What would you do to make sure that you become the next market-maker and not just a share-taker?
If you were to go around asking top level executives (CEOs, CTOs, CIOs, CHROs), probably 9 out of 10 would reply that they either have a corporate strategy in place or existing innovation labs that have been setup within their organisation to run them. The common narratives of Alibaba, Netflix and Amazon flood conversations while communicating these transformational stories with a grandiose demeanour. There are more strategies today about how innovation and R&D is going to transform the organisation and transcend it into the next success story than ever before. The world and market landscapes are changing so rapidly, it’s adapt or die.
The truth is everyone is getting tired of the same stories. They want to take their organisations to the offensive frontlines, become market-makers and leaders. However, if we compare the success of corporate innovation labs against an organisation’s vision for innovation, can we be as confident to say that we are at least on the way to achieving some of it?
Introspection and retrospection are slowly being valued less in a world where everything is about taking leaps and bounds forward. Realising mistakes, changing processes from the bottom up and being bold about decisions were perhaps the simplest answer, yet hardest to swallow, all along.
It is often difficult to set a clear mandate for a corporate innovation lab, especially in the cases of newer companies or companies that have business models that have been unchanged for a long period of time. On one hand, these labs are supposed to help companies avoid disruption, but on the other, it usually is not clear from day 1 if the mandate is targeted towards incremental innovation or transformational innovation. The organisational approach and level of support for both are vastly different.
· Transformational innovation tends to pose a threat of cannibalising current business scopes, which forces some of these ideas off the table and limiting the lab’s scope if incremental innovation was the unsaid focus.
· The need to do financial forecasting before any form of market testing tends to work well only in the cases of incremental innovation projects, but not for transformational ones, hence needing different handling and valuation metrics.
· The mannerism in which an innovation lab interacts with corporate venture funds and their placement within the core of an organisation would differ, resulting in different forms of value creation and business impact — be it on an organisation business model level or the business models of existing business lines.
Moreover, external influences and top-down mandates adds a layer complexity in deciding how certain mandates are carried out and executed. Being able to distinguish the strategic purpose of a corporate innovation lab will have a direct impact on their efficacy and ability to bring value to the table. That being said, incremental innovation will not likely defend a company from being disrupted by new and upcoming incumbents, unless the business models were niche in nature to begin with.
A typical innovation pipeline tends to look very simple. It covers a few phases in which are all familiar with, such as problem curation, hypothesis testing and market fit, incubation and so on. However, in a similar light, we are also very familiar with the “horror stories” where it is not the market that beats a corporate innovation lab down, but it’s usually multiple divisions of corporate staff that do. Somehow, there seems to always be a reason as to why a certain change cannot be realised, or everyone has the power to say “no” without an urgency to answer why a changed cannot materialise.
A couple of examples include the following:
· Procurement only allows us to purchase through vetted vendors where there are margins attached while I can make software purchases directly and obtain services right now and claim the bill from a credit card.
· Accounting tells us that they do not support R&D budgets with no specific accounting line item and cannot process purchases that do not fit the set of standard categories.
· Branding does not allow us to use company branding for any form of minimum viable product or website.
· Legal states that minimum viable products will open the company to potential lawsuits and does not advise on how we should go about to protect ourselves.
· Sales teams are shutting out innovation groups from interacting and performing user testing on existing or potential customers in fear of losing them.
This list goes on with a variety of reasons, most of which are understandable and tactical in nature, but harms the way a corporate innovation group is meant to function. It depletes them of core resources that the established business lines have open access to, and or often left in the dark trying to figure out how they can drive results.
There are a multitude of ways in which we can help corporate innovation labs to become more successful in their initiatives. However, it is not necessarily a full transformation of how an organisation works that should be implemented, but baby steps and softer approaches that could kickstart a wider organisation change as teams and employees evolve with the company.
If the choice between incremental or transformational innovation has not matured in a company, begin instead to focus R&D around new business models that are potentially imperative and strategic for the company. Many initiatives from a corporate innovation lab tend to be product, service and technology oriented because they feel a need to engage top management with a certain revenue number and timeline for the venture to “go in the green”. New business models can weave its way into existing models, improve a business line’s strategy and approach, while still enabling the innovation lab to explore and obtain data.
Once certain business models are proven for market fit, the lab can start to weave in product and technology R&D that not only helps the business line augment its existing revenue but opens new markets for the company to bring it back on the offensive.
It may be true that companies on the top level have playbooks for days on how to execute innovation, but what many tend to miss were specific processes for innovation itself. In lieu of this, the goal would not be trying to change existing processes across corporate functions but create new policies that support the speed of an innovation project. More importantly, policies should be grown from the bottom-up among the working groups collaboratively, not from a top-down mandate or a consultancy barking for some sort of change management and operation overhaul.
Innovation projects should be transformational to bring out the most value, but innovation policies can be incremental.
Putting value to new initiatives can be difficult for portfolio managers and justifying the continuation of said initiatives is even more challenging. However, new initiatives run by corporate innovation labs tend to be quite simplistic in nature.
For example, if we were to calculate valuations using free cash flow from the seed funding, tie it with the duration and probability of problem validation of each initiative stage, there is a good way to understand how the seed fund is being spent. Moreover, we can add required rate of returns into the mix to keep portfolio managers and finance satisfied. There is no need to mix in complex formulas like a mass scale project, which tend to create over-budgeting scenarios for bad ideas and under-budgeting for good ones.
Being able to communicate simply the value of an initiative at each stage, internal rate of return and the overall return on investment is key for an innovation lab.
Corporate innovation remains a very sensitive topic among organisations. The uncertainty it brings to existing business lines, the additional work that will be placed on corporate functions, the distance between a lab and core resources each plays a role. Alas, there is always hope when there is boldness, a well-crafted plan and a degree of “radicality” among our leaders.
The die is cast, the playing field set, disruption is lighting the playing fields ablaze. What would you do to make sure that you become the next market-maker and not just a share-taker?