What is innovation?
To best understand innovation in the present age, we need to go back in time to the nineteenth century. At the time, the term “innovation” began taking root alongside science and industry, where its meaning was synonymous with ‘technical invention’.
Then, in the mid-1900s, the common understanding evolved to “bringing a new technology to market”. More recently, it further transformed to include “anything new and/or good”. In 1997, Clayton Christensen wrote one of the most influential business books of all times, “The Innovator’s Dilemma”. The book covered the inherent conflict of catering to current customers’ needs, while adopting innovations and technologies which cater to future customers’ needs. In the book, he divided innovation into two major buckets, ‘Sustaining’ or ‘Disruptive’.
Sustaining innovation typically refers to innovations that improve existing products and/or services. It does not create new markets for the business, nor create new values for the customers. On the other hand, disruptive innovation creates a significant change to existing products and/or services that the market does not expect.
We can find a good example from the history of transportation. Before cars and motorcycles were invented, we utilised bicycles and horse-drawn vehicles. If we had witnessed sustaining innovation, we would have only found ways to improve bicycles and horse-drawn vehicles, such as through lighter materials. As we’re aware, this was not the case. We experienced disruptive innovation in 1885 with the invention of motorcycles, and in 1886 with cars. This disruptive innovation allowed evolutionary possibilities for society.
“Disruptive innovation describes a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors.”Clayton Christensen
Although disruptive innovation seems more enthralling, it does not mean that sustaining innovation is not important. It is still important to satisfy the current customers’ needs while being aware of what’s going on with competitors and potential future customers.
When an organisation fails to innovate, it opens opportunity for new entrants or competitors to capture market share. A famous example is Nokia’s failure.
“While Nokia posted some of its best financial results in the late 2000s, the management team was struggling to find a response to a changing environment: Software was taking precedence over hardware as the critical competitive feature in the industry. At the same time, the importance of application ecosystems was becoming apparent, but as dominant industry leader Nokia lacked the skills, and inclination to engage with this new way of working.”Yves Doz, Emeritus Professor of Strategic Management, INSEAD
We could think of the cause as the failure to adapt to the changing business environment, and it exemplifies a common trait in mature, successful companies, “Success breeds conservatism and hubris”. This shows that even in an organisation with extraordinary resources and success, innovation could be a challenge.
Why is it a challenge for corporations to innovate?
A company’s goal is to create value for all stakeholders. When a company is just established, the priority is to release the product or service and validate whether the solution proposed by the company fits the customers’ needs. Then, the company continually improves its product, enlarges the organisation, and matures in the process. In this process, it pushes to maximise revenue and minimise cost. Or in other words, “achieve operational efficiency”.
The issue with “operational efficiency” is the tendency to measure every project and activity with how it contributes to the bottom line. This involves projects that tries to cut costs, or increase topline revenue with as little risk as possible. Managers become averse to risk as they could be penalised for taking on a risky project and it doesn’t go as planned. This creates a problem in innovating as innovations are inherently risky. This conservatism mindset problem is the first problem that a corporate needs to tackle in order to innovate.
Another big problem that we’ve seen are expertise. An example is a company that is trying to change their software development methodology to agile. Companies that are used to waterfall methodology might unintentionally utilise the understanding of waterfall methodology when they try to change. Furthermore, hiring agile experts into the organisation require a lot of time and effort.
That’s why companies might require external help to innovate or implement change, such as consultants, other companies, or startups .
In addition to the above 2 big problems, there are many hypothesis of why a company fails to innovate such as the following:
- In 2012, Maxwell Wessel published an article in HBR arguing that big companies cannot innovate because they are built to make a profit through operational efficiency without jeopardising existing income level, and thus is not built to try new things
- In 2013, Karan Girotra and Serguei Netessine published an article in HBR that shared that the problems with innovation are lack of top management support and attention, reluctance to experiment, failure to pivot.
- In 2019, Rebekah Campbell published in Forbes, 3 challenges to innovation. These challenges are performance targets, mindset, and skillset
- In 2018, IESE Business School published an article in Forbes that identifies the lack of organisational agility as the root cause of why company innovation efforts often fail
- In 2018, Viki Tendayi published an article in Forbes that argues that companies organise themselves to focus exclusively on a single business model, which tied the company lifecycle to the business model lifecycle. It then becomes challenging to innovate because it requires an architectural change to the organisation.
How can corporates gain access to innovation from outside the company?
In recent years, investing in startups has become more and more popular. We can see this from the proliferation of the establishment of corporate ventures around the world. In 2018 alone, 773 corporate venture capitals (CVCs) placed bets all around the world, creating 2,750 deals and pumping 53 billion USD into the global startup ecosystem.
With such numbers, what’s the problem with CVCs? In 2019, Bain published an article on five issues that happen when corporates invest in startups through CVCs. The issues are as follows:
- Strong corporate brand won’t create excitement
- Shopping lists don’t work
- Don’t look for a payback within 2 years
- Taking a minority stake is not okay
- Corporate diligence processes and investment committees don’t work
On the other hand, purchasing startup offerings and then scaling them up within organisations has its own challenges. The challenges typically stem from the startup having less experience than corporate vendors (think SAP, Microsoft, Oracle, etc) in moving things forward within the company.
Furthermore, having separate departments trying to purchase products/services from startups can cause a shadow IT phenomenon where the IT department doesn’t have clear visibility of all the technologies used in the company. This could put the organisation at risk because it creates issues such as noncompliance to corporate governance or even security policies.
One possible antidote to accessing start-up solutions: Venture Client model
A possible solution to overcome these aforementioned issues is the Venture Client model, created by 27pilots. The Circuit Connector team met with 27pilots this July, and we listened to a presentation on this new model. In this model, a corporate establishes a specific unit that centralises all procurements of startup solutions from across the organisation. This team is in close relationship with all business units that could be interested in startup solutions.
The central idea is that this venture client team will eliminate the challenges of purchasing startup offerings. A venture client’s first responsibility is to develop the company’s start-up partnership strategy. This includes answering questions such as what kind of start-ups does the organisation want to work with, what kind of business problems does the organisation want to solve with start-ups, how do the organisation work with start-ups, and how is success measured.
The venture client team also needs to gain credibility in the start-up ecosystem by building it’s own reputation and be able to stand out separately from the main company’s brand. This could be done by having a separate office, a separate website, and their own independent marketing efforts.
After the strategy is built, then it’s time for the venture client team to identify challenges in the organisation that could be solved by start-up partnerships together with business stakeholders. When a problem is identified and the business stakeholder is willing to sponsor the effort, the venture client team then needs to identify and attract top start-ups to solve the challenge. They’re also responsible to evaluate and select the start-ups the corporate would like to work with. Then it’s time to negotiate with the selected start-ups, and support them in the process of working with the corporate, e.g., setting them with a supplier account in the corporate system.
Finally, the venture client team is responsible to manage pilot projects, evaluate the results, and decide on follow up actions. The follow up could be a decision to scale the project and maintain a normal supplier-client relationship, to create a development partnership, or even acquisition.
In this way, the venture client allows the corporate and the startup to start with a low risk pilot projects and only scale when it’s successful rather than invest in the company or commit to a large-scale purchase early on. On the other hand, the start-up gets a taste of working with the company, including valuable product feedback.
It allows standardisation of approach to ensure an efficient, fast process.. With the venture client at the centre of all start-up interaction, business units don’t need to create their own way of interacting with start-up and could rely on the venture client.
Innovation has gone a long way from the first time the term is used. Currently, it could be divided into sustaining and disruptive innovation. Companies need to do a combination of both to survive and create long term value. Unfortunately there are a few problems why corporates couldn’t innovate effectively, namely mindset and skillset. Thus, companies often seek external help to innovate.
These external innovation could come from other corporates or start-ups. Nowadays, many corporates try to access start-up innovations through corporate venture capital or through purchasing directly from the start-ups. But both of this method has their own limitations.
A possible antidote is the venture client model where a team in a company is mandated to lead the company’s start-up partnership strategy and be the first client of the startup in the organisation. This allows large companies to incorporate solutions from start-ups, minimise risk, measure success, and scale up the solutions across the organisation.