Companies invest in innovations with low financial risk that bring about little change.
In order to understand the causes and consequences of this point, it is important to know what is happening at a general level. Currently, the market power of companies is gaining ground. This has led to a global debate on its effects at the level of macro-economic trends in advanced economies.
The ‘World Economic Outlook’ report from the International Monetary Fund, dated October 2018 explains what has happened in the last two decades. As companies gain greater market power, more and more people are observing
low investment despite rising corporate profits, declining business dynamism, slow productivity growth, and falling labour income shares.
This growing market power is only driven by a small group of large companies. Leaving out most of the business fabric and concentrating all the power in a very small group.
This trend applied to innovation demonstrates the growing focus of companies on financial results, leaving – according to the IMF – other important aspects:
The inverted U-shape relationship between competition on one hand and investment and innovation on the other (…) suggests that, at low market power, firms invest to escape competition, whereas, at high levels of market power, firms have weaker incentives to invest because of the lack of competitive pressure.
When the focus on numbers means losing sight of business and trends
Most large companies with significant market power invest in small innovations that do not represent large risks. In other words, their need for growth is compensated by other types of actions that do not require implementing complex structures to innovate.
Some corporations compensate for their low investment in research by acquiring companies with innovative products or technologies. However, not all companies have the capacity to do this.
The opposite case involves companies with little market power that are forced to make disruptive innovations in order to compete. For this reason, small organisations have been responsible for creating products or services that have changed market trends.
This contrast can be seen in a study that Mark Dziersk describes in his article for McKinsey & Company, September 2018 ‘From lab to leader: How consumer companies can drive growth at scale with disruptive innovation’
Our analysis of the food and beverage market 2013–17 reveals that the top 25 manufacturers are responsible for 59 percent of sales but only 2 percent of category growth. Conversely, 44 percent of category growth has come from the next 400 manufacturers. In contrast, 44% of the category’s growth came from the following 400 manufacturers.
Excessive financial focus can be beneficial, but only in the short or medium term, but what happens when companies emerge that make significant progress in innovation? These companies are gaining market share and transforming their industry. By comparison, organisations that based their goals solely on financial growth lose power over time.
Throughout the history of business, we have many examples of companies that have disappeared or been displaced by others thanks to their innovation.
If you are interested in knowing more about the other mistakes, in the following posts you will find each of them explained in more detail:
- The Failures Companies Make When Trying to Innovate
- Second mistake in innovating: not renewing the corporate culture.
- Third Mistake in Innovating: creating products from your perspective.
- Fourth Mistake in Innovating: immobilism due to success.