The Innovation Paradox

Article from EY

https://betterworkingworld.ey.com/disruption/the-innovation-paradox

Summary

  • Most companies today will not live beyond their 50th birthday.
  • John Chambers, ex-CEO of Cisco predicts that 40% of today’s leading companies will be dead in a decade
  • In 2010, America’s Federal Aviation Authority (FAA) estimated that there might be 15,000 civilian drones in use by 2020. Today more than that are sold each day.
  • Most mature multinational enterprises recognize the need to plug into new trends, to listen for weak signals in their ecosystems and to bring the outside in
  • The hard part is how to execute on innovation, how to overcome the risk-reward paradox
  • Everyone’s got a venture fund. Noughties rock band Linkin Park has a venture fund; Sesame Street has a venture fund.

Article

The Innovation Paradox

1The age of uncertainty

‘How can leading enterprises use corporate venture models to solve the innovation paradox?’

Most companies today will not live beyond their 50th birthday.1 John Chambers, ex-CEO of Cisco predicts that 40% of today’s leading companies will be dead in a decade. “Change has never moved this fast and will never be as slow again,” as Jennifer Morgan, President, SAP North America said at EY’s Strategic Growth Forum US.

Unless you are one of just a handful of companies that have survived hundreds of years – Mitsui, DuPont, Beretta – a mix of competitive threats and failure to understand new opportunities will already be destroying your business.

We are neither very good at seeing what’s round the corner nor at recognizing a monster transformation as it appears in front of us. “Vague, but exciting,” wrote Tim Berners-Lee’s supervisor at CERN on the top of the web founder’s diagram that charted the underlying technology for the web.

In 2010, America’s Federal Aviation Authority (FAA) estimated that there might be 15,000 civilian drones in use by 2020. Today more than that are sold each day. Drones are already being used in agriculture (to precision-target insecticide, irrigation and fertilizer, pollinate, monitor crop growth); film-making (the most impressive footage in Avengers: Age of Ultron was shot using drones); logistics (Swiss Post has a pilot drone parcel delivery service); mining (recent research by International Data Corporation – IDC – reveals over one in four mining companies are researching the use of drones).

Most mature multinational enterprises recognize the need to plug into new trends, to listen for weak signals in their ecosystems and to bring the outside in. That’s not the hard part.

The hard part is how to execute on innovation, how to overcome the risk-reward paradox. As Edward H. Bowman observed over three decades ago, incumbent market leaders with the most to lose are the least likely to change.2 Having market leadership, stable profits, a dominant brand is the biggest drag on moving, on shifting key.

Paradoxically, by focusing on what got you to where you are, a company may be threatening its very survival. Indeed it often is the very thing that renders great companies insolvent.

In the last decade we have seen the explosion of corporate venture funds.

In the last decade we have seen the explosion of corporate venture funds, now numbering about 1,300, as one way of getting out of the office and close to the edge of innovation.

Today, corporate venture capital (CVC) participates in one in four venture deals and is active well beyond its heartland in technology and life sciences. Fortune 2000 companies are invested as never before in the risky game of monetizing ideas.

Everyone’s got a venture fund. Noughties rock band Linkin Park has a venture fund; Sesame Street has a venture fund.

This tsunami of corporate venture investment is partly symptomatic of a corporate recognition that internal R&D units are not always the best incubators of the novel. Conditions that foster innovation include autonomy and freedom, insulation from the orthodox, small team size, a relentless focus on solving consumer problems, a lean startup approach that encourages experimentation, no failure stigma and a bias toward non-conformity. These are not generally to be found flourishing in multi-billion dollar mature companies.

The innovation paradox is that for a disruptive idea to take hold, to grow into an economic force like a Google or Uber, it has to transition from an invention into an executed reality. The skills and processes that can work against creativity are also necessary for its widescale adoption. Today’s heresy will only become tomorrow’s orthodoxy when innovation gets plugged back into the mainstream.

In Zero to One, Peter Thiel’s bestselling book on entrepreneurship, the author reveals that he never invests in a CEO who wears a suit.3 The maverick is rarely a good corporate citizen, but no innovation takes hold without adoption – and in the end the maverick needs the suit.

This study into corporate venture explores a rich variety of strategies, approaches and models. By interviewing some of the most dynamic drivers of corporate venture innovation in diverse sectors and geographies, we uncover the strategies that market leaders are using to survive and thrive. The study shows how parent companies are using their venture activities to access extreme innovation – the so-called bleeding edge – to help them realize their future visions.

For discontinuous leaps to be achieved, innovators typically remove themselves to what jazz musicians and John Kao4, innovation thinker and author, calls ‘the woodshed.’ But parent companies must also find a way for those innovations to be injected back into their operations. Leaders must find a balance between managing today’s business and laying the foundations, however threatening, of tomorrow’s business.

There is no secret sauce to managing and executing on innovation, but in this study we offer a range of insights and analysis that will help company leaders, policy-makers and governments get close to solving the innovation paradox.

  1. World Economic Forum, www.weforum.org/agenda/2015/01/what-is-the-life-expectancy-of-your-company
  2. Edward H. Bowman, A Risk/Return Paradox for Strategic Management, 1980, Cambridge, Massachusetts
  3. Peter Thiel, Zero to One, 2014, Crown Business
  4. John Kao, Jamming: The Art and Discipline of Business Creativity, 1997, HarperCollins

2Into the woodshed

‘Winter is coming.’

In 1992, Karlheinz Brandenburg and his team of government-funded researchers at the Fraunhofer Institute in Erlangen found a way to shrink musical data to a 12th the size of an audio CD. They did it by removing all the musical sound that is inaudible to the human ear. The compression enabled whole albums to be shared over the limited bandwidth of 1990s internet connections. They released MP3-encoding software for free, allowing anyone to rip music files onto computers. The team also invented the first ever portable MP3 player but never patented it, because no one could see the transformative nature of digital music technology at the time. In fact a Philips executive, seeing the prototype in 1995, spoke for many when he pronounced, “There will never be a commercial MP3 player.”1

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3Leadership

‘Sitting on a throne is a thousand times harder than winning one.’

“Size is an over-rated and under-examined attribute,” argues Malcolm Gladwell in David and Goliath: Underdogs, Misfits and the Art of Battling Giants.1 Gladwell draws a parallel between how David’s agility and superior slingshot technology killed the myopic giant, Goliath, and the way in which small entrepreneurial startups are able to fell large, unseeing market leaders.

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4What structure?

‘Different roads sometimes lead to the same castle.’

There are many ways in which an established enterprise creates a distinct arm or unit whose focus is to invest in external companies, usually at an early stage.

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5Balancing current and future needs

‘Hard truths cut both ways, Ser Davos.’

“A lot of companies want to move to a new culture of innovation and entrepreneurship but there’s a reason that incumbent companies become incumbent,” argues John Kao. “They’ve mastered a lot of skills: managing complexity; managing resources; attracting talent. These are necessary for the today business but leaders need to understand that they are really managing two agendas and their job is to adjudicate between them.”

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6The end?

‘If you think this has a happy ending, you haven’t been paying attention.’

Lessons all mature enterprises can learn from corporate venture:

1. Think like a designer. Focus on the consumer

The toppled ruins of giant corporations are testament to the dangers of focusing exclusively on your immediate competitors. As technology-enabled innovation dissolves the barriers between sectors and starts to disrupt whole industry verticals, changing consumer behavior is a better place on which to focus your sights. Designers do this instinctively. Learn from them.

2. Think of yourself as a challenger, not a market leader

Incumbent stasis is the single greatest threat to market dominance. By focusing relentlessly on winning new markets, seeking new opportunities for growth and developing an insurgent mindset, companies can beat the odds of becoming irrelevant before their 50th birthday.

3. Experiential learning trumps data – the shock of the new

“It’s one thing for me to tell you that professional services firms will be different in the future,” says Professor Dushnitsky. “It’s another thing to take you physically to Silicon Valley, put you in front of ten startups all of them receiving more than US$150m investment from some of the best funds in the world, all of them with paying clients, doing what you have been doing for a hundred years, but with a different business model.”

Use the relationships with investee companies to provide your senior team with experiential learning.

4. Experiment

Recognize the value of an ideas lab that is insulated from your current business, whose role is to question, to be fast, to iterate often and to bring the outside in. Build robust channels for bringing that unorthodox thinking back into your organization and learn to listen out for transformative signals from the sandbox. Every company needs to create an innovation strategy in its own image – there is no one-size fits all.

5. Network

As open source innovation replaces proprietary know-how, the innovations of the future will rely more on web-like networks of players than vertical hierarchies. You need a new business model and new processes that can cope with that shift.

6. Balance

Leaders must be willing to do the hard work of reconciling often contradictory agendas to come up with a suitable innovation approach that they must also be willing to change and adapt as a process of learning. Being able to balance resources in both present and future tenses is a rare but essential art. If in doubt, place more emphasis on the future. As the Chinese proverb teaches us, the best time to plant a tree is twenty years ago.

Bryan Pearce
Global Leader, EY Entrepreneur of the Year™ and Venture Capital

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Acknowledgements

EY wishes to thank the following thinkers, academics and CVC fund leaders for giving us their insights and time:
Venky Balakrishnan, Diageo Technology Ventures
Kai Bond, Samsung Ventures
Debra Brackeen, Citi Ventures
Urs Cete, Bertelsmann Digital Media Investments
Elizabeth “Beezer” Clarkson, Sapphire Ventures
Professor Gary Dushnitsky, London Business School
John Kao
Wendy Lung, IBM Venture Capital Group
Dr Ulrich Quay, BMW
Bipin Sahni, Head of Innovation and Research, Wells Fargo
Tim Schigel, Cintrifuse
Michael Young, Caterpillar

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