Disrupting the Corporate Innovation Landscape

Innovating in a corporate environment and on a large scale is complex and can be rejected by the immune systems of many large organisations, who are set up to keep the ship moving steady as she goes, no matter what lies ahead. Changing course swiftly in the face of robust supporting evidence can be very difficult.

On the other hand, these same organisations are under constant pressure to deliver value for customers/clients/consumers [delete as appropriate] and shareholders. This demands continuous growth and means finding new products, services, and markets.

The main reasons large companies struggle can be attributed (but not limited) to:

? Siloed departments

? Risk aversion to big bets

? Lack of executive support of emerging technologies or big technology projects

? Lack of domain expertise

? Lack of talent

? Lack of grass-roots autonomy. S/he who holds the purse strings rules.

? Massive market – where to play?

The response to all the above has often been to create Labs, R&D functions and monolithic Strategy or Innovation departments. These are all fine things to do, but it is tempting to be seduced by the power of titles and words and treat these concepts as talismen, that are guaranteed to increase revenues and break into new markets, just because they sound dynamic and on-trend and everyone else is doing it.

Many companies’ senior management recognise that digital innovation requires a certain unfettered ability to float above the constraints of running a large operation and have attempted to build this approach into the corporate culture. They have learned the hard lessons from the epic Blockbuster fail and multiple styles of corporate innovation have emerged since then.

Common approaches include:

• Digital transformation/product innovation
• Co-creation partnerships with start-ups
• Merger/acquisition of start-ups and
• Combinatons of the above.

There is plenty of literature about these tried and tested strategies, so there is no need to dig into detail about them in this article. The intention here is to compare them to a new, rapidly trending model of technology innovation, which I will get into later.

Here is a quick overview of each, with their pros and cons.

Digital transformation/product innovation

Digital transformation leverages digital technologies to fundamentally change how an organization operates and delivers value to its customers. It involves adapting to new technologies and using them to improve or create new business processes, products, and services. This is an integral part of most companies operating model and rightly so, as technology gets more sophisticated and users get more demanding. And here is the issue. The democratisation of once opaque, monolithic technology through open sourcing has made it possible for small, smart and driven teams to outcompete incumbents. Quarterly planning and board approval for new products and services has been replaced with autonomous squads running 2-week agile sprints, whose outputs hit the market before the incumbents can sign off on the business case.

Co-Creation Partnerships

Co-creation involves partnering with start-ups to test new concepts in markets, which are addressed by the start-ups solution. This is a good way to maintain visibility of potential disruption of existing markets from upstart competitors, but it relies on the existence of start-ups that are operational in the domain of interest. The resources required (in terms of effort, cost and time) to find start-ups whose culture, products and services align with the corporate brand are not insignificant. If no appropriate start-up exists in the required domain, the corporate innovation team could be back to square one.

Corporate Venture Capital (CVC)

Acquisition of start-ups allows for the rapid expansion of companies into new territories. If a merger goes well, the value of the new company should appreciate as investors anticipate synergies to be actualised, creating cost savings, and/or increased revenues for the new entity. The newly acquired company is required to be grafted onto the main corporate body, much like a new limb or organ and if the conditions are not appropriate, the new graft can fail and need costly resources to adapt to the new environment.

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Risks to Corporate Innovation

Corporate innovation is a vital for delivering new or enhanced revenue streams, but remains fraught with significant headwinds.

Innovation Risk

Simply stated, large corporations (over 250 headcount [1] ) can struggle with large-scale digital transformation/product innovation.

Gartner reports that 75% of ERP projects fail. Others report that CRM projects fail at nearly the same rate.?Big data analytics projects also fail at an alarming rate. Clayton Christensen suggested that 95% of product innovation projects fail. Digital transformation fails 70% of the time: ?McKinsey reports that only 30% of digital transformation projects result in improved corporate performance. Technology projects fail at an astounding rate at enormous cost to the companies – and executives – who support them.?Perhaps the harshest finding is that “90% fail to deliver any measurable ROI.” [2]

Domain Risk

A lack of presence of the right partners in a relevant domain, can significantly hamper co-creation and M&A activity. A domain may be as niche as the set of all start-ups in the maritime industry who focus on AI. Conversely, an oversupply of start-ups in a given domain could reduce revenue generation opportunities due to saturation and require effort to be noticed amongst the crowd.

Founder Risk

Following completion of a merger or acquisition, the founders, who had ultimate autonomy of their once-independent start-up, must now fit into a new culture and operational structure, with all the bureaucracy and red-tape that accompanies organisations over a certain size. Are they cut out for life under new management and able to perform? What got us here, will not necessarily take us there.

Operational Risk

Executives face major stumbling blocks after the deal is completed. Cultural clashes and turf wars can prevent post-integration plans from being properly executed. Different systems and processes, dilution of a company's brand, overestimation of synergies, and a lack of understanding of the target firm's business can all occur, destroying equity value and decreasing the company's share price after the deal is done.

Financial Risk

We will illustrate this by way of an example of Warner Communications, who merged with Time, Inc. in 1989[3] .?In 2001, America Online acquired Time Warner in a megamerger for $165 billion, the largest merger in history at that time. Respected executives at both companies sought to capitalize on the convergence of mass media and the Internet. This marriage appears to be a match made in heaven, on first sight.

Shortly after the mega-merger, the dot-com bubble burst, which caused a huge reduction in the valuation of the company's AOL division. In 2002, the company reported a loss of $99 billion, the largest annual net loss ever reported.?

In the next article, we will explore a relatively new approach which is gathering steam among corporate innovators with an appetite for the risk of rapid disription: The Venture Studio model.

In the meantime, please feel free to hit me up LinkedIn or comment. I would love to hear from you.

[1] https://single-market-economy.ec.europa.eu/smes/sme-definition_en

[2] https://www.forbes.com/sites/steveandriole/2021/03/25/3-main-reasons-why-big-technology-projects-fail---why-many-companies-should-just-never-do-them/

[3] Source: https://www.investopedia.com/articles/financial-theory/08/merger-acquisition-disasters.asp

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