Optimizing The Balance Between Operating And Innovating

Four models of corporate innovation: Integrated Corporate Innovation, Corporate Incubation or Accelerators, Corporate Venturing and External Incubation


Large organizations have many advantages in bringing new products to market: Established distribution channels, access to capital, deep and wide pools of talent. So what gets in the way of effective, continuous innovation? Whether it’s creating new markets, building disruptive products, radically changing operating processes or leveraging technology to more effectively execute business, the status quo isn’t going to cut it. Innovation, once considered 'risky' or 'distracting', is now highly desirable.

Venture Capitalist John Doerr of KPCB says the rate of innovation today is “like the cosmos: expanding and accelerating.” Keeping pace requires new ways of thinking and a new tolerance for risk.

But the challenges to innovating also have a practical side: At the individual level, there’s a structural tension between doing your primary job well (hitting your numbers, leading your team, operating your department) and allowing space for improvement and innovation. There is an inherent tension between innovation and execution. Most employees are too caught up in day-to-day tasks to act on new ideas. Even in fecund environments, new ideas must be supported by processes that allow them to be filtered, developed, financed and tested.

Corporate leaders define the top main blocks to innovation in their companies as 'culture' and 'getting new products to market.' What are companies doing to overcome these? In the 1950s and 60s, core scientific research and development (R&D) at companies such as Bell Labs or Xerox was done in separate facilities. Many major breakthroughs happen in these environments, even today. Yet, while R&D is a vital locus of innovation, things often stall out in the phase after discovery. The process of commercial prototyping, market validation, launch and scale is a minefield for new discoveries. There are a lot of orphan patents sitting on the cutting room floor in corporations - sometimes because they didn’t fit with corporate strategy, and sometimes because there wasn’t the will or the structural capacity to bring the product all the way to market.

There are varying beliefs about where innovation should be seated. Is it most effective when tightly integrated into the day-to-day processes of a company, or when sequestered in a special operating unit?

Vivienne Goldstein, GE’s Director of Innovation Acceleration and co-founder of GE FastWorks, says “Innovation is like respect - it should be part of the culture, woven into everything. You don’t need a VP of Respect, do you?

In practice, though, that attitude doesn’t always translate. Google, for example, famed for their '20% of your time free to work on your own initiatives' policy, appears very innovation-friendly - but employees there will tell you that that 20% is 20% on top of their regular jobs. And Google has their own R&D facility: Many new products are incubated and tested at Google Labs. On the other extreme, Scott Painter, CEO of True Car, says he wants all of his operating people focused on revenue and customer retention: Innovation is a completely separate group.

So what is the best way to structure corporate innovation initiatives? Here are four models that businesses currently adopt with the aim of creating environments that support innovation.

Integrated Corporate Innovation

In this model, companies weave innovation into the fabric of their day-to-day operations. Often, innovation is a job requirement for all employees. Each business unit is charged with developing new products and technologies that will fit their business and their market. They need to build the team, and flow the operation into their existing launch processes—all while still responsible for their normal deadlines and quarterly earnings. This is a tough task!

Often companies facilitate internal (or even external) hackathons, idea boot camps, Startupathons, etc. to kick-start ingenuity, focus effort and speed up decision-making. Some companies, like 3M, build time into an employee’s day to allow work on 'passion projects'. Masking tape and Post-It notes were developed by individuals at 3M without any formal support. This process may even be getting easier: There’s a host of new internally crowd-sourced ideation and innovation platforms that can help employees with this.

But to innovate and execute simultaneously is a challenge. Research, testing and experimentation require different skill sets than running existing products. There is an obvious tension in creating disruptive products and services: Why encourage people to switch from products that are already generating good brand revenues?

Would Uber, for example, have implemented from inside the taxi industry? Would Red Bull have been introduced in the context of an existing product team at Coca Cola? Would Comcast have introduced YouTube?

To innovate this way, there must be a massive tolerance for risk. Companies must be willing to embrace failure if time and money are invested in projects that just don’t work out. Google famously spun a million dollar mistake by Sheryl Sandberg as proof that it was pushing the envelope. In other words, if too many of your projects are successful, and there are not enough failures, you should take it as a sign you’re not trying hard enough to innovate. There’s a point there. According to research conducted by Harvard University’s Beth Altringer on innovation models in global companies across diverse sectors, innovation attempts conducted with the 'intrapreneur' model fail between 70% and 90% of the time. That’s a sobering record.

Corporate Incubation or Accelerators

To separate execution from innovation, many companies set up an internal system whereby they remove small innovative teams from the day-to-day operations and constraints of company politics and charge them with developing new technologies and taking them to market. Essentially, this removes the impediments that are generally inherent in upstream reporting and wraps them in commercialization skills, in order to create the business and marketing model needed launch a new product or service.

Panasonic, for example, has an innovation lab in Silicon Valley researching the convergence of user interfaces, sensing, cloud services and networking technologies. Ideas from the multiple divisions across the company are held under one roof, and tested to see which ones are going to win. The division has its own budget, culture and procedures (and email server!) and acts more like a startup than an established corporation.

Such a system can work, but it requires an incredible amount of trust between corporate leadership and the individual placed in charge of innovation. One key to successful incubation is to align the areas of investigation to the core work of the company, or areas of investigation that align to a company’s core advantages, rather than in radical departures into new lines of business.

Corporate Venturing

Another primary way of innovating within a company is to do strategic external investment in fledgling companies or startups. This investment can help an established company respond to changes in technology without the cost or risk of traditional R&D, which typically involves more hiring and increased operating costs.

Corporate venturing gives a company the chance to explore new markets and sound out potential acquisition partners. It allows companies to place bets in a number of different sectors. It’s a way of creating an option portfolio of emerging technologies without having to commit anything other than capital.

Let’s use a company like Kodak, which struggled to keep its position in the photography market. If it had taken a corporate venturing approach back when photo-sharing sites were emerging—investing, for example, in 10 of the most promising companies—it may have remained nimble enough to adapt. If one of those 10 had been Instagram, Kodak would have received a share when Facebook ultimately bought the company.

Corporate venture groups invested $5.4 billion in 775 deals to U.S.-based companies in 2014. And these are not small investments: the average deal size with corporate venture participation reached $23M+ in three of the four quarters in 2014. The most active corporate VCs (CVC) of 2014 were Google Ventures, Intel Capital and Salesforce.

External Incubation

With increasing pressure to develop and launch products quickly, it’s often easier, cheaper and faster for a company to outsource some of its entrepreneurial effort. An innovation consultancy can provide market intelligence to help companies identify where the next opportunity is coming from, and act fast to seize it.

External incubation offers a laser-focused effort to solve a single problem and the agility to move incredibly fast, able to develop and build a product in a matter of months, not years.

It can take an idea from concept (or even just a question) to a fully branded, market ready reality without additional overhead, new hires, materials or tools. In return for a fee, a handpicked team of experts will deliver the finished product and all of its Intellectual Property.

This does not mean that a company completely hands over its innovation efforts. In our experience, the best examples of external innovation are those in which the external team is deeply integrated into the parent company. In this way, the company learns about the technology and may choose to apply it to other areas of their business in the future. Conversely, if the company has the technology, but lacks the capability to translate it into a saleable product, a good solution might be to embed the company’s tech team into the external design and business building team. In both scenarios, the teams are working hand in hand.

One of the biggest advantages of an external incubator is its ability to test half-baked ideas in the marketplace. An established company needs to be pretty certain of success before it will risk its reputation on a new launch. It can’t drop products into the market and then pull them back out again. An external incubator has a startup mentality and a “good enough” approach to ideas. Early market feedback—and the flexibility to change direction based on this feedback—is an essential part of the innovation process.

Final thought

Being innovative is not just for startups. It’s a strategic goal for companies of all sizes. All startups want to grow into what John Maeda calls 'End-Ups': established, successful businesses operating at scale. But they don’t want to ossify; they want to continue to lead the field.

The skills and operating infrastructure needed to run an established business, though, run contrary to those required in an innovation space. Policies and procedures that bring efficiency and profitability to a company can inhibit or stifle innovation. Eliminating the status quo can be seen as threatening to a company that’s not accustomed to rapid change. To succeed in today’s business arena, companies must have a clear innovation strategy in place—a dynamic culture that allows the freedom to innovate, and to help the best ideas become a reality.

Man with city small

Read next:

The Key Challenges For The CINO