The Paradox of Scale

How big companies can innovate
in a world that favors the underdog
The Paradox
of Scale

Big Entrepreneurship
The way businesses need to organize and behave has
fundamentally shifted. Across industries, companies,
and organizational functions, we have heard many of the
world’s most innovative companies echo the same challenge:
businesses must urgently embrace a more nimble and
entrepreneurial approach in order to stay competitive.
We call this challenge of how big companies can leverage
scale while staying innovative “big entrepreneurship.”
This report aims to deconstruct some of the complex
challenges around big entrepreneurship and provide
actionable insights for business leaders.
Fahrenheit 212
Fahrenheit 212 is a global innovation strategy and design
firm. We define innovation strategies and develop new
products, services, and experiences that create sustainable,
profitable growth for our clients. We challenge the belief
that innovation is inherently unreliable and have spent the
last decade designing the method, building the model, and
assembling the minds to make innovation a predictable
driver of growth for our clients’ businesses.
www.fahrenheit-212.com | marketing@fahrenheit-212.com
@fahrenheit212 | #bigentrepreneurship
5Big Entrepreneurship

Whenitcomestodrivinggrowth,oneofthemost
pressingproblemsfacingFortune500companies
isthattheyareFortune500companies.
Foryears,beingbighasmattered.Scalecreated
advantageacrossallaspectsofthebusiness.
Becomethebiggest—sothelogicwent—and
youwouldhaveunrivaledaccesstocapital,
globalreach,expansivenetworks,andapowerful
abilitytospend—onthebestinR&D,technology,
marketing,sales,facilities,andpeople.
2Big Entrepreneurship The Paradox of Scale

Today, the balance of power has irrevocably shifted from
big companies in favor of both smaller, nimbler upstarts
and consumers. This is being driven by competitive market
changes as well as significant new dynamics in consumer
preferences and behaviors. The following trends are tearing
away at the traditional benefits of being big while also
turning the tables to enable small companies to flourish.
Driving
Forces

4
Across categories, consumers are turning their backs on the
industry leaders. Campbell’s CEO, Denise Morrison, summed
up the state of affairs recently when she told analysts of the
“mounting distrust of so-called Big Food” and its impact on
their bottom line. From 2009 to 2014, $18 billion in sales
of consumer packaged goods have shifted from large to
small companies.
Consumers are losing
trust in big brands
Driving Forces
Big Entrepreneurship The Paradox of Scale
As of 2014, only 29% of
consumers said they believe
that name brands are better
quality products, down from
43% just two years prior.

5
Today’s consumers are more willing to embrace the smaller,
local, and unique products and services that are tailored
to their tastes.
Consumers place more
value on being unique
Driving Forces

6
Digital services as varied as Google Now
for intelligent recommendations, Flipboard
for tailored news, and Glow for data-driven
fertility advice all enable increased person-
alization. Consumers have come to expect
the companies they interact with to know
who they are and what they prefer. It’s a
move back to the day of the local shop-
keeper that knew your preferences,
powered by digital and the troves of data
available on us. In the age of what Forbes
has coined “me-commerce,” companies
capitalizing on personalization are
poised to win.
For the first time since Interbrand began
issuing their Best Global Brands Report
15 years ago, the top retail brand on the
list was a brand that mostly does not even
sell its own products. Ranking above Louis
Vuitton and H&M was Amazon, which
has an entire team dedicated towards
personalization and recommendations.
(At the time of writing this, there were
several openings in the personalization
and recommendations team.)
People desire more
personalized interactions
Driving Forces

7
Technology has given small companies the
ability to punch well above their weight.
They can now conceptualize, fund, develop,
market, and sell their goods/services at a
pace and cost base the big companies simply
can’t match.
One look at the Pebble smartwatch reveals
how the nature of competition has changed.
After surpassing their Kickstarter fund-
raising goal of $500,000 in just 17 minutes,
they went on to raise $20 million for their
latest watch, Pebble Time.
The Pebble Time project will
show that the real power
and utility of our platform
is not in money; it’s in
community and distribution.”
Yancey Strickler, CEO, Kickstarter
“The truth is that Kickstarter, in addition
to being a fundraising platform, has
also become a mega marketing platform
for product companies. Add to that the
principles of lean and iterative product
development that many small companies
are able to integrate, the speed and agility
at which today’s new competition can enter
the market is faster than ever before.
The ankle biters are
becoming serious competition
Driving Forces

14
Business strategies are
rapidly evolving
Driving Forces
Here it’s important to consider two points. First, consumer demand
for videos didn’t fundamentally change. The movies people rented
from Netflix were the same ones they bought from Blockbuster.
Second, streaming videos was not unique to Netflix; in fact,
consumers could stream videos from Blockbuster in 2008. What
changed was that Reed Hastings made a strategic decision to go
all-in on streaming. He knew the decision would hurt Netflix badly
(leading to a 77% drop in stock price the 4 months after spinning off
the DVD service), but he was betting on the fact that it would crush
Blockbuster because their traditional advantages—retail network,
inventory, sales staff—would quickly become unsustainable
liabilities. It was a brilliant move that shows how quickly small
companies can make the size of big companies work against them.
Across many industries, access has begun to supersede
ownership. Companies ranging from Spotify to Lending Club
to Task Rabbit have shown how businesses that enable the
sharing, borrowing, and “renting” of goods and services can
create major competitive advantage in markets where the
established leaders are burdened by high fixed costs, legacy
technology, and organizational structures designed for the
traditional competitive dynamic.
A now classic example is Netflix. As late as 2008, former
Blockbuster CEO Jim Keyes stated that Netflix was not “even on
the radar screen in terms of competition.” And yet within 2 years
Blockbuster was bankrupt and Netflix was on pace to acquire
over 65 million global streaming subscribers.

Given this dynamic commercial and consumer environment,
it is little surprise that big companies are facing a situation
in which their scale has been transformed from a killer
asset into a real liability. So the real question is: as a big
company, how can you take action in a way that gives you
a good chance of succeeding? More specifically, in a world
that favors the underdog and where change is inevitable,
how can you embrace a new, more nimble approach while
still harnessing your inherent scale?
9
Taking
Action

10
As a big company, it’s imperative to identify growth opportunities that meet
two equally important criteria:
They are big and sustainable. Scale can be leveraged as an advantage when
the opportunity is a big and meaningful undertaking.
They are winnable. Chasing opportunity simply because it’s big or wide-open
can be a fool’s errand.
A compelling example of a company that has identified and invested against a
big, sustainable, and winnable core is Patagonia. Outdoor apparel companies
all lean on the consumer promise of exceeding quality: high performance, built
for the extreme. Patagonia’s promise is to build products that last — so that
consumers can have fewer, but longer-lasting things.
This commitment to do better by consumers and the environment is deeply
embedded into the organization. From their “Ironclad Guarantee” on their
products to becoming a certified B-Corporation in 2012, Patagonia continues
to invest in their mission in products that are made with the environment in
mind. The results of their commitment to transparency and environmentalism
have tripled profits since 2008.
Identify meaningful
growth opportunities
01
Create discrete but
complementary platforms
Develop a strategy
that provides real
competitive advantage
Apply a portfolio
approach to funding
Create innovations that
solve a two-sided problem
03
02
04
05
07 Recognize innovation for
the experiment that it is
06 Appoint a champion

11
Identify meaningful
Develop a strategy
that provides real
01
02
Once you know where you can win, it’s essential to develop a strategy that
will give you a distinct advantage. Although this seems intuitive, it’s often
over-looked. Companies often chase growth for growth’s sake without
thinking about ways to create defensibility. And in today’s hyper-competitive
marketplace, that’s a counter-productive exercise because you’re simply
providing the roadmap for fast-followers.
To achieve truly valuable growth, you need an Innovation Strategy that is
designed to serve as the foundation for the business, inspire innovations and
set the new initiative up for sustainable, profitable growth.
At Fahrenheit 212 we take an approach that’s inspired by a core tenet of
value investing; namely, that the key to truly valuable growth is to identify
your defensible, profitable core, invest against it, and build competitive
barriers around it.
As such, it becomes the mechanism for making critical choices, establishes a
clear value proposition for the business and provides the inspiration for the
development of innovation.
Create discrete but
Apply a portfolio
approach to funding
03
04
05

12
Create discrete but
Develop a strategy
that provides real
03
02
Identify meaningful
01 In order for big companies to create internal alignment and support, the
strategy needs to translate into evergreen platforms that become the
foundation for innovations over time.
Every innovation should be a new manifestation of the strategy that deepens
and expands the relationship with your customers—like the unfolding chapters
in a book. This helps with internal planning and focus, it enables you to stay
ahead of the competition (i.e., when they copy you, you are already taking the
next step) and it makes scale an advantage because each new initiative expands
and deepens the unique value you’re creating in the market, thereby
reinforcing barriers to entry.
Apply a portfolio
approach to funding
04
05

13
Create discrete but
Develop a strategy
that provides real
03
02
Identify meaningful
01 Since inception, Amazon has leveraged
technology to create new waves of discrete yet
inter-related platforms of innovation. They
didn’t stop by simply taking books online.
They created new value for the consumer
through their personalization algorithm, they
repurposed their backend storage capabilities
to open up a complimentary B2B revenue
stream that’s now worth over $1.2B, and they
launched a loyalty program in Amazon prime
that’s created significant lift in the lifetime value
of their customers (the average Prime member
spends $1,500 as opposed to $625 per year
for non-Prime members). In each case, the
platforms reinforced Amazon’s core strategy
but created new, discrete types of value that
drove their topline and insulated them from
competitive encroachment. Said another way,
they made their scale matter.
05
Apply a portfolio
approach to funding
04

14
Create discrete but
Develop a strategy
that provides real
Apply a portfolio
approach to funding
03
02
04
Identify meaningful
01 Often times, CEOs hesitate to fund innovation because it’s perceived as a very bad
bet: it’s unpredictable, requires investment in initiatives that sit outside the core
of the business, can become a distraction, and the vast majority of innovations fail
within the first two years of launch. But with the rising power of the underdogs,
the very things that made innovation a potentially irrational choice for traditional
firms now actually make it a very smart use of capital.
When thinking about risk, it’s important to remember innovation has offensive and
defensive benefits. On the offensive side of the playbook, it provides the potential for
disproportionately high returns that could compliment the existing revenue drivers,
it create synergies with the core business and can open new avenues of growth.
Defensively, innovation serves as a hedge against the potential negative impact
of an unanticipated threat knocking the core business off its axis. Therefore, the
decision to fund an innovation needs to be based on more than just the obvious risk
associated with the up front investment. It needs to involve an honest assessment
of the risk of not investing. Because in today’s dynamic markets, it’s safe to assume
two things. First, if you’ve identified a meaningful opportunity for growth, you’re
likely not alone. Second, there’s a very good chance your current and potential
competitors don’t view the corresponding risk exactly the same way that you do.
05

15
Create discrete but
Develop a strategy
that provides real
Apply a portfolio
approach to funding
03
02
04
05
Identify meaningful
01 Once the growth opportunity areas, competitively defensible strategies,
and consideration for the risk of investing (and not investing) have been
defined, it’s important to create innovations that solve for the consumer and
the business simultaneously. These two-sided innovations are critical for
the success of these investments and minimizing risk of innovation failure.
A great idea that the business can’t support or a good business decision that
consumers don’t want will either never hit the market or quickly fizzle out.
Run a two-sided methodology that from day one looks at the problems
of both constituencies that count—the consumer and the business—to
build ideas that marry up an answer for each. Working this way, you
can develop ideas that deliver big value to both sides of the equation
while also ensuring necessary questions get answered up-front.

16
Create discrete but
Develop a strategy
that provides real
Apply a portfolio
approach to funding
Appoint a champion
03
02
04
05
06
Identify meaningful
01 As any entrepreneur knows, developing a successful innovation
requires total commitment. Therefore, it’s essential that the company
appoints a champion to lead any new innovation project. Enabling
innovation to thrive requires experience driving these innovations
from conceptualization to commercialization and a direct line to
company leaders so that the innovation is aligned with corporate
strategy and supported from the top. The more tightly aligned the
innovation champion’s personal and professional aspirations are
with the success of the innovation, the more likely it is to succeed.

17
03
02
04
05
06
07
01 By definition, a real innovation pushes outside the core business. Therefore,
it can’t accurately or effectively be measured using the traditional metrics.
The system should be based on the measurement of KPIs that reflect the
strategic role within the portfolio and it should enable the company to
uncover and quickly reapply insights.
Learning fast—from successes and failures—gives the company the ability to
course correct the innovation’s development. It also provides insights that
can help strengthen the core business and translate it across the company.
Create discrete but
Develop a strategy
that provides real
Apply a portfolio
approach to funding
Appoint a champion
Recognize innovation for
Identify meaningful

18
In hospitality, the rules of engagement are changing faster than most large
companies are equipped to react to efficiently. Marriott was looking for an approach
that would enable them to remain relevant to future generations of travelers by being
more nimble and entrepreneurial as an organization. The opportunity to transform
Marriott’s entire food and beverage (F&B) offering—from how it was sourced, staffed,
executed, and run—went hand-in-hand with transforming Marriott’s appeal with
Millennials.
We helped Marriott develop an innovation platform, CANVAS. It is a global incubator
which brings together Marriott’s strengths and resources in F&B with the vision and
talent of passionate young chefs, bartenders, and entrepreneurs. Using Marriott
properties as incubators for local F&B experiences, they began to shift how and from
whom F&B concepts are sourced around the globe—all with the goal of making the
process more efficient, less costly, and more nimble.
03
02
04
05
06
01
Create discrete but
Develop a strategy
that provides real
Apply a portfolio
approach to funding
Appoint a champion
Identify meaningful
We wanted to try something from the bottom up, asking entrepreneurially
minded individuals who had worked in our hotels or who were part of the
local community to come up with new ways to do things.”
Wolfgang Lindlbauer, Chief Discipline Leader, Global Operations at Marriott International
“
* In full disclosure, Marriott International is a client of Fahrenheit 212

Key considerations
for big companies
Have you identified
sustainable, winnable
growth opportunities?
Do you have platforms
that will ground and
inspire the innovations
going forward?
Are you set up to
defeat the underdog?
Have you considered
the risk of investing
versus not investing in
innovation?
Do you have a champion?Are the innovations in
the pipeline solving the
two-sided problem?
Are you managing
innovation like the
experiment that it is?
01 0302 04
05 0706

The Paradox of Scale
Incubating Innovation
Winning the Next Generation
of Innovators
The Rising Billion
The Chief Innovation Officer,
Redefined
Big Entrepreneurship
01
02
03
04
05
As Managing Partner and Chief Growth Officer at Fahrenheit
212, Pete is responsible for driving growth for the firm and
our clients’ businesses. With over 20 years spent working with
Fortune 500 companies and private equity firms on a wide
range of growth projects, Pete knows what it takes to create real
innovation for companies and drive change in the marketplace.
Since helping to launch the firm in 2005, Pete has been involved
in more than 200 projects. Pete is committee to driving innovation
across the corporate landscape and is a well respected thought
leader. An active speaker, lecturer, and writer, Pete has been
featured in publications including the Wall Street Journal,
Financial Times, Harvard Business Review, Fast Company,
Private Equity International, and Inc.
About the author
Pete Maulik
Managing Partner, Chief Growth Officer
pmaulik@fahrenheit-212.com

Fahrenheit 212 defines innovation strategies and develops
new products, services, and experiences that create sustainable,
profitable growth for our clients.
We challenge the belief that innovation is inherently unreliable
and have spent the last decade designing the method, building
the model, and assembling the minds to make innovation a
predictable driver of growth for our clients’ businesses.
www.fahrenheit-212.com
marketing@fahrenheit-212.com
@fahrenheit212
#bigentrepreneurship
New York
665 Broadway, New York, NY 10012
+1 (646) 654 1212
London
31 Great Sutton St, London EC1V 0NA
+44 0 20 3567 0820
Copyright © 2015 Fahrenheit 212.

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innovation-agents/inside-marriotts-attempt-to-win-over-millennials
References

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