By Evangelos Simoudis, Synapse Partners
In the face of the rapidly changing innovation environment — and the increasing importance of innovation to corporate growth initiatives — it is becoming apparent that corporations need to reinvent their innovation strategy and associated model. In Part 1 of this series I provided four observations that corporations must understand about innovation and disruption. I also argued that existing R&D models and the organizations that support them are no longer sufficient for addressing today’s corporate innovation challenges, particularly as every industry is becoming a technology industry. Innovation in areas that can become new growth opportunities for the corporation is difficult and complex. It used to involve R&D only. More recently, however, corporations have started to appreciate the value of startups in their innovation endeavors, as their recent forays in establishing a presence in innovation clusters such as Silicon Valley, forming venture funds and creating incubators. In order to effectively capitalize on the opportunities offered to them by startups, they must learn new skills and develop new approaches. In Part 2 we present a new corporate innovation strategy, called Startup-Driven Innovation, which provides a playbook for corporations to use in order to effectively work with startups. Startup-Driven Innovation could be used in tandem with existing R&D-centric models.
Corporations from many other industries, from companies that produce consumer-packaged goods to financial services, are facing similar challenges because of innovations produced by startups. For example, consider the technology and business model innovations that have been introduced by automotive startups over the past few years and how they expose the limitations of the incumbent automakers’ own R&D efforts. Increasingly startups are succeeding in disrupting a variety of industries, even industries with high barriers to entry, such as automotive.
As we analyze corporations we begin to see that many are particularly good at using their R&D organization to produce innovations that support, continue to scale and even extend their existing business models. But they are rather weak at creating new businesses under novel business models. While such businesses may generate new revenue streams, they may also cannibalize, or completely disrupt, existing models. This is particularly difficult for corporations to accept. In the automotive industry it has proven impossible for incumbents to predict that electric vehicles with many innovative characteristics will become popular even during periods of low gas prices, that consumers globally will be adopting ridesharing services with increasing frequency, and that new companies, including many startups, will be first to bring to market autonomous, and even driverless, cars with consumers ready to adopt them.
What we are witnessing with the role that startups play in the disruption of the automotive industry is not new, or unique to this industry. We have seen the pattern before in industries such as retail and telco: first, new technologies with new business models become better aligned with customer needs while the incumbents’ R&D organizations are not able to respond; second, profit margins fall and industry incumbents cannot adapt to changes; third, consolidation occurs.
To avoid falling into this pattern, corporations need to reinvent their approach to innovation. Specifically, they need to:
- Broaden their view on what constitutes innovation and consider business model innovation to be as important and sought after as technology innovation;
- Modify their approach to identifying and developing over-the-horizon innovations that one day could give rise to next-generation offerings and even new business units.
The new approach must involve and engage the startup ecosystem and must enable corporations to effectively address their innovation challenges, particularly the over-the-horizon innovation challenges, by innovating:
- At a faster rate and more cost-effectively,
- From outside and inside by leveraging entrepreneurship and intrapreneurship,
- By combining technology with business model innovations,
- By establishing the right timelines for each type of innovation,
- By assessing the effectiveness of each innovation through a portfolio management approach and KPIs that are appropriate for the type of innovation, and the corresponding timelines.
The Startup-Driven Innovation Strategy enables corporations to accomplish these goals.
Defining the Startup-Driven Innovation Strategy
The Startup-Driven Innovation Strategy is a corporate innovation strategy that describes how corporations can innovate continuously by a) working with startups and b) applying approaches pioneered by startups and the members of their ecosystem, e.g., their entrepreneurs, venture investors, etc.
To better understand the strategy I have found it useful to build upon the work on the Three Horizons of Growth framework. According to this framework, corporations must operate across three horizons. Horizon 1 (H1) includes the corporation’s core businesses, the ones whose business models provide the greatest profits and define the corporation’s brand. For example, the Tide detergent for P&G, the Series 3 compact car for BMW, or the 737 passenger jet for Boeing. Horizon 2 (H2) includes emerging opportunities that are either extensions of H1 businesses, or growing new ventures that can eventually become H1 businesses. For example, the Boeing Business Jet represents an H2 business, as it is an extension of the 737 passenger jet. Horizon 3 (H3) includes the disruptive ideas that could provide profitable growth in the future, once the appropriate business model is identified. For example, IBM’s Watson platform started as an H3 initiative based on work that was initially performed within IBM’s R&D organization.
Most corporations focus their innovation efforts on H1 businesses and some, such as Boeing, also invest in H2 initiatives. In fact, corporations, such as Unilever, American Express, have been visiting innovation clusters, such as Silicon Valley and Israel, and routinely partner with or acquire startups to gain access to specific technologies that could help them address their H1 innovation needs. We expect that this trend will expand, particularly as more corporations are establishing a permanent presence in these, and other, innovation clusters with high startup concentration.
Where corporations fail increasingly is in consistently identifying and launching H3 opportunities. The potential disruption that is starting to happen in the automotive industry because of the introduction of electrified autonomous vehicles combined with mobility services serve as an excellent example of the ramifications of such failures. To avoid such failures, corporations must innovate continuously across all three horizons, essentially becoming 3-Horizon Corporations. And the Startup-Driven Innovation Strategy enables them to establish and manage effectively their innovation initiatives and become 3-Horizon Corporations.
Before embarking on applying the Startup-Driven Innovation Strategy, it is important for the corporation to determine the type of innovations it will pursue. Is it looking for H1 innovations to maintain existing business models, H2 innovations to extend these models to adjacent markets, or for H3 innovations that will disrupt existing models and create new ones that may cannibalize existing business models?
The Startup-Driven Innovation Strategy incorporates organizational, financial and cultural elements.
- Organizational: The corporation must establish Innovation Outposts, whose mission is to enable the corporation to identify and respond to developments that can disrupt the corporation, or allow the corporation to be disruptive. Innovation Outposts collaborate with the corporation’s various existing business units and complement its R&D organization. A single executive leader who reports to the company’s CEO manages the Innovation Outposts.
- Financial: In addition to its R&D budget, the corporation must allocate sufficient capital for each Innovation Outpost’s operation and the variety of investments and acquisitions it makes.
- Cultural: Innovation can come from anyone within the corporation, i.e., the corporation’s intrapreneurs, as well as from outside the corporate four walls, particularly from startups and their entrepreneurs. The corporation must foster a culture of continuous innovation.
The Innovation Outpost
The Innovation Outpost is a corporate organization that operates in an innovation cluster. In addition to managing the overall Startup-Driven Innovation Strategy for the corporation, it performs two basic functions:
- It senses for innovations that can serve one or more of the H1 or H2 businesses, become threats and disrupt the corporate parent, or launch H3 efforts that may enable the corporation to disrupt.
- It responds to the opportunities it senses in one of five ways.
- Invent: The Innovation Outpost can establish advanced development efforts that are associated with a specific innovation goal, or broader H3 basic research efforts that take advantage of, or investigate, technologies and business models the innovation ecosystem is known for in order to create new products and services. For example, Verizon’s Silicon Valley R&D center focuses on big data and software technologies, as well as online advertising-based business models.
- Invest: The corporation allocates a venture fund that invests in startups working on technology, product and/or business model innovations of interest. For example, UPS invested in Ally Commercein order to understand the logistics opportunities arising from manufacturers selling directly to consumers rather than through distributors.
- Incubate: Supports the efforts of very early stage entrepreneurial and intrapreneurial teams and companies that want to develop solutions in areas of interest–for example, Samsung’s incubator focuses on startups working on the Internet of Things—or they experiment with new corporate cultures and work environments –for example, Standard Chartered Bank’s startup studio.
- Acquire: Corporations buy startups in order to access both the innovations the startups are developing and their employees and in the process inhibit competitors from getting them. For example, Google acquired several of robotics startups that had what was considered the best intellectual property.
- Partner: Collaborate with startups in order to develop a disruptive new solution using their innovations along with the corporations or to distribute innovative solutions the start-up has developed. In other words, it enables the co-innovation efforts between the corporate parent and startups. For example, a few years ago Mercedes had partnered with Tesla to develop batteries for electric vehicles.
The Innovation Outpost is not only important in order to bring the corporation close to the startup ecosystem of the selected innovation cluster. We have found that it becomes the perfect organization for hosting work relating to H3 innovations that in order to improve its probability of success it must be performed outside the established corporate structure but with well-defined re-entry criteria to the rest of the corporation in due time.
The Innovation Outpost:
- Focuses on the strategic innovation issues selected by the corporation. For example, technology and business model innovations related to autonomous vehicles and mobility services.
- Decides which startups to invest in, partner with, or acquire in order to address the selected innovation issues and selects which internally- and externally-generated ideas to incubate and identify the teams to incubate them with. The selected startups and teams to be incubated can be thought of as low-lost H3 experiments for addressing the established corporate innovation goals.
- Manages the startup H3 portfolio(s) it creates, selects which of these startups to continue supporting and grow them into emerging H2 businesses, how to staff these businesses and position them in the market.
- Collaborates with corporate management to identify which of these emerging H2 businesses to launch as full-fledged H1 next-generation corporate business units.
Deciding which new efforts/experiments to include in its portfolio, and how to manage the resulting portfolio is an ongoing process performed by the Outpost.
A fully developed Innovation Outpost consists of five groups (shown in Figure 1): IO R&D, Corporate Venture Capital (CVC), Startup Incubator (which can be incubating entrepreneurs only, intrapreneurs only, or both types of teams), Business Development, Startup Corporate Development.
Figure 1: The structure of the Innovation Outpost. Figure courtesy of Evangelos Simoudis
The Innovation Outpost’s leader must:
- Empower and ensure that the groups comprising the Outpost collaborate effectively and continuously rather than operate as silo organizations.
- Ensure that the Outpost interacts constantly with the corporate R&D and the various business units in order to keep them updated on the Outpost’s portfolio and confirm that the efforts remain relevant to the strategic innovation goals the Outpost is tasked to address.
- Have the constant support of the corporation’s executive management and even its board of directors.
It is very instructive to understand how 3-Horizon Corporations such as Google, Facebook and Amazon, but also corporations such as Qualcomm and GE have incorporated these principles into their innovation work. For example, Google Ventures, one of the most active corporate venture investors, closely collaborates with the company’s corporate and business development organizations, as acquisitions of companies like Nest clearly demonstrate. Moreover, to promote intrapreneurship, Google organizes engineers in small teams and allows them to develop new ideas for a period of time every week.
Qualcomm has used its Innovation Outpost to address one of its strategic opportunity areas: robotics. The company’s CTO-led the innovation initiative (single leader). The initiative engaged four internal groups, including R&D and corporate ventures. The focus on robotics developed when the venture group collaborated with R&D to find adjacent markets for Qualcomm’s Snapdragon processors. The corporation focused on robotics because that field can use many of the technologies Qualcomm has already developed for mobile phones, such as motion sensors, GPS, GPU, and computer vision. Qualcomm established short, medium and long-term goals for this innovation initiative, with the associated timelines, and then addressed them strategically. In addition to starting a new R&D initiative, Qualcomm acquired KMel Robotics to address its short-term market opportunity. It invested in 3D Robotics to address its medium-term goal (ROI in 4-6 years). To address its long-term innovation goal (ROI in 7-10 years), Qualcomm established the Qualcomm Robotics Accelerator in collaboration with Techstars, where it is currently incubating 10 startup teams.
Inhibitors to applying the Startup-Driven Innovation Strategy
Based on our analysis of the innovation efforts in several large corporations we have concluded that the following reasons inhibit corporations from launching H3 innovation initiatives and using strategies such as the Startup-Driven Innovation Strategy to ensure the success of such initiatives:
- Executive management’s “short-termism.” Corporate boards, CEOs and senior executive management teams are engaged in well-documented horizon conflict that places the need to always provide shareholder value front and center. This is causing corporations to remain locked in their existing products and business models and fail to see on time potential disruptions.
- Middle management. Typically the senior management aspires to adopt particular innovations created by startups as well as the innovation methods developed and used by startups and their ecosystem in the process of creating these innovations. Additionally, the rank and file employees on a daily basis encounter a variety of problems that need innovative solutions and may be eagerly looking to apply novel approaches to address them. Middle management, on the other hand, either because they resist change in general, or see innovation as a threat, and largely resist them.
- The corporate management’s realization that technological and other types of H3 innovations take longer to adopt and roll out to market, than innovators typically believe. This can be either due to corporate organizational inertia, or market inertia.
- Incumbents’ beliefs. Incumbents in each industry believe that their established business models will continue to work well into the future and fail to foresee the impact of emerging technologies and business models. The disruption of the music industry from digital streaming media, and the disruption of brick and mortar retailing through ecommerce are well documented. Typically corporations look into disruptive models once they start feeling the effects of disruption and, by then, it is too late. Our discussion on the potential disruption of the automotive industry from new technology (electrified autonomous connected vehicles) and new business models (on-demand mobility services) is a case in point.
- Labor and special interests in labor-intensive and regulated industries. The disruptions caused by startup innovations can have profound impact on labor-intensive industries such as automotive, manufacturing, logistics, agriculture, etc. For example, consider the reaction of car dealers to Tesla’s direct to consumer sales model. In 2015 the automotive industry employed 1.5M people and impacted the employment of 7.25M people, including 1M people that are employed by car dealers round the country. As a result, oftentimes these groups provide strong resistance to the adoption of innovations that will impact their employment status. As noted by the World Economic Forum, the technological and business model innovations that are impacting many industries, including the automotive industry, e.g., robotics, big data and machine intelligence, digitalization, etc., will have profound impact on the future of jobs.
Ensuring success in adopting the Startup-Driven Innovation Strategy
While some of today’s corporate initiatives in Silicon Valey are reminiscent of similar efforts from the late ‘90s, particularly the corporate venture funds, — most of which were abandoned by 2003 — those efforts were mostly aimed at enabling corporations to reap financial gains through investing in startups. I’m suggesting that it is important to understand and utilize the best experiences and practices offered by Silicon Valley’s ecosystem as we define and refine the new corporate innovation strategy and associated model. To increase the probability of successfully applying this strategy to their innovation initiatives corporations must:
- Ensure the senior leadership’s support: There must be broad and strong executive support for the new innovation model. Through our work with Fortune 500 corporations we have found that the C-Suite (CEO, Chief Strategy Officer, CMO and Chief Digital Officer) leads these efforts with the board’s active involvement, but it constantly seeks the engagement of every corporate layer. We have often had to “educate” the senior executive teams and boards of directors of these corporations on how to support such efforts.
- Understand the culture factor: The corporate culture will contribute positively and negatively to these innovation efforts, and leaders must be prepared to lead a culture shift if necessary. The corporation must adopt a continuous innovation culture.
- Employ the right people: Staff the Innovation Outpost with the startup ecosystem with the people who have a passion for these activities and understand how to engage with the ecosystem.
- Establish the right timeframes: Establish the right timeline during which to measure success, and make it consistent with other corporate timelines. For example, most corporate investments in Silicon Valley-based startups, as well as the startups being incubated, should be viewed with a 7-10 year time horizon. Large corporations often cannot understand such a long time horizon, whereas institutional VCs do. The long time horizon is often in conflict with the typical tenure of corporate executives, including the CEO, which tends to be 3-5 years.
- Use appropriate KPIs: Establish the right metrics and KPIs for assessing the risk and the performance of each of these innovation-related initiatives. Financial return by itself is not the right metric.
- Nurture intrapreneurs: Support intrapreneurs and help them develop their internal startup ideas, rather than paying attention only to external startups and their teams.
- Learn to incorporate startup success into the rest of the corporation: Understand how to best integrate the successful results produced by the Innovation Outpost back into the business units given a particular culture since there may be strong resistance to such integration, particularly by middle management.
We have entered a period characterized by breakneck innovation pace occurring in many fields and impacting all industries. The existing corporate innovation model that is based on the contributions of the corporate R&D organization is no longer sufficient to address today’s challenges. We are proposing a new strategy for driving corporate innovation that integrates R&D with venture investing, incubation, business development and corporate development and is shaped by our extensive experiences in and best practices of Silicon Valley’s ecosystem.