Letting go of old ideas is a deal more difficult than picking up new ones.

At the heart of the search for economic growth is a small mystery.  Why does it seem that large and richly endowed companies with intimate knowledge of markets and the resources to fund research find it so difficult to be innovative?

The general premise behind this thought obviously does not apply without exceptions – some like giants Google and Apple seem to have mastered innovative processes - but we can all recall frustrated CEO’s likening their travails to turning giant oil-tankers around in mid-channel.  There is an underlying truth borne out by employment data showing that growth is dominated by small, young and more-innovative enterprises whilst those employing hundreds or thousands become experts in ‘downsizing’.

Small was beautiful

In the 1980’s a study of employment ‘churn’ – the generation of new jobs and the loss of old ones – showed that jobs were mostly created by the smallest of firms (up to around 50 employees) and progressively lost by larger companies. The peak 10% rate of annual job loss from large organizations was more than compensated by surges of employment in new enterprises and smaller fast-growing businesses where the boss most probably knew the first name of every single employee and the Personnel Manager had not yet been retitled as ‘Director, HR’.

The graphic image from this study that remains entrenched in the minds of policy developers and economists is one of layers of employment clouds (stacked by employee size) with thermals of rising employment bubbling up on one side and precipitation on the other with employee fall-out as businesses became unsustainably large.

That study - nearly 30 years ago – is still largely valid today but in recent years the job creation thermals seem to have lessened whilst precipitation has continued largely unabated.

This may be another sign that, in a digital economy, the nature of new enterprise has a very different relationship with employment patterns whilst the same digital-driven efficiency is shrinking the need for old jobs in big organisations.  The question that many will ask is whether the volume growth of new but slimmer enterprises will ever be enough to compensate for the losses.

‘Job Polarization’

More recent research confirms that the relationship between innovation and jobs has indeed changed quite dramatically.  According to a recent paper, ‘Innovation and Employment in the intelligent community’, by Robert Bell (co-founder of ICF) the change is spurred by the digital economy and is less related to organisation size.  The key to understanding the current dynamics are found, he says, in ‘Job Polarization’ (JP).

This JP effect has been noted elsewhere as the ‘squeezed middle’ but here refers to the relative growth both of highly valued and of menial jobs but the decline of ‘middle income’ roles.  This polarization into ‘lovely and lousy’ jobs has captivated researchers (notably at MITT) but has also led to further research showing that this trend is not smooth or evolutionary but has happened in bursts prompted by organizations adjusting to recessionary pressures.

It is difficult to unravel cause and effect but almost all of this disruption has been facilitated by better application of digital ICT and ‘globalization’ – and it is far too glib to simply blame the technology for what some would see as a ‘jobless recovery’.  The digital economy will not go away.  The question that Robert Bell’s paper poses (and one that must surely pre-occupy the smart minds within BIS and HM Treasury) is ‘What can communities do to adapt to these trends?’

Most policy reactions to apparent ‘jobless recovery’ challenges are focused on initiatives like investment in ICT education that will surely take the best part of a generation to have any major impact – though that is no excuse for not getting on with it.  However, in an appendix to the ICF paper, Robert Bell reports on studies that highlight five critical success factors: Broadband Connectivity, Knowledge Workers, Digital Inclusion, Innovation Capacity and Marketing & Advocacy.

Whether the wisdom of this research will penetrate the UK national mindset to bring about a radical resetting of policy is very uncertain.  Most of the signs are that policy advisors probably imagine that enough is already being done (or as much as can be done) – a view not much shared by those who have taken the trouble to visit countries and communities where advanced digital access networks are just so much more mature.

Meanwhile, there is no doubt that the global scope for new enterprises – often requiring less in terms of start-up capital and with access to larger markets (globally the specialist niches are larger) - means that business planning gestation is shorter, the routes to potential success are more varied and fewer see any need to become big and burdened by bureaucracy.  It is a huge entrepreneurial incentive – the thrill of running rings around tired ‘last generation’ organizations.

But while all this turbulence is brewing in the lower strata what are those larger organisations doing to improve their innovative performance?

Some, it seems, accept that new ventures are best managed at arms length – ring-fencing their activities, giving them greater protection and tolerance and even making a strong case to shareholders for the speculative overheads.  But it is very difficult to take the long view.  A CEO signaling the end of that strategy remarked at the end of the 1980s, ‘we sowed a thousand seeds but most turned out to be weeds’.  Famed for decades of R&D achievements, that company has now turned its research campus into little more than a demonstration centre for marketing.

Other large organisations are content to look out for bright new ventures and partner or acquire them when they are reasonably proven.  This approach has advantages when there is a very clear vision for an extended portfolio and they have expertise in managing the integration of smaller units into the core organisation.  That road, however, is littered with marriages that didn’t quite work.

But both of these approaches push innovation to the margins while career-centric managerial minds are focused on ‘core business’ and ‘sticking to the knitting’.  

It is this intensive focus on the central definition of the company that freezes out fresh thinking.  Take for example mobile phone businesses.  Subsidiaries in far-flung places may have amazing success with new services but, ‘not invented here’, these ventures are rarely or rapidly imported back into the core business.  A business that might have started out fuelled by zeal for ‘sanctions busting’ may have lost sight of that spirit and by default substitute a rationale around the products or services that seem to realize the most immediate revenue.  Over time the market moves and what was once a central capability looks more like core incompetence.  This is now compounded by the speed with which innovation-energized markets can move.

One view of the innovative caution of larger organisations is a fear of the unknown when set against the comfort of ‘business as usual’.  Hanging on and exploiting a legacy business core for as long as possible often engenders protracted regulatory negotiations to delay the inevitable and tactics deliberately designed to spike the guns of upstart market entrants.

So why do big businesses find innovation so difficult?  Letting go of old ideas is, it seems, even more difficult than picking up new ones.  The old business can be made ever more efficient until that point when its perfect point suddenly becomes irrelevant.  Small wonder then that in our digital economy the prospects for new small ventures have never been better but at the same time have never been under greater threat from those who would rather not see apple-carts upset.

While folks rage at the apparent inability of banks to lend to small businesses the spotlight might perhaps be better turned on the investment responsibilities of larger firms needing to nurture innovation. 

It has been said that the big company view of a ‘level playing field’ is a large rectangular area under which they have buried the competition.  Champions, therefore, of economic growth and innovation need to see more, rather than less, regulatory supervision of those giant organizations that resist the need for change or simply refuse to recognise the fundamental and enduring spirit of a digital economy – creative disruption.

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Robert Bell's report for the Intelligent Community Foundation can be downloaded here (PDF) or visit the ICF website. 

Readers may also have visited our recent editorials on new economic models and the Digital Economy, 'Finding NEmode' and 'The Digital economy: it will not go away'.  Both are available via the Groupe Intellex blog where comments are welcome.

Discussion of the employment impacts of infrastructure investment in 'next generation' digital access networks is expected to feature in the 2-day London conference 'NextGen 12' on 8th & 9th October 2012.