Regression to mediocrity (mean) - why corporations stop innovating.

Regression to mean (mediocrity) is a well known statistical phenomenon. Basically, almost everything regresses to mean over periods of time. I wondered for a while if this applies to corporations as well- specifically when it comes to innovation.

It is now mostly established that eventually most big corporations stop innovating, specifically around their highest grossing products. If the product is successful, generally the corporation wants to sell more of it and thus requires increasing its team size to achieve that. To support every function required, it hires teams for each function. As the team grows, not all the hired team members are equally skilled. The cost of the team forces the team to look for people at all levels of skill set, settling for less than desired members. This eventually leads to regression of the team to mediocrity.

Then comes competition, that puts downward pressure on pricing. Shrinking profits force the organization to hire even lower quality people, and further converging the skill, talent (and thus innovative thinking) towards the mediocrity. This moves the Motivation Levels towards the mediocrity as well.

Eventually the most entrepreneurial minds leave the big corporation, the optimized execution takes over, which by nature is supposed to minimize the risks, which means the regression is complete and the innovation stops.

However, the corporation has lot of money, and it sets up a team to go find outside innovation and buy that. The team that buys those outside innovations is now running the show, but the rest of the corporation has now achieved regression to the mediocrity and thus starts declining.

While certain corporation (Alphabet, Amazon) have figured out ways to make this work by creating smaller teams and funding them with all the money they can, it is not possible for all the big corporations to do so. Various factors that stop this from happening include internal politics, share price pressures etc. And eventually the corporation itself regresses to mediocrity, and many times completely dies out.