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Target and the Promise of Internal Startups

+ Brandon Fuller

In a recent post for the New York Times Bits Blog, Nick Bilton asks:

Why was a small start-up with only 13 employees able to build Instagram while a company like Eastman Kodak, which recently filed for bankruptcy protection, was not?Michael Hawley, who is on Kodak’s board, said the answer could be summed up in one word: culture. “It’s a little like asking why Hasbro didn’t do Farmville, or why McDonald’s didn’t start Whole Foods,” said Mr. Hawley, formerly of the Media Lab at the Massachusetts Institute of Technology. “Cultural patterns are pretty hard to escape once you get sucked into them.”

Bilton notes that the challenge of creating a small and disruptive new business inside of a large, established company is not unique to older and more traditional firms. Facebook, despite its relative youth and the skill-appropriate composition of its workforce, did not create Instagram either. Instead, it paid $1 billion to acquire the start-up.

Even when established firms see disruptive new business models coming, they have trouble adapting. An executive quoted in Bilton’s post likens the challenge to “trying to change the fan belt without stopping the engine.”

Since it may be impossible to change the fan belt, buying a new engine, even for $1 billion, starts sounding pretty smart.

It may be true that simply buying successful start-ups is ultimately less expensive than developing them internally, but one has to wonder why more firms don’t just build additional engines – start a new business unit, give it the autonomy to pursue a new direction, and isolate it from the existing business.

Clayton Christensen’s study of the emergence of discount retailing in the 1960s reveals an interesting case of an effort to build another engine: Target. Like most other established retailers at the time, the successful department store retailer Dayton-Hudson saw the discount retail revolution coming. Unlike other department and variety store heavy-weights (for example, Woolworth’s), Dayton-Hudson was an incumbent that successfully made a transition to discount retail.

In his book, The Innovator’s Dilemma, Christensen points out that a key to success was “Dayton-Hudson’s decision to create an autonomous team called Target to enable the corporation to survive the disruption of the department stores by discount retail.” Because Target was isolated with its own leadership, it was able to avoid the legacy of Dayton-Hudson’s department store oriented corporate culture. Eventually, Target was so successful that it remade the entire firm.

In thinking about anticipating disruptive innovation, firms might do better by asking “Why was Dayton-Hudson able to create Target?” rather than “Why didn’t Kodak create Instagram?”

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