Most corporate executive suites are packed with state-of-the-art technology. But one low-tech instrument is in demand in nearly all of them – a periscope. Not a literal one, perhaps, but CEOs would welcome a device that allowed them to see around corners and spot the approaching forces that could disrupt their businesses or give them an innovation advantage over their peers.
That is why many of the corporate world’s innovation leaders are employing new tools to identify and explore pathways to growth, including business incubators and accelerators, corporate venturing and strategic partnerships. In this article, we offer insights into their most effective applications and describe how they can best be used in concert for maximum strategic advantage.
Innovation is high on most CEOs’ agendas – some 77% of CEOs surveyed in 2012 said it was their top strategic priority or one of their top three priorities. And no wonder – innovation is the surest, straightest route to superior performance. In the Americas, for example, innovative companies generate three-year total shareholder return premiums of 6.7% over their industry peers. In Asia, innovators enjoy a 6.9% three-year premium over their peers.
The innovator’s toolkit
Two tools in particular have been developed in recent years to increase corporate exposure to innovative thinking – incubators and accelerators. They differ from one another in important respects. Incubators enable corporations to support and collaborate with a handful of promising start ups over a relatively lengthy time period, sometimes as much as three years.
Accelerators, on the other hand, enable rapid screening of a large number of start ups focused on a particular technology or region. Support takes the form of a structured business-development curriculum for a fixed term, usually three months. Participating start ups are usually close to launching revenue-generating activities, and the corporate sponsor promotes their development by offering them access to office space, technical support, mentoring, networks of other startups, and funding sources.
Our analysis of the top 30 companies by market capitalisation in six innovation-driven industries – technology, telecoms, media and publishing, automotive, consumer goods and chemicals – shows that today, 21 companies have incubation programmes, 17 have accelerators, and four use both.
The most promising alumni of an incubator or accelerator are often targeted for investment by the corporation’s venturing units. Such units are typically the cornerstone of any corporate effort to access outside innovation.
Of the 42 companies in our analytical sample that have formal business-incubation programmes, 39 also have corporate venturing units, according to data provided by Global Corporate Venturing. In recent years, many corporations have turned to venture investing to acquire innovation in areas adjacent to their core businesses. Today, almost 50% of the top 30 companies in our six focus industries are actively engaged in venture investing, and companies in industries across the board have entered the arena for the first time.
The objectives of corporate venturing have shifted in recent years. As corporations have gained venturing experience and sophistication, best-in-class venturing units have concentrated on accelerating the growth of their start ups and their own business units. Their search fields cover areas where one or more of the business units can offer a start up a competitive edge and a value creation plan. Their investments typically are of medium duration and represent innovations close to the business’s core or adjacencies.
Corporations seeking short-term product development, commercialisation and roll-out of outside innovation, on the other hand, typically opt for strategic partnerships with already established start ups. These partnerships typically entail setting up of a new legal entity co-owned by the start up and the corporate. Through partnerships, companies can close knowledge gaps, address new customer populations, expand the market for existing or contemplated products, share distribution or sales channels, and
test new business models. They are especially valuable to corporations seeking quick entry to a particular market or business line.
Fine-tuning innovation vehicles
Five success factors distinguish high-functioning innovation suites from less effective ones.
Strategic alignment: The design and use of innovation tools at best-in-class companies are closely aligned with overall corporate and business unit strategy. If the company is seeking to support outside innovation close to the core over the medium term, venture investments are probably the most suitable vehicle. If a company seeks a specific product or technology still under development, an incubator is likely to be the best vehicle for the job. If it is looking instead to take the pulse of the entrepreneurial sector, an accelerator can provide a relatively rapid overview. And if a company needs to roll out a specific product or service through a narrowing window of opportunity, partnerships are usually the most suitable vehicle.
True partnership between internal and external innovation centres: A culture of co-operation, rather than rivalry, should characterise relations between the corporate research and development department and external innovation centres. Companies should foster co-operation between the units and put in place incentives that encourage collaboration.
Extensive corporate backing: Leading innovators recognise the importance of providing their innovation-focused units with robust backing, viewing the deployment of corporate resources as vital investments in the development of new business models.
Effective organisational design: Organisational design should be customised to suit the company’s particular innovation needs and capabilities, and each department’s readiness to take on innovation support tasks.
Effective leadership: Leaders of innovation teams should combine an entrepreneurial mindset with a deep understanding of the corporate culture and structure. Their ability to operate within both the start up and corporate environments enables them to connect the corporation to its investment targets and the wider world of start ups and early-stage ventures.
Innovation or annihilation
If emerging competitors are threatening parts of your business, if technology or regulations are reshaping your company’s value chain, or if your competitors are experimenting with new innovation vehicles, inaction is not an option. Rather than assemble an innovation toolkit simply to keep up with corporate fashion, however, companies should carefully consider the kind of innovation they wish to source and match it with the appropriate innovation strategy and vehicle. Each company will have unique and specific needs and should design its innovation suite with those in mind.
The authors’ new publication – Accelerators, Incubators, Venturing, and More: How Leading Companies Search for Their Next Big Thing, will be available from bcgperspectives.com next month