Corporate digitalization programs and strategies provide a space for companies to innovate!
By questioning archaic company assumptions and thus developing new methods of tackling problems, these external hubs can help to grow and test exciting new business ideas at speed and incorporate a new innovative mindset within the company’s digital transformation strategy.
As internal corporate innovation fails to provide this necessary freedom, external, independent innovation hubs must be created. This article offers a step-by-step guide.
It explains how large corporations can become a part of the digital transformation, and engage with startups through external innovation programs in mutually beneficial ways to solve their most pressing problems.
After assessing the current state of corporate innovation and digitalization strategies, it maps out a possible trajectory of digital transformation accelerators and highlights where possible challenges lie.
The current state of corporate digital transformation
But first, it is important to ask:
Why should you innovate?
An example of why it matters:
Founded on the 12th of May 1865 in Espoo, Finland as a single paper mill operation, this world-renowned company expanded into several different products, best known now for their distinctive mobile phones.
Nokia capitalized on their success and lack of competition with operating profit increasing from $1b in 1995 to nearly $4b by 1999. In 2003 they created the best-selling mobile phone of all time, the Nokia 1100. By 2007, their market share of smartphones was a staggering 49.4 percent.
[Related Article - 6 Lessons Corporations Can Learn From Startups]
Smartphones vs. bricks
Yet, the introduction of the iPhone into the marketplace changed everything. Despite an almost 50 percent share of the global market by the end of 2007 compared to the 5 percent share of Apple’s iPhone, a dramatic industry shift was imminent.
Ben Wood, an analyst at CCS Insight summarised it as follows; "Nokia make great phones, they still do.
Nokia went through this incredible decade of innovation in hardware, but what Apple saw was that all you needed was a rectangle with a screen, and the rest was all about the software."
Nokia was left behind. At its core, Nokia was a hardware company, rather than a software company. Its top engineers were expert at creating physical devices yet paid less attention to the programming, consequently underestimating the importance of adaptability and compatibility in the face of new software and apps.
The marginalization of software experts alongside their failure to recognize how vital the transition to smartphones would be.
This ultimately pushed Nokia out of the smartphone-race before the start gun fired.
Why did Nokia fail?
Nokia’s failure can be attributed to a number of reasons.
Their strategy was short-term, focusing purely on ensuring the next financial results were better than the last. This stifled innovation and placed stringent parameters around their technological advances.
Their technology was inferior to Apple’s, despite their research and awareness of touchscreen technology. The operating system used by Nokia, named Symbian, focused heavily on a device-centric system in an environment that was shifting toward application and platform friendly systems.
They failed to take a leap of faith and hoped to ride out the storm with their tried and tested method: producing quality physical handsets. They became vulnerable to competitive forces and ultimately destroyed their market stronghold.
This result could have been prevented through a successful corporate digitalization strategy.
Internal and external innovation
Corporate transformation can follow two different strategies.
These can be termed ‘internal’ and ‘external’ strategies, in many cases the latter of which can lead to more genuine innovative results.
This is because despite the fact corporations are normally highly successful at advancing existing business models, they commonly fail to recognize new disruptive avenues for expansion and growth.
The success of these startups can often come down to the culture implemented within.
What is internal innovation?
A large organization brings in talent to work directly on new projects that "feel" like startups within the large organization or inside the departments.
Mastercard built a platform called "shop this." They focused on structuring the team's growth just like a startup would.
What is external Innovation?
A large organization creates a stand-alone corporate garage that encourages the growth of small pilot projects in a separate building with unique projects and often encourages early stage startups to join.
These "innovation labs" usually have completely different management styles and structure from the parent organization.
Microsoft encourages startups to join its accelerator and gives a ton of resources to those that make it into the program. By initiating startup partnerships early on, they can give rise to more opportunities for startups to drive revenue early.
The result? There are far more favorable outcomes when it comes to future acquisition and mergers given the close relationship from the start.
The shortcomings of internal innovation
Internal innovation commonly follows a top-down communication flow.
The C-level executives call the shots for the future of a company:
- Scope of the research
- Technology implementation
- Time frames
- Goals / Expectations
These personnel are mainly concerned with their quarterly and yearly bonuses which is inextricably tied to revenue.
Most large scale projects may disrupt entire markets tech sectors, and consumer behavior takes years to get market penetration before they scale.
If you are measuring on a quarterly basis, how can you possibly expect leadership to support projects that have three to five years before they reach profitability?
There is a problem with short term wins that lead to long term failure.
Meetings between the CEO, the CTO, and CIO, along with other directors set the parameters for research, and thus the innovation team itself has no power to independently innovate and drive the project. Passion wanes.
When major company decisions are made from above and imposed upon the innovation hub with short terms KPIs in mind, everyone loses.
The problem with internal innovation is it's a short term focus on immediate revenue results.
When investigating the sudden downfall of the mobile phone giant Nokia, Tim O. Vuori, Assistant Professor in Strategic Management at Aalto University and Qui Huy, Professor of Strategy at INSEAD Singapore discovered an organizational structure permeated by fear.
In Nokia, middle managers feared for their jobs and thus did not express their concerns; top managers feared the quarterly targets and thus these numbers governed their decisions to push for short-term fixes; and executives feared publicly acknowledging the inferiority of Nokia’s operating system Symbian for fear of losing investors, customers and suppliers.
In such a constricted, pressured environment of non-negotiable targets, innovation cannot and did not thrive.
[Related Article - 50 Examples Of Corporations That Failed To Innovate]
The benefits of external innovation
Large companies frequently struggle to innovate due to these structural barriers.
Innovation teams NEED some distance and independence from the company. Without institutionalization, startups have an advantage when re-envisaging how an industry can develop and grow.
Imagine asking a track and field athlete to run a race but just before the starting gun fires, they're instructed: "don't use your legs."
External collaboration with startups can help corporations innovate faster and discover new approaches to overcome problems. Companies can, therefore, gain access to the latest technology and avoid the inflexibility they may encounter if they did this alone.
How to find investable startups?
Once the need for visionary startups and the power they can offer the stagnating company is fully recognized, it becomes a question of how the corporation can best find interesting, investable startups.
Common ways to source startups to boost corporate innovation include:
- Events and Competitions
- Startup scouts for hire or internal resources
- Big Data Analysis + Machine Learning
- Large listing sites
[Related Article - Top 5 Things Investors Look For In Startups]
Attend events to scout startups
Events and startup competitions can be a great place to meet the rising stars of the tech scene. For example:
- Demo Days
- Startup Competitions
- Pitch contests
- Startup Conferences
- University startup events
- Startup Weekends / Hackathons
The hardest part about attending these types of events is determining which meetings to take and which startups are genuinely doing what they claim.
Startup scouts for hire or internal resources
Some companies may approach a startup analyst who investigates possible startups.
It's a bandwidth issue.
The problem is there are too many startups for one person to critically analyze with any degree of accuracy.
Often these startup analysts and scouts are going off hunches. Sometimes they just like the founder and made a good connection.
Is that the best predictor of success?
How reliable are their recommendations – what is the basis of their assessment?
Fortunately, there is an alternative. Companies can now use a combination of machine learning and thousands of crowd-sourced technology scouts to accurately assess startups.
Finding startups via big data analysis + machine learning
Big data analysis can be highly valuable at helping companies discover the perfect investment among a huge mass of possible startups.
The concept is simple, aggregate lists of startups from publicly available sources, events, competitions, and crowd-sourcing. Despite everyone's best intentions, it's hard to go through all that information.
Valuer, for example, can provide curated lists of startups for companies that fit their unique needs using machine learning tools that assess the startup based on over 70 different fields. Machine learning in combination with a global network of human scouts who find these innovative companies grants an accurate assessment of suitable startups.
Companies may openly invite startups, computer programmers and others involved in software development to compete in a design sprint-like event to tackle a company issue.
Hackathons last between 24 and 48 hours, the aim of the organizers is to source young startups and talent into the company. The time restrictions increase adrenaline and make the team far more productive.
Moreover, Hackathons provide companies the unique advantage to see how their possible investments and collaborations perform.
Once the appropriate startups are known by the corporations, they may be invited to participate in an accelerator. Unlike hackathons, an accelerator can be offered to a company that already has a product or tool of interest to the company. These programs can help to maintain the momentum that would otherwise be lost as a result of internal bureaucracy.
But, how can a company successfully organize an innovation accelerator?
Successfully organizing an innovation accelerator
Accelerators are highly context-dependent; there is no right way to go about organizing and implementing an accelerator program alongside your business.
Nevertheless, it is vital to maintain clear goals and structure your program accordingly. Accelerators are preemptive: the aim is to foster good relations between investors and startups so that over time, companies can build deeper and more successful partnerships that advance the company further into new markets.
To make the most out of these partnerships, it is possible to separate a digital innovation accelerator into five distinct stages. These are not inflexible but offer an overview of the steps necessary to maintain a mutually beneficial relationship.
STAGE 1: ASSESSMENT
When discussing the possibility of an innovation accelerator, it is vital to have a clear goal in mind. Why is the accelerator necessary? And, what do you aim to achieve? It is first necessary to map out the scope of the problem.
The company must ask: what is preventing the company (or individuals/teams) from producing their best work and achieving the best results?
This initial exposition of the problem domain is not to question what is wrong with the company, but rather to establish; what is it that is preventing further success?
When making this strategic assessment, it is necessary to consider the biggest opportunity areas within the organization, along with what remain the most challenging. Fundamentally, these assessments must align with the key business objectives of the company.
This isn't translating languages, it's about understanding what is and isn't working internally.
Successful pairings of startups and corporations require an understanding of where the biggest opportunities are within an organization.
- Is it supply chain management?
- Is it each department?
- Is the competition beating you on services you once used to dominate?
Once the enterprise company has established where their opportunities for growth and innovation lie, these discoveries must be translated into practical information.
The question becomes; what technology or innovative strategies could be used to solve these pressing problems?
Importantly, during the transition from the ‘discovery stage’ to the ‘translation’ of these problems into possible avenues of innovation, the thinking still remains somewhat abstract.
In the final stage of assessment, the problem domain is grounded in the practicalities of creating a corporate accelerator.
The question, therefore, concerns who is best suited to solving the company problem.
Which startups or individuals can help a company innovate?
The corporation may, therefore, engage with startups to discover what the current opportunities look like.
While connecting with the startup, assessment continues to be essential.
Measuring the most important elements of a startup allows you to make tough decisions.
Examples of startup assessments:
- Founding team prior experience and history
- The uniqueness of the product or service
- Product-market fit
- Current and future traction
- Competitor analysis
- MVP (minimum viable product)
- Reach, growth, and market penetration
Assessments are tricky
Throughout the processes of assessment, Valuer’s startup discovery platform can offer its unique services to corporations looking to invest. Using up to 70 unique fields, we are able to make data-driven decisions regarding the potential for success within any given startup in any industry, based on quantitative and qualitative data collected over 10 years.
Despite the difficult nature of these questions, they can easily be answered, and provide vital insight for investors, managing expectations and guiding the development of the accelerator.
STAGE 2: ENGAGEMENT AND INVESTMENT
Once decisions regarding who and what have been finalized, the chosen startup is invited into an innovation hub, i.e. a corporate accelerator. It is essential that the selected goals in the first stage are maintained and continually aligned with the goals of the startups involved.
Here, a distinction is needed as the alignment of goals and their similarity are very different things. The company and the startup do not need to have the same goal, but they must be compatible.
For example, the corporation may have a vested interest in using the accelerator for self-promotion and to develop and acquire new technology. The startup’s main goal may differ, for example, more investment and revenue growth.
While different, these goals align, and both drive the accelerator towards a successful outcome. The companies mutually benefit from their collaboration.
STAGE 3: MEASUREMENT
After some time, it becomes essential that the performance of the accelerator is measured. Yet, one of the main challenges accelerators face is trying to remain clear about how best to measure for success. Startups commonly have a different perspective than large corporations on how they organize their time and measure successes.
Rather than following rigid quarterly targets, a startup may measure its success in terms of important milestones; for example, creating the first prototype, getting their first investors or overcoming a pressing problem.
What can we learn from Spotify?
While KPIs must be sought after, the investing corporation must acknowledge that the developmental trajectory of a startup is never consistent. Spotify exemplifies this problem.
After being founded in 2006, it took a further two years to launch and four years before it secured initial funding. Despite the roughly $99 million loss it reported in Q4 of 2017, it is now finally turning a profit.
This demonstrates how conventional and fixed measures cannot accurately paint a picture of this startup. A corporate perspective would inevitably label this business a failure, yet by measuring in more flexible and adaptive terms, success can be seen. With this mismatch between corporate and startup expectations, it is more likely the investor will measure a startup’s success long before they are ready.
There are two alternative styles of measurement, that can be termed either ‘light’ or ‘heavy’ touch. Just like how internal innovation was rife with challenges, so too is ‘heavy’ measurement and it remains a dangerous approach.
‘Heavy touch’ is a form of micro-management in which investors are involved in all aspects of the startup’s work. Investors may take control, setting deadlines for the startup and measure its success based on their own corporate mindset.
Such a stern approach once again stifles innovation and creates a culture shift within the accelerator, the atmosphere of the startup is no longer organic and if too many expectations are imposed by investors, it cannot ‘pivot’ between ideas and explore options.
A lighter form of measurement is paramount for an accelerator’s success. Goals and targets are set, yet they remain open for revision. Targets are set according to milestones, rather than arbitrary quarters.
Furthermore, the measurements may refer to the progress of the product’s development, rather than to financial returns. Of course, corporations want to see a return on their investments, but, as the example of Nokia and Apple has shown, investing in long term success may ultimately yield higher results than tried and tested, simpler approaches.
Ultimately, measures should be there to ensure the goals of the accelerator are still at the forefront of the developer’s minds. Rather than focusing on financial profits and the speed of development per se, the progress itself should be measured.
And of course, progress comes in many forms…
STAGE 4: (RE)DEVELOPMENT
Progress should not be assimilated only with success. Failure and mistakes are also progress: learning what not to do naturally drives a project forward.
The motto, ‘fail fast, fail often, and fail forward-thinking’ captures the positives to be found in unsuccessful solutions or products. Therefore, the fourth stage of an accelerator builds closely upon the third.
When revising and developing products, mistakes are inevitable.
By putting restrictions on failure, and measuring this failure as the ultimate evil, corporations limit the scope for startups to fund their winning formula.
It is the fast-paced experimentation within the accelerator or innovation lab that enables wrong approaches to be recognized swiftly, learned from, and corrected.
Redevelopment is not a step backward, but rather an essential component of innovative development. In the startup scene we call these pivots.
Once a product has been selected, tests are performed. These can either be a Proof-of-Concept Test (PoC) or a Pilot Test.
Proof of Concept tests
PoC (Proof of Concept) tests commonly refer to small scale, pre-market tests that demonstrate the feasibility of the product and normally last less than three months.
Usually, PoC tests are very small and may or any not be complete demonstrations of what the product does, but they do demonstrate the concept has practical potential.
Typically, PoC tests are internal and non-consumer facing. If PoC tests yield negative results, redevelopment is again required.
Pilot tests take longer to perform. They are tested in the market and are consumer-facing. Using a monitored environment, pilot tests validate the feasibility of the new product/solution before its subsequent launch or scaling.
These tests take longer to perform, lasting anywhere between three to six months.
Again, any last-minute problems are identified and ironed out, prolonging the tests, but guaranteeing the innovative solution best supports the investing organization.
Redevelopments and tests do not produce results overnight.
Preliminary outlines of processes will save everyone time in the long run.
Assuring the corporation and startup continue to align their goals is essential to a healthy accelerator. Setting clear milestones and KPIs enable both parties to assess the feasibility of novel products and deliver actionable results.
STAGE 5: IMPLEMENTATION
In the final steps of the accelerator, referred to here as ‘implementation’, the final product has been agreed upon and final tests have been conducted.
Only now can the new product or solution be internally implemented within the investing corporation. The corporation, therefore, becomes the client of the startup. During this stage, there may be a scaling up of the resources and investments available to the startup.
When scaling technology, there are two alternative routes. The product may be scaled across geographical regions. This is easy if the startup is still working with their investors as large corporations may implement a phased roll out across their entire company.
Alternatively, scaling may happen across business functions. To scale in this way, the startup may return to the accelerator and assess the feasibility of molding the product to accommodate and solve further problems the investing company faces. Both paths offer great success for the startup.
Yet, it is in this final stage of implementation that the startup is both the most powerful and vulnerable. While the startup holds the finished product in their hands, the investing company who has engaged with them throughout the accelerator program may attempt to short change them, leaning heavily on the fact that they have previously invested in the startup, offering the accelerator, and therefore argue that they deserve a better deal.
Nevertheless, the startup still has power, if desired, they can offer their product to other competitors. A startup may have gained substantial interest from another corporate, and therefore could receive offers to be acquired. Of course, innovative solutions are always highly sought after.
However, it must still be recognized that corporate accelerators may have the power to veto an acquisition by an outside party or may have the right to buy first. Therefore, deals between the startup and the corporation must be made.
Negotiating a fair price and the terms of such an acquisition can be challenging for both parties. With a finished product and the completion of the accelerator per se, investors may wish to tear apart the startup and absorb their technology, employees, and ideas within the larger body of the corporation.
These are the biggest fears for startups that agree to work with large enterprises.
This integration within the organizational infrastructure of the corporation will inevitably affect the startup immensely. Team dynamics can change, and naturally, the culture of the startup will again shift substantially.
Therefore, upon completion of the accelerator, the interests and goals of the startup and the corporation are once again misaligned, and it is this misalignment that can continue to challenge both the further development of innovative solutions and the employees behind them.
Innovative solutions demand innovative research. Without innovation, even the largest corporations risk losing their relevance in an ever more competitive world. The dramatic fall of Nokia perhaps remains the most striking example of how innovation is essential to maintain market share.
By developing early relationships with startups, corporations can tap into the uninhibited innovation these small companies possess, therefore collaborating together to develop novel solutions to their most pressing problems. The goals of the two parties do not need to be the same, but they must be compatible so that innovative solutions can develop.
The corporate approach to innovation directly contrasts the fast-paced and arguably haphazard approach of a startup. Investing in startups therefore requires that corporations reconsider how they manage, measure and engage with parties within a corporate accelerator.
Through this new form of mutual collaboration, this generation will continue to see huge leaps in innovative products, solutions, and ideas that improve our lives and push our development further in this technological age.