The Dichotomy of Corporate Innovation: Centralization vs Decentralization

By Dave Hengartner, Co-Founder/CEO of rready, a SaaS startup supporting companies to unleash their biggest asset for innovation: employees.

Warren Buffet once stressed the importance of "carefully weighing your investments and maintaining a balanced portfolio," underscoring the need to avoid extremes and ensure overall stability and well-being. While he was referring to financial investments, this wisdom is just as applicable to business decisions and strategies, including how a company approaches corporate innovation. 

The debate that continues to be at the forefront is whether companies should centralize or decentralize their innovation efforts. While we at rready have consistently advocated for the latter, we see the need for a balanced approach, combining both centralized and decentralized innovation, based on the needs and structure of a company. 

Pure Centralization 

A purely centralized innovation approach involves the restriction of all innovation activities to a single, dedicated unit. This unit’s exclusive mission is that of overseeing the development and implementation of new ideas, products, services, and processes across the organization. 

The advantages of this approach are the concentration of resources, talent, and strategic direction, as well as the facilitation of experimentation and development. 

The downside, however, is that centralized units can also be inefficient and costly. They often become bogged down by politics and bureaucracy, which can slow down decision-making and impede the ability to respond quickly to market changes and emerging opportunities.  

Another significant shortcoming of centralized innovation is that it usually results in the creation of singular processes that govern how a company innovates. Meaning that regardless of the type of innovation, a single innovation process is applied. Organizations may therefore miss out on opportunities available in other areas of innovation, as not every situation requires the same approach. 

Complete Decentralization 

A decentralized approach is taken when firms release all departments to engage in innovation. This means that innovation becomes ‘everyone’s business’ and allows an organization to get insights from all different areas of the company to weigh into the process.  

Given that all employees possess expertise in their respective areas, this approach provides a valuable opportunity for people to voice ideas and contribute to innovation. Rather than adhering to the same method repeatedly, it enables companies access to a wider array of information and knowledge. 

In a world where change is happening faster than ever and at a pace that is constantly accelerating, getting ahead and maintaining the speed of innovation is key. Decentralized innovation helps companies to maintain a certain pace by ensuring that the teams responsible for implementing innovations have the freedom and ability to make adaptations and respond to changes quickly and efficiently.

The downside to decentralized innovation processes is that there is reduced control if a structured innovation program and central oversight are lacking. Companies may struggle to keep track of all their innovation activities, ultimately leading to inefficiencies.  

For one of our peers for example, we conducted an analysis and found 60+ decentralized innovation activities that were ongoing. These were, however, not aligned, meaning that there was no sufficient structure in place and a lack of transparency. 

When implementing an innovation management program and methodology, such as the Kickbox methodology originally designed by Adobe, the opposite effect can be observed, however. The program's gamified nature engages employees in their work, providing a learning effect that benefits the company and employees. Participants learn tools and methods they can apply in their everyday tasks, enhancing productivity and innovation. 

Trends Influencing a Shift from Centralization to Decentralization 

In line with an increased pace of change, various trends are causing more companies to shift to a decentralized innovation process.  

1. Increased Focus on Profitability and Productivity 

Amid volatile economic conditions, companies are increasingly prioritizing profit generation and improved productivity. This shift also influences the nature of innovation, with a renewed emphasis on core business innovations. 

A major advantage of decentralized innovation, as previously mentioned, is that teams implementing new ideas can quickly make adaptations and changes, boosting productivity and efficiency. Additionally, spreading innovation efforts throughout the company allows ideas to originate from those closely involved in core business operations and customers, ensuring that innovation consistently aligns with the company's strategic goals. 

2. Access to Innovation Methods and Tools 

Increased availability and capabilities of tools like AI have transformed innovation processes and strategies. Despite the argument that AI cannot create entirely new concepts and that creativity remains inherently human, the tools and methods for innovation are now just a click away. This makes useful innovation methodologies and strategies accessible to everyone.

3. Ability to Outsource Non-Core Innovation Efforts 

A worldwide decline in startup and M&A valuations has allowed companies to outsource their non-core innovation activities at lower costs. Consequently, maintaining a centralized innovation department solely dedicated to generating new ideas and innovations is no longer essential. Instead, resources can be allocated in a manner that encourages all employees to participate in core business innovations, while non-core innovation tasks can be outsourced. 

Further, due to the saturated market of innovation specialists, organizations can tap into a wide pool of external innovation experts without having to build and maintain a large, centralized innovation team internally. This allows for access to cost-effective, flexible and niche expertise as needed. 

4. Achieving a Balance: Decentralization with Centralized Oversight  

Unless a business environment is conducive to decentralized innovation, supported by the necessary structures and innovation program infrastructure, it's crucial to strike the right balance between centralized and decentralized initiatives. In some cases, adopting an either-or stance can present significant challenges. 

Large, centralized innovation teams will become less common because their output has not significantly impacted large corporations. Developing the next breakthrough is challenging for a central innovation team, which remains too small to create something as transformative as the iPhone for example. 

Current research reveals that companies are increasingly prioritizing the strategic direction of their innovation efforts. Therefore, decisions about when and where to innovate are no longer confined to the traditional innovation team. Instead, driven by a heightened focus on productivity and profitability, these decisions are now made more strategically and less frequently. Consequently, innovation is becoming more decentralized, accompanied by a stronger central strategic oversight.