Rickerism

The markets are a sea of change, and the change comes faster with each passing year. The value of a company is no longer based on its ability to produce a particular product. Rather, the value is now based on the company’s ability to produce new products. You still need a factory to build products; a software team is still a factory. Now you need a factory that creates new factories. Companies must have an innovation factory.

There is no economy of scale for innovation. Innovations come from individuals, not committees. There may be a committee assembled, but any innovation produced came from one or two individuals on that committee. The rest of the committee members (a) did nothing, (b) got in the way, (c) nodded their heads or (d) stole the credit.

An individual has to ask, “What’s in it for me?” Thirty years ago, a big company like IBM or GE did not need to worry about such things. The engineer gave his all for the company to make sure the company won in the marketplace. In return, the engineer was guaranteed a job and a pension for life. Loyalty goes both ways or no way at all. A company can not expect its employees to give their all if the company is not beholden to give its all. Today, even a very big company can be expected to let an engineer go at any time. Why, then, should that company not expect its engineers to leave at any time and take their innovation with them?

Big companies do not have the incentives to innovate. Big companies have to treat everyone the same. Very often an engineer in a big company lives under the same constraints as a clerk. The big company cannot hand an engineer $1 million worth of stock options. There is no big upside swing that they can include the engineer on.

Capitalism rewards risk, but there is no way to have an engineer in a big company participate in any sizable risk in order to gain a sizable reward. As such, there is no incentive for an engineer to innovate in a large company. The engineer will only receive just compensation for his innovation from a small company. That’s because he can only expose himself to risk within a small company. Thus, it is logical to conclude, most innovation will come from small companies.

Innovation is geographically dispersed. Innovations usually come from hard core engineers and architects, who are rare (see Inverted Talent Pyramid). You must take innovators where you can find them. One innovation may come from a small team in Portland while a complementary innovation comes from a couple of guys in Tallahassee.

There is no sense in moving these small teams of innovators into a central location. You get no economy scale, as we mentioned before. You will not exercise any greater oversight of these innovators by having them in a central location. They are resistant to oversight and excess oversight will discourage them from innovation. Innovators know that they can find jobs, so forcing them to relocate will only force them to leave the company.

My conclusion is that companies must innovate through acquisition. An effective innovation factory is a process to join small teams into a large company. The process should be repeatable and replicable. An innovation factory is be able to:

1. Locate small innovative teams that complement existing teams
2. Acquire the team with the least amount of disruption
3. Integrate the team with the other existing teams
4. Manage the team remotely
5. Provide economy of scale with shared infrastructure
6. Provide access through the trust barrier to greater number of customers

Even relatively small companies must innovate the same way if they are to become large companies. Start ups must eventual acquire or be acquired in order to meet the natural market demands of consolidation (see The Evolution of New Technology Markets).