitable process of trying, failing and trying again. So, when we talk about innovation what we’re really talking about is the process of testing out diverse ideas and efficiently eliminating the ones that don’t work. Our research with Donald Drakeman, a Fellow of the Cambridge Centre for Health Leadership & Enterprise at CJBS, has found that this process of experimentation in large organisations is often inhibited and leads to reduced levels of innovation, which can lead to larger organisations being outperformed by smaller, more nimble industries.

Our findings are based on a detailed analysis that tracks the origins of the most innovative medicines of the past two decades. We find that the ecosystem of many small companies making up the biotech industry have outperformed the large pharmaceutical companies, in creating novel medicines and breakthrough discoveries, and have done so at a much lower cost.

Through our discussions with senior executives from both industries we looked at some of the factors that systemically block innovation:

  • The decision-making structures and incentives of larger organisations might inhibit experimentation as they are more focused on metrics that reward successes rather than failures. The result of such performance metrics is that managers prioritise projects for which more information is available. Inevitably, those are unlikely to be breakthrough projects.
  • Senior executives also favour narrower project portfolios as they might be worried that once a project gets started it “gets a life of its own” preventing efficient termination decisions.
  • This can eliminate breakthrough ideas because it narrows down the breadth of the project portfolio too early (i.e. radical ideas are often filtered out as there is no evidence for their success).

Overcoming these challenges requires companies to widen their project portfolios by adopting a culture focused on experimentation, and more importantly, setting the right processes and systems for enabling it. For companies aiming at breakthrough projects, this means embracing failure rather than avoiding it.

In a recent annual shareholder letter, Amazon CEO Jeff Bezos wrote: “One area where I think we are especially distinctive is failure. I believe we are the best place in the world to fail (we have plenty of practice!), and failure and invention are inseparable twins.”