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John Donahoe, CEO of eBay, spoke tonight. He said something that stunned me. He said,

eBay relies on entrepreneurs for innovation. We don’t try to innovate outside the core business

At first, hearing it made me angry and confused. To me, it is a statement of giving up, admitting defeat:  large companies can’t make big changes in their businesses without bringing someone who is innovating in house. Once an acquisition has been encircled by the corporate embrace, stifling further innovation, it is supposed to generate enough cash to feed the next acquisition. At some level, this is portfolio theory for conglomerates. But at a deeper level, it’s much more dangerous.

Of course, an important issue to raise is how do you define the core business? For eBay, is it “auctions”, “providing a secondary market for goods online”, or “providing transaction systems”? Each one in the list increases scope of the business.

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But let’s ignore that question and assume it’s defined broadly.

The next question I asked myself was is this the case for all/most companies? Counterexamples abound. Amazon continues to cannibalize existing businesses to build new ones: Kindle and cloud computing. Apple reinvented itself with the iPod. Walmart is now selling electronic health records to doctors in it’s first B2B play. Toyota develops cars, transportation systems, powered by alternative means, not just gas engines. The New York Times reinvents itself as a data repository, with APIs and blogs and data visualization systems. The gray lady isn’t in the business of paper anymore because she innovated.

Let’s examine a culture of change vs. innovation. The words change and innovation have very different connotations. People hate change; they are slow to adopt it and it’s painful. But we love innovation: bigger, faster, stronger, better.

At eBay, Donahoe is presumably building a culture of change. In effect, he’s saying “Let’s work with the product we have and make incremental improvements to it. Then when growth slows, let’s will buy another business and deal with the change of the business then.” It’s difficult for employees to change abruptly. One day, we’re in the business of providing electronic secondary markets; the next we’re in the business of providing payment systems; the third we’re in the business of empowering low cost communications. Where’s the logic and strategy? Moreover, it’s even harder for the entrepreneurs who come in as a result of the acquisition because post-acquisition they’re working in culture of a completely different mentality and in short order as a result of the disparity in cultures, they’ll likely leave to innovate elsewhere, leaving a cash cow to graze and less effective acquisition.

On the other hand, Amazon and Apple are different because there’s a culture of constant improvements, of innovation, of cannibalization of existing businesses to build new ones and adjacent ones where cultures accept continuous change brought about by acquistions and new ways of thinking about business models and products.

Make no mistake, M&A is essential for large businesses. Read the Granularity of Growth , if you don’t believe me. But these transactions should be consummated after a strategic direction has been selected. Not as cash cows to finance further acquisition. Businesses should practice kaizen at the highlest levels to ensure consistent improvement and innovation.

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