How Traditional Companies get Digital Innovation right - Part 1/2

10 minute read

Key messages

• Your value chain is not enough: Disruptive innovation can hit established companies from far beyond their own industry
• Now or never: The upcoming downturn may further widen your innovation gap vs. startups – if innovation is put on the backburner in these game-changing times
• It’s not that hard: Ingredients for success are all there, they just need to be worked with in a different way
• Divide and conquer: Excubating the new from the old enables both to thrive
• No unicorns, no bunnies: Sober innovation portfolio management trumps big bets and actionism
• The entrepreneur is the pioneer is the orchestrator: CxOs need to adopt a Chief Entrepreneurial Officer mentality and become “leaders of the future”, playing three dedicated roles

The existential question: Digital Disruption - Friend or Foe?

Every traditional company (and as such, their management team) is currently facing an existential question: How to address digitalization and disruption and not only survive the respective challenges, but also take advantage of the massive opportunities coming along with them?

It's easy to get scared in the face of what's coming, especially out of the startup world. This is particularly challenging for companies in low-tech industries (e.g. food, textiles, services…) that, by nature, exist in a bigger distance to digital technologies. Let's take an example from the food industry: Tyson vs. Beyond Meat.

Tyson is a big meat producer in the U.S., with revenues of around $40B and a $24B market capitalization. Tyson has been recently taken on by Beyond Meat - a (still) startup providing meat-like, vegan food products to people who love meat, but also want to eat vegetarian. With only about $80M revenues in 2018 (0.2% of Tyson), Beyond Meat already commands a $13B market cap (50% of Tyson), which highlights the belief of the market in the future potential vs. established players like Tyson. Despite the recent triple-digit revenue growth, Beyond Meat will remain tiny compared to Tyson, at least for a while. Tyson also had invested into Beyond Meat, but sold its stake and is now establishing an own plant-based meat line Raised and Rooted, results to be seen.

The economic downturn will likely widen the gap, as more and more traditional industry players miss the innovation boat

Whether digital disruption becomes one’s friend or foe depends on what established companies make of it - and how they handle situations of ambiguity, such as an upcoming economic downturn.

In the traditional view, industry players were all in the same boat: An economic downturn forces one to reduce innovation spending? All industry competitors follow suit, reducing their spending too. In sum, little damage was done to their long-term market positioning.

Now, there are two new players in the boat, to whom this rule does not apply: Heavily financed startups (see Beyond Meat) and state-backed companies dedicated to taking on an existing market. For these players there is no downturn – and with incumbent companies standing back, they can aggressively grab market shares (think about the German solar industry pattern).

Based on insights from a recent Excubate study on “Innovating through the downturn”, only a few established companies have a clear plan for how to handle innovation activities. While almost 50% take an undifferentiated cost cutting approach and just stop spending ("The Cost Saver"), others (35%) are more opportunistic and selectively increase innovation spending, while hoping to pick the relevant innovation opportunities ("The Opportunist"). Other companies either don't change anything during a downturn ("The Stoic") or are very unclear about investing/not investing ("The Volatile"). More concerning, however, is how companies go about selecting their innovation investment: For the most part they don’t have a clear strategy for where to put their focus: Short vs. long-term benefits, close vs. far from core business, financial vs. non-financial impact. The number of companies struggling with this decision-making process is staggering – according to our research, 74% of companies don’t have a clear understanding of what they are optimizing for when spending on innovation during a downturn.

In light of these dynamics, it is very likely that the classic cost-reduction approach will hurt companies much more than it had done in past downturns and may even pose an existential risk to some players if they just sit and watch stoically how their business model gets disrupted. Traditional industries are particularly endangered, as their management often reverts to behaviors that worked in the past and fails to see how the underlying competitive dynamics have changed.

To take on this challenge and make digital disruption a friend rather than a foe, three questions are important for traditional industry players to get right: What, How, and Who to innovate.

The What: Look in the right place - beyond your own industry

Looking at traditional approaches to innovation, all seems very simple: Run a few design thinking workshops to understand your immediate customers better, scope out a few incremental or disruptive ideas, prioritize and validate, maybe even implement some of them.

Considering a traditional industry, for example the packaging industry, the immediate market trends for each player in the value chain and the respective jobs-to-be-done for packaging manufacturers are actually well understood. For example, the internationalization of product manufacturers and more complex distribution channels lead to requirements like prevention of counterfeiting and real-time traceability. Most companies have strategy and business development departments tackling these topics and implement solutions – with varying results.

This traditional approach, however, is not effective at addressing real disruption risks. Disruption often comes from unexpected angles, that – by nature of looking into a single industry – are rarely on the radar of strategy or business development teams who are too focused on their own market and close adjacencies. It is often innovation in a separate industry, however, that brings beneficial, detrimental, and often unintended side-effects.

A few interesting examples from non-adjacent industries impacting the packaging industry include 3D pill printing, real-time pizza delivery and home-grown food:

• $18B global medical blister market: Pharma companies experiment with 3D pill printing; with patients filling their prescription right at their homes, much fewer blisters and other pill packaging is needed

• $2.3B global market for pizza boxes: U.S. startup Zume now bakes pizza while it is being delivered to customers, serving them directly off the truck on a reusable tray – no box needed

• $83B global food packaging market: Startups provide help and guidance with growing own food, using app support

Thus, it is an imperative to look beyond immediate industry adjacencies and closely monitor what is happening in other industries to identify potential disruptions from various sides – and benefit from respective business opportunities. Other examples like the automotive industry, where ownership of the customer inside the car is taken over by, e.g. Apple Carplay, further highlight that merely looking up and down the value chain will strongly limit the perspective on disruption threats and opportunities, leaving companies vulnerable.

You have reached the end of part 1 of this article: Continue here to part 2

Excubate is an expert for corporate innovation and our team helps build corporate innovation units and individual corporate startups as well as address required cultural change throughout corporate hierarchies. We are excited to discuss your innovation and digital leadership challenge - reach out to us.