In The News
Can large companies buy innovation?
Mergers and acquisitions can be an interesting indicator of economic trends beyond the simple combination of companies.
In the recent case of Wal-Mart acquiring Jet.com, which has a 160,000-square-foot distribution center in Northern Nevada, the acquisition can be seen as a primer on innovation, both its value and its absence in some large, publicly traded companies.
Wal-Mart paid $3 billion for Jet.com, a company that loses money every year but has created an e-commerce growth machine, attracting up to 350,000 new customers each month.
Meanwhile, despite dumping enormous sums of money into their e-commerce business, Wal-Mart’s online sales have slumped. In the first quarter of 2016, the retail giant only registered a disappointing 7 percent e-commerce growth rate.
So why, despite having billions of dollars to spend on innovation, has Wal-Mart had to go outside of its company to find new ideas and growth?
Innovation is remarkably hard to maintain. Companies grow, become bureaucratic, calcify and stifle new ideas.
Take Microsoft, the onetime upstart, which upended a technology world dominated by traditional powerhouse IBM. By the early 2000s, Microsoft had converted into its own version of IBM. Innovation waned and the company was being surpassed by the next crop of technology giants — Apple, Google, and Facebook.
Microsoft soon turned to a tactic many innovation-challenged companies take — buying up younger, more nimble competitors to try to inject new energy into the company. After disappointing purchases of Yammer, Nokia, Skype and others, the tactic clearly had limited success.
What this reinforces is that growth and innovation are not easily bought and sold. They must be nurtured. Large corporations can spend billions of dollars on an innovation-rich acquisition and then quickly destroy that innovation by placing it within a rigidly structured organization.
Companies have experimented with how to retain and foster that startup-style culture within large structured organizations. Perhaps one of the most notable successes of innovation within a large organization is Lockheed Martin’s “Skunk Works” project, which engineered the most revolutionary aircraft on the planet, including SR-71 and the U-2 spy plane. The U-2 spy plane was completed only nine months after receiving the official contract, a product of Skunk Works founder Clarence “Kelly” Johnson’s philosophy on work — “Be quick, be quiet, be on time.”
The Skunk Works template — a loosely governed, highly creative division of a company that is free to innovate — has been replicated by Apple as it built the Macintosh computer, and by the Google X Lab.
But companies that choose to acquire for innovation need their own post-acquisition game plan on how to integrate, or keep separate, the newly acquired company in a way that protects the very reason the company was purchased.
Whether Wal-Mart’s acquisition of Jet.com proves successful will likely come down to the post-acquisition choices that Wal-Mart makes.
But as long as cash-flush companies like Wal-Mart find it impossible to grow innovation from within, they’ll keep trying to buy it, even at high prices, whether it has a history of working or not.
John Solari is the managing partner of J.A. Solari & Partners. He has 25 years of accounting experience and is also a member of the American Institute of Certified Public Accountants and the Nevada Society of Certified Public Accountants.