Because Google is now an 800-pound gorilla, it’s hard to remember just how slight its prospects were at birth a decade ago. If Yahoo hadn’t made Google the default search engine on the Yahoo site in 2000–giving Google both broad exposure and a big endorsement–it’s easy to imagine that few people would ever have heard of Larry Page and Sergey Brin. Now, the Wall Street Journal reports that Microsoft had its own version of Google technology being developed around the same time that Page and Brin were starting their company–but killed it for fear that the technology would cannibalize other revenue streams. Imagine how little chance Google would have had in a competition with Microsoft in the late 1990s, when Google was just a handful of people and a few million dollars of venture capital.

The WSJ says Microsoft actually got a second bite at the apple when it was approached about buying Overture in 2003, a time when Google was still plenty vulnerable. Overture combined advertising with search results much as Google does. But Microsoft CEO Steve Ballmer and founder Bill Gates shot the idea down. Yahoo ended up buying Overture, and it now forms the core of the part of Yahoo that Microsoft has been most interested in buying.

Now, Ballmer and Gates are awfully smart guys. They even had the benefit of having had a tight relationship with IBM that gave them a front-row seat as IBM hurt itself in the personal-computer market in the 1980s by making precisely the kind of mistake Microsoft made on search technology. Among other things, IBM delayed using a breakthrough Intel processor because IBM didn’t want to cut into revenue for minicomputers and mainframes. Compaq had no such qualms. It came out with a PC that used the processor and stole the leadership position in PCs from IBM, which never recovered. IBM lost as much as $1 billion a year on its PC business in the 1990s, before selling it to Lenovo.

If Ballmer and Gates goofed, despite their great track record and their experience with IBM, there must be powerful motivations that make people miss opportunities like that presented by Google. And there are.

Our research found numerous situations where an existing business blinded executives to what was coming.

One problem is that the economics of a potential new business are compared with the economics of the existing business, even though the existing business model may soon be obsolete. Kodak, for instance, delayed by years its entry into digital photography because it didn’t want to give up the cushy 65% gross margins it generated from sales of film, chemicals and paper, in return for maybe a 15% gross margin on products related to digital technology. What Kodak couldn’t get its head around was that those 65% margins were going away, no matter what Kodak did, and it needed to adapt to the new world sooner rather than later.

Another problem has to do with size.  Even when executives accept the need to innovate, it is hard for large corporations to nurture new ideas, no matter how good.  One client referred to this as his “Starbucks” problem.  His annual growth target was equivalent to all of Starbucks, making it hard for him to consider an idea that did not quickly add hundreds of millions of dollars of revenue. Another executive talked about his “oak and acorn” problem. Tasked with finding huge oaks, he couldn’t spend much time on acorns.

Two lessons to consider:  First, if you find yourself evaluating the prospects for an innovative idea, don’t limit yourself to what those responsible for protecting existing businesses think. You also need to figure out what the competition can do to you, because it’s unlikely that you’re going to be able to stem the tide of innovation.  Second, make sure that you save some room in your investment portfolio for radical innovations, killer ideas that just might grow into the next Google.  [For more on how to innovate, check out "Unleashing the Killer App," which Chunka co-wrote and which was published in 1998.]

You don’t want to ruin your existing business by letting someone pull a Page-Brin on you. You also don’t want to miss a chance to generate that kind of innovation yourself.