Introduction

Google has a stratospheric market capitalization, but the company that organizes the world’s information could easily have been tens of billions of dollars richer. In October 2004, Ev Williams, who had joined the company when it acquired his startup, Blogger, left after a year of chafing under corporate bureaucracy. Blogger product manager Biz Stone departed 11 months later. The pair went on to found Twitter. The new venture went public in November 2013, and was worth $36.7 billion as the new year began.

Losing Williams and Stone was an expensive mistake, but Google didn’t learn the lesson. Ben Silbermann joined the company in 2006 after a stint as an IT consultant. He spent nearly two years working on display advertising products but felt out of place as a nonengineer in an engineering-centric culture. He resigned and cofounded Pinterest, the online pinboard service that was valued at $3.8 billion as of January 2014.

Google still didn’t get the message, and Kevin Systrom left the company in 2009 after two years of feeling stifled by organizational politics. Not long afterward, he cofounded Instagram, which he sold to Facebook for $1 billion in April 2012.

Williams, Stone, Silbermann, and Systrom—not to mention founders of Asana, Cloudera, Foursquare, Ooyala, and dozens of other young companies—quit because they were unable to exercise their entrepreneurial talents within a large enterprise. We’re huge fans of Google. Still, if the iconic Silicon Valley success story, which regularly shows up on lists of the world’s most innovative companies, had the potential to keep these brilliant innovators aboard, they left at least $40.5 billion (the combined values of Twitter, Pinterest, and Instagram as of January 2014) on the table.

That’s bad news for a paragon of innovation. But it’s good news for large, established companies that wish to foster innovation within their own walls. It means that even the most innovative operations are passing up billion-dollar ideas that any enterprise could pick up and run with. It also means that, among the thousands of people working in diverse corporate business units and far-flung offices, there are likely to be scores who have ideas that could create tremendous value. Even the oldest, least savvy companies don’t need to repeat Google’s mistakes. Enterprises seeking to build new high-growth businesses can unlock and retain latent entrepreneurial talent. They can create an organization that innovates successfully, predictably, and repeatedly—not by chance, but by design.

Enterprises in Peril

The need for enterprises to innovate has never been more acute. Many established brands are on the ropes. American Airlines was valued at just $5.5 billion at the time it merged with US Airways in 2013. Kodak, a name synonymous with photography for more than a century, retreated into bankruptcy in 2012, with its arch competitor Olympus close behind. Suzuki’s automotive division fled the United States the same year, and Volvo appears to be approaching the off ramp. Two cornerstones of the PC industry, HP and Dell (which sold itself for $24 billion in early 2013), are struggling to build a bridge to the post-PC future. BlackBerry’s worth has slid to a few billion since it tripped over the very smartphone market it pioneered. Blockbuster has shut down its storefronts and DVD-by-mail services. The death rattles of Radio Shack and JCPenney speak volumes about the challenges in retailing.

This calamity isn’t confined to an unfortunate few companies or a particular selection of industries. The threat to established firms is pervasive. Of the names listed in the Fortune 500 in 1955, nearly 87 percent have either gone bankrupt, merged, reverted to private ownership, or lost enough gross revenue to fall off the list. A study of the S&P 500, which ranks companies by market capitalization, found that its constituents averaged 61 years on the list in 1958 but only 18 years in 2012.

Contrast the turmoil in the enterprise world with value creation among the world’s most valuable companies as of January 2014. Apple is worth $436.55 billion after three and a half decades in business, a beacon of market-disrupting prowess. Google, less than half that age, is valued at $395.42 billion. Amazon has a market cap of $165.79 billion. Facebook’s initial public offering (IPO) was a notorious fiasco, but the 10-year-old company is still worth $164.00 billion and rising. Twitter, founded eight years ago, is already worth $29.60 billion.

Alternatively, consider the fastest-growing companies coming out of the startup crucibles of Silicon Valley and New York. Dropbox, Pinterest, Snapchat, and Uber have accrued valuations approaching $14 billion in a few short years. Newer arrivals such as Airbnb, Evernote, MobileIron, PureStorage, Marketo, Spotify, SurveyMonkey, Violin Memory, and Zscaler are worth more than $1 billion each. In fact, the number of billion-dollar startups is estimated to be as high as 40. These companies are creating value at an unprecedented rate and on a historic scale.

The difference between stagnant enterprises and their fast-growing counterparts is no secret: These emblems of growth have an uncanny ability to bring to market exciting products and services and open vast new markets. High-flying corporations like Amazon and Facebook have proven that big companies can do it. But for lessons in how, the best place to look is startups.

Startups Ascendant

If the present is a dark time for established companies, it’s a golden age for new ventures. Entrepreneurs number 380 million worldwide, according to foundersandfunders.com, a number that’s expected to grow exponentially. Superstar entrepreneurs like Steve Jobs and Mark Zuckerberg have become cultural icons, spawning best-selling books and blockbuster movies. The Social Network, Hollywood’s treatment of the Facebook story, has grossed nearly $300 million worldwide. Hit television show Shark Tank features business pitches from aspiring entrepreneurs to a panel of potential investors. The Bravo network even took a chance on a reality TV show, Start-Ups: Silicon Valley, which followed a handsome pair of would-be moguls through their efforts to form a business plan and pitch venture capitalists (VCs).

All of which has dulled the appeal of even the biggest enterprise brand names. For bright business- and technology-minded college grads, it’s no longer cool to work for a blue-chip corporation. In general, millennials reject the traditional comforts of management hierarchy, financial stability, risk aversion, and buttoned-down culture. They want to work at Airbnb, Dropbox, FourSquare, or Tumblr—or launch their own bid to rule the infosphere.

And, for the first time, it’s clear how to do it. Over the past decade, what was a wilderness trail to starting a high-growth business has become a well-worn path. Students can study entrepreneurship in school, read up on the scene in TechCrunch, VentureBeat, or Xconomy, attend meetups for like-minded aspirants, get a job at a hot startup, draw up a business plan, and start pitching VCs.

More important, the cost of starting a company has fallen through the floor. Many fixed costs have evaporated, replaced by variable costs. For instance, Amazon Web Services gives aspiring entrepreneurs access to data center infrastructure, and it costs nothing until customers start showing up en masse. Freelance communities such as Crowdspring, Mechanical Turk, Odesk, and Elance can handle odd jobs from programming to design to writing press releases. Coworking spaces provide cost-effective offices where startup founders can congregate and support one another until they have sufficient revenue to rent a proper office. Capital has become more accessible as well, thanks to crowdfunding sites such as Kickstarter, seed-funding communities like AngelList, and new laws that allow almost anyone to buy and sell equity.

All these trends boost the level of competition with an enterprise’s established business units as well as the possibility that they’ll be blindsided by unforeseen market shifts. A new generation of highly empowered entrepreneurs is coming up fast. They have the means, motive, and opportunity to disrupt your business, and they’re out to do just that.

The Enterprise’s Dilemma

Hidebound enterprises don’t start out that way. As Clayton Christensen pointed out in his classic 1997 business manual, The Innovator’s Dilemma, most large companies begin as innovators who unseat powerful incumbents by leveraging cheap technology to deliver good-enough capabilities at a lower price. The dilemma arises once they’ve ascended to dominance. At this point, they have a market to protect, and their original focus on disruptive innovation shifts to sustaining innovation that bolsters their legacy business. Now exploiting a mature market, they can look forward to decreasing growth. Ultimately, a new competitor emerges that undermines their business with a cheaper alternative. By failing to develop disruptive technologies first, they leave themselves vulnerable.

Indeed, overcoming inertia has become a do-or-die priority for large organizations. Enterprise CEOs must fend off ever more rapid technological shifts and ever more aggressive competitors. Christensen’s manual was the first of what has become a flood of books, conferences, workshops, and blogs devoted to the topic, and executives have embraced them in search of a solution. Corporate...