Size is Not a Strategy

But Lucent was wedded to existing technologies, and, as Laroia observes, "it's not easy for large companies to cannibalize their own products." So he and his team of eight engineers left the company. With $12.5 million in venture funding, they founded Flarion Technologies. "The fact that we could come up with our best work and still not have it go anywhere was a clear sign that big-company structure was not the right one for us," Laroia says. Two years later, Flarion has 150 employees, a market-trial partner in Nextel, a second round of financing, and healthy market buzz. Lucent, in free fall, has little that is healthy about it.

The question: Are giant companies such as Lucent doomed to fail at innovation? For Hamel, this is "the most exciting problem to solve today in the world." It's one that he has wrestled with for much of the last decade with the likes of IBM, Nokia, and Royal Dutch/Shell. "There will always be advantages to size and scope," Hamel says. "But the industrial company was built for optimization, not innovation."

Giant companies erect any number of barriers to innovation. They allocate resources based on what has worked in the past instead of on what could determine the future. Established hierarchies tend to minimize new threats to the existing order. Perhaps most telling, many big companies have no coherent innovation strategy. "Every CEO will at least give lip service to the idea that the world is moving faster and that we need to do a better job at being innovative," Hamel says. "But if you go into an organization and ask people to describe their innovation system, you get blank looks. They have none."

What's the best way to create a giant organization that's capable of perpetual renewal, one that's constantly innovating? Hamel proposes forming an open market for ideas, capital, and talent within the company. He suggests distributing the capability for innovation to every employee in every corner of the business. That is what Hamel imagines for the post-industrial organization -- a company that combines hierarchy with markets.

The post-industrial organization doesn't dismiss hierarchy altogether. Hierarchy, Hamel argues, brings discipline and consistency to business. But traditional hierarchies are self-reinforcing: They serve the status quo. Markets, on the other hand, challenge what has worked before. They have no vested interests.

And in a market, new ideas come from everywhere. Look at what's happening at Royal Dutch/Shell. Five years ago, working with Hamel, the company's exploration-and-production division set aside 10% of its research budget for "crazy" ideas, proposals that were far removed from its existing operations. Anyone in the division could apply for the funding. And a group of four or five employees -- all of them well-known mavericks and nonconformists -- were charged with deciding how the money got spent. The strategy was called GameChanger.

Consider the implications. There were millions of dollars set aside for no specific purpose. The accountants hated that. The people making the funding calls weren't managers, so they weren't wedded to any existing projects. "Experience shows that in a normal hierarchy, people don't like ideas that do not support their businesses," says Leo Roodhart, innovation manager for the Shell group. "These were ideas that by definition didn't fit with current business thinking."

GameChanger creates a marketplace within Shell for ideas. Proposals are assessed within one week of application. If they are judged promising, they win seed capital and support. If early results meet expectations, the innovation is marketed within the Shell Group. So far, GameChanger has attracted hundreds of proposals. It has funded 150 projects a year, 10% of which have become commercialized.

Hamel's lesson: Innovation can happen at big companies, but only if the market conquers hierarchy. "The beauty," says Roodhart, "is that there are no managers involved. It's a bunch of renegades who like playing around. It's about the excitement and freedom of a new idea."

How Does Size Shape Strategy?
Dennis Kozlowski was an acquisition junkie. In the decade after he took over as chief executive, Tyco International spent tens of billions of dollars to buy nearly 1,000 businesses around the world. By 2001, Tyco was in fire alarms, medical products, waste-water treatment, and, well, you name it. Revenues soared from $5 billion in 1996 to $34 billion in 2001. But there was a problem: The acquisitions were masking tepid performance in the underlying businesses. Return on equity over the same period dropped to 16.3% from 17.4%. All of those deals, and the resulting mass of physical assets, had made Tyco a lesser company -- and that was before Kozlowski got caught shipping empty crates to New Hampshire.

The question: In the information economy, is there a smarter way to think about the relationship between size and strategy?