How Traditional Companies get Digital Innovation right

Key messages

  • Your value chain is not enough: Disruptive innovation can hit established companies from far beyond their own industry
  • Now or never: The upcoming downturn may further widen your innovation gap vs. startups – if innovation is put on the backburner in these game-changing times
  • It’s not that hard: Ingredients for success are all there, they just need to be worked with in a different way
  • Divide and conquer: Excubating the new from the old enables both to thrive
  • No unicorns, no bunnies: Sober innovation portfolio management trumps big bets and actionism
  • The entrepreneur is the pioneer is the orchestrator: CxOs need to adopt a Chief Entrepreneurial Officer mentality and become “leaders of the future”, playing three dedicated roles

The existential question: Digital Disruption – Friend or Foe?

Every traditional company (and as such, their management team) is currently facing an existential question: How to address digitalization and disruption and not only survive the respective challenges, but also take advantage of the massive opportunities coming along with them?

 

It’s easy to get scared in the face of what’s coming, especially out of the startup world. This is particularly challenging for companies in low-tech industries (e.g. food, textiles, services…) that, by nature, exist in a bigger distance to digital technologies. Let’s take an example from the food industry: Tyson vs. Beyond Meat.

Tyson is a big meat producer in the U.S., with revenues of around $40B and a $24B market capitalization. Tyson has been recently taken on by Beyond Meat – a (still) startup providing meat-like, vegan food products to people who love meat, but also want to eat vegetarian. With only about $80M revenues in 2018 (0.2% of Tyson), Beyond Meat already commands a $13B market cap (50% of Tyson), which highlights the belief of the market in the future potential vs. established players like Tyson. Despite the recent triple-digit revenue growth, Beyond Meat will remain tiny compared to Tyson, at least for a while. Tyson also had invested into Beyond Meat, but sold its stake and is now establishing an own plant-based meat line Raised and Rooted, results to be seen.

The economic downturn will likely widen the gap, as more and more traditional industry players miss the innovation boat

Whether digital disruption becomes one’s friend or foe depends on what established companies make of it – and how they handle situations of ambiguity, such as an upcoming economic downturn.

 

In the traditional view, industry players were all in the same boat: An economic downturn forces one to reduce innovation spending? All industry competitors follow suit, reducing their spending too. In sum, little damage was done to their long-term market positioning.

 

Now, there are two new players in the boat, to whom this rule does not apply: Heavily financed startups (see Beyond Meat) and state-backed companies dedicated to taking on an existing market. For these players there is no downturn – and with incumbent companies standing back, they can aggressively grab market shares (think about the German solar industry pattern).

 

Based on insights from a recent Excubate study on “Innovating through the downturn”, only a few established companies have a clear plan for how to handle innovation activities. While almost 50% take an undifferentiated cost cutting approach and just stop spending (“The Cost Saver”), others (35%) are more opportunistic and selectively increase innovation spending, while hoping to pick the relevant innovation opportunities (“The Opportunist”). Other companies either don’t change anything during a downturn (“The Stoic”) or are very unclear about investing/not investing (“The Volatile”).

 

More concerning, however, is how companies go about selecting their innovation investment: For the most part they don’t have a clear strategy for where to put their focus: Short vs. long-term benefits, close vs. far from core business, financial vs. non-financial impact. The number of companies struggling with this decision-making process is staggering – according to our research, 74% of companies don’t have a clear understanding of what they are optimizing for when spending on innovation during a downturn.

In light of these dynamics, it is very likely that the classic cost-reduction approach will hurt companies much more than it had done in past downturns and may even pose an existential risk to some players if they just sit and watch stoically how their business model gets disrupted. Traditional industries are particularly endangered, as their management often reverts to behaviors that worked in the past and fails to see how the underlying competitive dynamics have changed.

 

To take on this challenge and make digital disruption a friend rather than a foe, three questions are important for traditional industry players to get right: What, How, and Who to innovate.

The What: Look in the right place – beyond your own industry

Looking at traditional approaches to innovation, all seems very simple: Run a few design thinking workshops to understand your immediate customers better, scope out a few incremental or disruptive ideas, prioritize and validate, maybe even implement some of them.

 

Considering a traditional industry, for example the packaging industry, the immediate market trends for each player in the value chain and the respective jobs-to-be-done for packaging manufacturers are actually well understood. For example, the internationalization of product manufacturers and more complex distribution channels lead to requirements like prevention of counterfeiting and real-time traceability. Most companies have strategy and business development departments tackling these topics and implement solutions – with varying results.

This traditional approach, however, is not effective at addressing real disruption risks.

Disruption often comes from unexpected angles, that – by nature of looking into a single industry – are rarely on the radar of strategy or business development teams who are too focused on their own market and close adjacencies. It is often innovation in a separate industry, however, that brings beneficial, detrimental, and often unintended side-effects.

A few interesting examples from non-adjacent industries impacting the packaging industry include 3D pill printing, real-time pizza delivery and home-grown food:

 

  • $18B global medical blister market: Pharma companies experiment with 3D pill printing; with patients filling their prescription right at their homes, much fewer blisters and other pill packaging is needed
  • $2.3B global market for pizza boxes: U.S. startup Zume now bakes pizza while it is being delivered to customers, serving them directly off the truck on a reusable tray – no box needed
    • $83B global food packaging market: Startups provide help and guidance with growing own food, using app support

Thus, it is an imperative to look beyond immediate industry adjacencies and closely monitor what is happening in other industries to identify potential disruptions from various sides – and benefit from respective business opportunities. Other examples like the automotive industry, where ownership of the customer inside the car is taken over by, e.g. Apple Carplay, further highlight that merely looking up and down the value chain will strongly limit the perspective on disruption threats and opportunities, leaving companies vulnerable.

 

The How: Use what you have in a different way – Excubation

Once disruption occurs, traditional companies often react with paralysis, and then panic, mostly reverting to traditional innovation behaviors. When telco SMS revenues were disrupted by WhatsApp in 2009, the approach was to copy it and try to build a better one. This, however, resulted in an overengineered solution, taking 2 years and endless funding only to end up not having a chance against the disruptor who had gathered 500M users by then.

 

While, in the traditional, non-digital space, the incumbent would have had the chance to mobilize and outmaneuver a disruptor with its sheer resources in the scaling phase, digital innovations enjoy substantially faster global scaling, leaving little chance for followers to catch up.

 

The good news for traditional industries is that they do possess most ingredients for successful digital innovation, some in vast excess, compared to startups: Smart people, good ideas, access to customers, financial and technological resources, patents, etc.

It is merely the approach to using and combining these resources that must be fundamentally revised.

 

Despite all the behaviors engrained in traditional corporate culture and massive organizational inertia, companies must adopt the startup-way of doing things, as only that will eventually ensure sufficient speed, focus and nimbleness. And despite all reassurance of corporate management, that this isn’t possible: It is possible. Almost more importantly, the existing resources (unfair advantages over startups) need to be leveraged thoughtfully and effectively to create a strong competitive advantage.

 

There are three levels on which digital innovation needs to be approached differently: Company level, innovation portfolio level, and individual innovation level – all of which we want to briefly touch upon and provide a quick intro to.

Digital innovation on company level: The Excubation model

The Excubation model enables a new way of innovating by separating innovation from the core business, while retaining selective linkage to the core to ensure best possible access to the right resources. An innovation unit will be tasked with identifying, building and scaling digital innovations and business models. It is critical to smartly separate the innovation unit from the core, such that fast and autonomous innovation can happen while customers, technology, and supporting resources of the core business can be accessed swiftly.

 

This not only requires a thoughtful setup of the innovation unit, but also enablement from within the core, e.g. in educating employees, setting respective incentives and fueling the innovation unit with people, ideas and resources.

Key activities in the innovation unit include managing the innovation portfolio, facilitating the innovation flow, developing the respective innovation methodologies and processes as well as attracting and retaining internal and external innovation talent.

 

A more thorough introduction to the Excubation model is provided here:

Excubate - Corporate Innovation needs a major makeover

Digital innovation on the portfolio level: No unicorns, no bunnies

Managing a reasonable innovation portfolio is a key enabler for digital innovation success. Yet there are still many companies either trying to find the unicorn innovation to save their business for the next 20 years, or running after a large number of small innovations (bunnies) that individually don’t have much to contribute, but trigger much management effort and disperse the focus.

The innovation funnel and respective evaluation and decision criteria should be designed such that a portfolio of 10-15 digital innovations is being managed at any time, each innovation with the potential to contribute tangible business volume, but not too big to make the company fully dependent on it. A funnel logic like the one depicted below typically works very well.

While digital innovations shouldn’t be measured based on quarterly financial results, a minimum financial perspective must be reflected among the funnel criteria at all stages. It still happens too often that companies explicitly neglect financial KPIs and focus mostly on building digital capabilities and practicing new working modes. These – no doubt – are also key innovation objectives from a corporate perspective, but don’t necessarily put sufficient momentum on individual innovations to force success vis-à-vis disruptive startups.

Individual digital innovation level: Startup-like, clear focus, hybrid approach

How an individual innovation is tackled and developed is the make-or-break factor for success vs. disruptive startups. And it is currently the main reason for failure in corporate innovation. Too little focus (“each person runs 5 projects”), too high aspirations (“build the endgame solution right away, not an MVP”), too much management intervention and politics (“who will own it once it’s done?”) and too little actual leverage of corporate resources (e.g. customer access) put corporate innovation in a tough spot, compared to greenfield startups.

While many companies have logically understood how innovation should be approached, practically it is still rarely done in a way that can compete with startups and their ruthless, survival-driven and uncompromising way.

 

Best practice corporate innovation methodologies like the Corporate Startup Campus are designed not only to resemble startup innovation, but also to leverage corporate resources, know-how, and customer access in a way that startups can’t and, thus, exploit this edge over even the most aggressive startups.

 

The corporate startup campus builds upon three cornerstones: Team, location, and working mode. If followed through stringently, these enable the most effective creation, validation and scaling of a digital corporate innovation.

Why is this hard? The campus approach forces companies to prioritize more ruthlessly and really focus resources on one topic vs. trying to have key people stretch across many projects in parallel. It requires the best (not the most available) people to be put in charge and grow into a startup-like team. If successful, the team may never return to their former line jobs and instead continue running the corporate startup, which is exactly what the company should make them do. However, this conflicts with the agenda of their (former) line managers who lose valuable resources – just another corporate dilemma that requires smart thinking about management incentivization.

 

For further reference, we provide a full introduction to the corporate startup campus here:

Excubate Corporate Startup Campus

As much as a cross-functional team configuration is an imperative for a corporate startup campus, it requires a catalyst to weld them together as an effective team and fill any capability or capacity gaps that may still be open. The Hybrid Coach was designed by Excubate to do exactly that: Play a multi-faceted entrepreneur-type role to coach and support an initially disjunct group of high-potential employees into a high-performing and self-sustained corporate startup team.

 

The Hybrid Coach

The Who: Take on a Chief Entrepreneurial Officer mentality

To enable digital innovation success in a corporate, five constituents need to work together and play dedicated, intertwined roles.

The innovation unit (1) sets overall direction, manages the innovation portfolio as well as the innovation funnel and provides resources and methodology guidance to the individual innovation teams. It also “defends” the innovation success against the core business, should it ever have to.

 

The core innovation project team (2) does the heavy lifting of driving an individual innovation forward and ensures its market success. It will work autonomously enough to make fast progress but will pull resources from the core business when they are needed for success.

 

Closely working with the core innovation team is the Hybrid Coach (3), ensuring ruthless focus on the innovation goal and supporting the team on a daily basis with methodologies, external input and challenging of the achieved results.

 

The core business (4) is playing another crucial role without which the innovation team will not have a chance to outperform a greenfield startup: It provides access to corporate resources, primarily customers, technologies, know-how and external partners that are vital for the innovation. At the same time, it must shield the startup team from unnecessary processes and bureaucracy.

 

Finally, the most important role is the “Chief Entrepreneurial Officer” (5). Supporting the whole innovation construct from the top, only the “CEO” can make sure there is sufficient management attention and priority throughout the hierarchies as well as dedicated innovation resources. Also, the “CEO” needs to protect the innovation unit and individual innovations against external threats like an economic downturn, that only too easily could put a halt to them.

 

The management or leadership role is one of the most crucial roles and will have to change most significantly in the future. Recent Excubate research on future leadership capabilities has shaped three archetypical roles, a future leader needs to play to enable digital innovation success of their organizations and teams:

 

  • The Innovative Entrepreneur: Visionary, learner, innovator
  • The Agile Orchestrator: Catalyst, orchestrator, coach
  • The Digital Pioneer: Technology expert, data manager, challenger

 

For a more thorough view on the future leader, read our Excubate perspective here (in German):

One important trait of a current leader must be the willingness and ability to learn – mostly also from more junior people in their organization. We have summarized our perspective on the Apprentice Leader here:

 

The Apprentice Leader

Following these guidance points on the what, how and who to innovate, traditional companies have a fair chance to succeed in building digital innovations not only the way greenfield startups are able to do it, but with an even higher chance of long-term success.The difficulty lies within the traditional (leadership) culture of established companies that are not adopting these behaviors very readily and are often stuck in traditional behaviors and incentive structures.

 

Excubate is an expert for corporate innovation and our team helps build corporate innovation units and individual corporate startups as well as address required cultural change throughout corporate hierarchies. We are excited to discuss your innovation and digital leadership challenge – reach out to us at www.excubate.de.

Platform economy meets B2B reality

Why your platform strategy may fail

Summary

Blindly following the platform paradigm may not work as well in the B2B space.

In B2B, additional quality & reliability requirements need to be addressed and the potential moves of industry competitors need to clearly inform your strategy. Just building the next platform business and expecting competitors to jump on it is a risky move and may leave you with a “ghost town” type platform.

Taking a strongly entrepreneurial perspective, building an end-to-end solution with clear value creation and only then extending to a broader platform model may be a promising move that many startups take and that corporates should follow.

The current academic, expert and consultant guidance on why and how platform business models should be pursued is well understood and often discussed. But in B2B, the discussion often misses out on competitive dynamics as a key driver for success and we believe a more differentiated perspective needs to be taken.

Where the discussion is at: You need to become a platform!

There is a lot of well thought through research on platform economics and platform business models that intellectually makes a lot of sense (e.g. the thorough analysis of Parker/van Alstyne/Choudary in “Platform Revolution”) and reinforce the importance of becoming a platform. Also, there are many successful and often cited examples, especially in B2C. Many experts conclude that every “pipeline” business (aka everything older than 5-10 years and however successful), must now become a platform business or otherwise not only lose connection to their customers but miss out on every opportunity for profitable growth and scaling and thus vanish soon.

 

But as with topics like blockchain, overstretching the platform lingo may have negative effects on the idea itself if suddenly everything is or needs to become a platform – strangely validating the self-fulfilling prophecy that no non-platform business model will prevail. Successful traditional business models are now labelled “platform businesses”, yet may have only little to do with the basic economic idea behind it. A report from the World Economic Forum “Unlocking B2B platform value” even puts companies like AUDI, Monsanto, e.on, Siemens or DHL into the platform business model category. Sometimes even the actual economic logic of a platform is mixed up with a purely technological platform perspective – an Infrastructure-as-a-Service platform is not a platform business model. And more than 25k people on LinkedIn have “platform business” in their job title, many following platforms as a form of millenarianism of economics, i.e. final deliverance from all current economic problems. That may be a romantic, but not fully realistic view.

What the discussion is missing out on: Competitive dynamics

As in B2C, the B2B space is following the notion of becoming a platform business and many paradigms are adopted 1:1 from B2C. However, designing the right platform model and making a margin with it is substantially more difficult in B2B as there are different and additional requirements. Just focusing on network effects as the main driver of value may fall short of B2B reality.

 

All (B2C and B2B) platforms benefit from general platform success factors like clearly defined and high-volume value units (e.g. room bookings), smart curation mechanisms (e.g. five stars for good behavior), multisided network effects (i.e. more is more) and customer retention levers (e.g. blocking of multi-homing) to name just a few. However, B2B platforms, especially those that offer services, not one-off product sales, may struggle fulfilling a few important requirements:

 

  • Quality assurance, already from the first transaction – puts higher pressure on the curation mechanisms
  • Reliability and longer-term availability of services – puts higher pressure on the stability of individual providers
  • Efficiency from stability rather than constant switching – puts higher pressure on defining the right value unit

 

A major pitfall of platform models is the difficulty to ensure quality of components (and their providers) and respective solutions. Recent B2C platform challenges of AirBnB and Uber could be addressed, for example, with respective review-mechanisms. In a B2B scenario, where the relevant service may be critical for business continuity and carry substantial risk for the customer, this is different. Imagine a predictive service offering, composed of multiple components sourced from different providers on a platform that doesn’t deliver because the analysis app from provider A doesn’t work with the data from provider B.

Moves of your competitors should inform your own: How to play to win

There are essentially three archetypical positions players can take in platform-based B2B value creation that define their competitive potential and positioning:

 

  • Component provider: A specific value adding element that needs to be combined with others to actually deliver value (e.g. payment component)
  • End-to-end solution provider: A stable, value delivering solution that integrates (own or third party) components to address a specific customer need (e.g. a predictive analytics solution including sensors, transport, data, analytics and payment)
  • (actual) Platform: A market orchestrator hosting 3rd party components to flexibly and frequently combine into end-to-end solutions and provide to customers (e.g. an IIoT platform for the machinery industry)

 

There are nine potential outcomes when a company chooses its positioning while the competition does the same. Some of these are favorable outcomes, some less so. If all players jump on the platform bandwagon (field 9), nobody will eventually have partners on their platform and all find themselves in a deadlock. If a company chooses to provide components only, it may end up depending on other’s platforms (field 7), and so on.

Not every company can, nor should become a platform. In the IIoT space for example, there are now more than 150 platforms already, according to a recent OliverWyman study (IIoT Platforms: Source of Profit or Inflated Hype?). Most of them are not adding real value yet (aka a field 6 or 9 situation).

It is important for B2B players to first and foremost optimize for customer value creation, which is best created by a stable and reliable end-to-end solution. Even the often cited platform success models Amazon and Facebook started out as an end-to-end solutions for online book selling or social networking before they became a market place or advertising platform. In B2B IIoT terms this could be a predictive service offering focusing on a specific client use case and provided with high service quality and strong value focus. Going for fields 2, 5 or 8 will be the best shot at that, regardless of what the competition will go for. To maximize the platform option value, a field 3 scenario could be prepared in parallel, leveraging an own strong end-to-end solution as a kick-starter and attracting additional component providers.

How does it play out in B2B reality: The GE/Predix vs. Konux example – a “Field 8” situation

It appears like the classic corporate vs. startup stand-off: An industry giant trying to position itself as a large-scale platform player vs. a focused startup with just one specific value proposition. While not disecting the typical corporate issues GE ran into while trying to make GE Digital, and its IIoT platform Predix succesful (this would rather be an Excubation discussion), it is interesting to highlight the platform-specific differences to Konux.

 

Predix, which has recently been spun off from GE’s struggling digital unit in an attempt to give it more freedom and growth potential, has been following the classical IIoT platform vision early on (see also Navigan research from Sep 2018): Take a substantial investment from GE and build a holistic third party developer platform to combine and provide end-to-end IIoT solutions and dominate the market. A premature marketing push created high expectations while the platform, lacking sufficient breadth of its offering, could not sufficiently deliver. Platform success factors like high customer switching cost turned out risky for customers, fearing they could not migrate their data to another platform. Eventually, many apps on the platform came from GE itself.

 

Konux, on the other side, started with one very specific use case (AI based improvement of equipment availability), delivered end-to-end (including sensors up to analytics tools) to one industry (railway) and even one specific type of equipment (switches). Konux has been very successfully deploying this system at large railway companies and gained substantial trust from investors, who by now invested more than $50M (as per Crunchbase 02/19). Based on initial success, Konux will be able to extend its solution to further use cases (e.g. tool machinery) and eventually even a platform business model.

 

This is a field 8 situation with Predix providing a broad platform that is struggling to succeed while being outperformed by an end-to-end solution provider – in the specific use case area that both are eventually competing in. Extrapolating this situation to all use cases covered by Predix, it may not win (sufficient trust) in any.

Key message: Take a differentiated, competitive and value-oriented perspective when implementing a platform strategy

  • If everyone is a platform, no one is a platform.
  • A platform strategy only pays off if the context of competition and the quality and stability needs of the customer are considered and actually met. Announcing a platform before it actually creates value is dangerous.
  • There is value in providing end-to-end solutions that solve real customer problems over building the next best platform model in last-minute-panic. If you have a strong end-to-end capability, relax and build upon that.
  • If quality matters, a pipeline model may have an edge over a platform and should be the starting point to eventually develop into a platform (the 2>5>6 strategy)

 

We have been working together with our clients in the financial services, healthcare, machinery and technology industries to ideate, design, validate and implement B2B platform businesses as well as non-platform end-to-end solutions. If you are working on your own platform strategy, we’d love to invest some time to help you get the best out of it. Start a conversation at innovate@excubate.de and www.excubate.de.

Overcoming Corporate Innovation Barriers and Saving on costly Startup Investments – with Excubation

Summary

  • Nine main barriers seem to hinder Corporate Innovation, all are self-inflicted
  • Traditional corporate innovation approaches (incubation and acceleration) fail to fully address them and show limited empirical success
  • Corporates react by closing or repurposing corporate incubators and rely more on later stage startup investments or external company builders, paying substantial mark-ups
  • The Excubation approach addresses corporate innovation barriers more holistically and can be a way for corporates to innovate and build themselves, relying less on cash-intense startup-investments or external company building

Introduction: Innovation is easy, innovation is hard

  • Second maybe only to the term digitalization, innovation is one of the most glamorous labels that companies and individuals want to be associated with these days. And it is easy to do: Some innovation workshops, some time & budget allocation for creative internal teams to work on business ideas, a public commitment to leveraging current technology, say: blockchain, for every imaginable task and a fancy incubator far away from the core business are common in most companies now.

     

    Worldwide, companies are building innovation centers, yet only few actually transform ideas into real products/services in a foreseeable timeframe. For example, in fall 2018 Siemens just announced another innovation mammoth to be built in Berlin with a €600 million funding – by 2030.

     

    Succeeding with innovation and capturing real value from new business is hard and successful approaches have indeed been rare. Many corporate incubators like Wayra of Telefonica, Allianz X, Coca Cola Founders Initiative, or Plug & Play of Springer are being “repositioned” to focus less on early stage incubation but later stage investment – or closed down altogether. Success still suffers from many primarily internal organizational and cultural barriers, kept up by the corporate immune system, despite all efforts to separate from it.

Why corporate innovation fails: Nine Barriers

  • “Corporates just can’t innovate” is too easy a paradigm and leads to the wrong conclusions along with often too much cash-out for startup-investments. It is important to understand the key barriers more specifically and find ways to address them with an advanced incubation approach. Plenty of research has been conducted on that topic: 20+ market reports, surveys and interviews by research institutes and established consulting firms such as PwC (Reinventing Innovation), Staufen (Industrie-Monitor) and BCG (Most Innovative Companies studies) show a pattern and recurring set of barriers. These also align with empirical experience at Excubate from a multitude of innovation projects at large and mid-size corporates across industries.

     

    Nine barriers consistently appear to have the highest negative impact on a firm’s innovation capability, based on number of mentions in an Excubate meta-study:

    1. Lack of time for Innovation projects
    2. Too many ongoing projects in other departments
    3. No alignment of company strategy and innovation strategy
    4. Lack of innovation capabilities among staff
    5. Insufficient adoption of innovation culture with regard to failure of projects
    6. Inefficient process management of innovation projects
    7. Absence of a clear innovation Road Map
    8. Lack of financial resources
    9. Missing commitment to take risks with regard to innovation projects

Now looking at why traditional approaches of corporate incubators and accelerators seemed to have failed: Some of these barriers have not been sufficiently overcome.

Corporate incubation barriers lead to increase in startup investments

The three most pronounced explanations for the failure of many corporate incubation programs are insufficient support/mentoring, faulty startup evaluation methodology and the fact that startup support programs are not necessarily run by companies and mentors with enough entrepreneurial experience and grit. Linking these insights to the more general corporate innovation barriers mentioned above, there seems to be a lack of strategy, skill and rigor in organizing and executing innovation projects – on all levels.

 

As a result, corporates are moving away from building new businesses themselves towards investing into established companies and later-stage startups that have already overcome those initial hurdles, or by acquiring ready-made businesses from external company builders.

 

While the reasons for corporate management to go for investment rather than incubation make sense in the light of the identified barriers, this move is not entirely rational. Investment in external startups, naturally, comes with a substantial mark-up and skyrocketing valuations. For example, SaaS, Deeptech and Marketplace startups are valued in the range of 8-9 times revenue with Fintech startup multiples reach as high as 14-17 and medtech even beyond 20 (source: avoltapartners tech transaction multiples 2018). So, essentially, corporates are buying highly valued options for future revenues, which not necessarily fully fit with their actual innovation objective. They easily end up paying 200% of the value for 60% of what they actually want to innovate. Any approach that helps Corporates pay 120% for 90% of what they need would be vastly superior – and financially much more rational. It would, however, require overcoming the main corporate innovation barriers.

Excubation approach to overcome corporate innovation barriers

  • Excubation, as outlined in the Excubate innovation blog at Swiss Innovation Factory Park Innovaare, is the smart separation of corporate exploitation and exploration endeavors, where new ventures are given access to existing corporate assets (client base, technology, patents, etc.), while also being allowed to bypass the typical limitations of the corporate conventions and processes. The “smartness” of this approach lies in ensuring a cohesive, tight exchange between the in- and out-flow of innovation and a tailoring of the corporate support to the needs of the individual venture business model. It explicitly challenges the classical cookie-cutter approach of doing it all in-house or all external.

     

    Excubation encompasses seven rules as the main pillars of the model:

    • Rule 1: Separate innovation from Execution (Separate both activities to ensure that neither one is too strongly influenced by the other)
    • Rule 2: Attract entrepreneurial talent (Incentivise and promote innovation to attract and retain employees with entrepreneurial talent)
    • Rule 3: Facilitate innovation flow (Establish an agile and efficient innovation process; and closely connect the innovation teams to resources)
    • Rule 4: Manage innovation portfolio (Focus the innovation portfolio on internal as well as external sources of innovation)
    • Rule 5: Inspire employees (Introduce your employees to a culture of innovation to discover and foster entrepreneurial talent)
    • Rule 6: Educate employees (Provide your employees with a toolset for innovation, but more importantly, give them the opportunity to apply it)
    • Rule 7: Support idea flow (Promote sourcing and ideation of future business models within the company & ensure transfer of ideas to the Innovation Units)

     

    Mapping these seven rules against the identified innovation barriers shows how the Excubate approach can help to overcome them. A scaling model helps classify whether a rule has a strong, weak or no effect on a barrier, based on Excubate project and client experience. The number of rules that had the ability to positively impact a barrier is used as an indicator for how well Excubation can address that barrier.

     

    The actual impact of each rule on each barrier has been reviewed in larger detail but should not be outlined here in favor of a summary of the insights in the table below.

The table shows that the Excubation approach has an impact on each of the barriers. All excubation rules have a similar importance and those corporates fare best that implement them most thoroughly and repeatably.

 

The novelty of the Excubation concept, the respective nuts and bolts of its implementation and the – as in any case – required senior management backing are still hurdles for a broader empirical study of the benefits. Still, given the lack of impact of current corporate innovation approaches and soon to come tighter cash management policies of corporates (latest in the next recession) we expect to see more companies deploy Excubation and build Excubator units to drive corporate innovation.

 

For a more in-depth conversation, reach out to Excubate at innovate@excubate.de.

The digital operating model: How corporates can make digitalization happen (1/4)

The need for a digital operating model

Digitalization is not a strategy, because strategy involves a choice. And, thus, the choice around digitalization is rather in the how than in the why or what. Still, the discussion about why and what to do in digital transformation turns into quite a buzzword bingo these days, as we see from current debates in media, at conferences and in the experiences of our clients. This  creates more confusion than clarity and easily overwhelms with the breadth of issues and options for how to handle digitalization. The executive team of a corporate is often challenged to give direction, and an approach of test-and-learn could easily be misinterpreted as a lack of leadership. When turning to experts, companies are confronted with heterogeneous approaches on digital transformation. Some see the need for a new CRM as most pressing (which they can provide, obviously), others start by digitizing project management (a small lever, overall), others sell their digitalization assessment tool only to jump to the surprising conclusion that their services are needed to catch up with the competition. To stress their own relevance, IT experts often anticipate the unconditional dominance of technology at the heart of the organization and any digitalization effort. All these different agendas, technology myths and too much focus on the strategic aspects of digitalization actually dilute this topic.

 

Thus, we suggest to take this debate to a next level of specificity: Let’s park the vague discussions whether to digitize or not, stop focusing on the why or the what and rather to talk about the how.

What is a Digital Operating Model?

The operating model connects strategy with the daily business operations. It effectively describes how the strategy is implemented and the business is run. Without it, people would either not know what to do to achieve the strategic mission or – in the better case – would do things in an inconsistent and non-repeatable way. There are various approaches to describing an operating model, more or less structured and stringently defined. In our daily practice we have found five components that consistently affect how well a strategy is implemented via an effective operating model – ordered by logical dependency: Processes, Decision making logic, Capabilities, Incentives and Organization (PDCIO – or DIPOC, for the sake of pronouncability). When a trend as radical as digitalization is reshaping every aspect of the modern enterprise, a firm cannot get around substantially adapting those five pillars. Thus, a digital operating model is the post-transformation operating model, which has undergone a digital redesign of its processes, decision making logic, capabilities, incentives and organizational structure. A digital operating model is mandatory to realize digitalization goals such as internal process efficiencies, higher innovation effectiveness or better customer experience.

 

We have often seen companies set ambitious digital strategic targets, but fail to adapt their operating model respectively. This blocks the strategic vision from reaching the employees, because the latter cannot connect with the strategy and resources are not adapted accordingly to support the strategy.

 

We don’t believe that digital transformation can be achieved just by hiring a CDO or launching an app. Neither can the operating model be redesigned based on vague suggestions like “use big data”, “be customer-centric” or “work agile and lean”. Not only today’s CEOs should stop focusing on just digitizing the corporate project management in order to keep their position, but also tomorrow’s CEOs should do so in order to actually prove their execution capabilities. Instead, it is time to mobilize resources to design, establish and implement an efficient and holistic digital operating model. For this, they need to get specific on what has to be transformed how. In this thought piece, we provide a perspective on this transformation and define the components in question while giving hands-on advice on how to adapt the operating model.

The digital operating model: How corporates can make digitalization happen (2/4)

The need for a digital operating model

The operating model needs to be put into the overall strategic context of the firm. Starting with a clearly framed digital ambition, a digital strategy defines the where to play and how to win the game. The where to play defines which (digital) products and services should be offered to which customers and – as an extension to the classical version – which people the company wants to be an attractive employer for. All this needs to be transformed as part of a digital strategy. Where to play involves clear choices on what elements a firm needs to transform or re-focus to realize the strategy: customers, services/products, people and processes. The how to win defines which specific approach should be taken to achieve success vs. the competition and is in line with the operating model elements.

Processes, decisions, capabilities, incentives and organization constitute the operating model, bridging the digital strategy with the dgay-to-day-operations. Given this constellation, it is a logical consequence that the design of the operating model is deeply linked with the digital strategy. This might be why many experts advise their clients to select just one specific type of operating model according to their strategic goals such as the customer centric model, the data powered model, or the open & liquid model (as seen at e.g. Accenture, Deloitte, Ernst & Young, World Economic Forum). However, this approach falls a bit short in our view.  In our experience, it is not about choosing one operating model approach, but rather about evolving the operating model in line with the short and the long-term milestones. Instead of aiming at following just one digitalization goal such as customer centricity or data-enabled business model, companies actually should strive for all of these goals over time – in different stages over a certain time horizon, depending on a company’s individual digital maturity state, market situation and resources. This allows for tailoring the digital operating model individually to the firm’s situation, while following digital innovation blueprint principles. The visual below shows the relationship between digital strategy and the corresponding digital operating model, its suggested evolution over multiple stages or periods and some examples of digital strategy and operating model adustments we regularly see in companies.

Processes, decisions, capabilities, incentives and organization constitute the operating model, bridging the digital strategy with the dgay-to-day-operations. Given this constellation, it is a logical consequence that the design of the operating model is deeply linked with the digital strategy. This might be why many experts advise their clients to select just one specific type of operating model according to their strategic goals such as the customer centric model, the data powered model, or the open & liquid model (as seen at e.g. Accenture, Deloitte, Ernst & Young, World Economic Forum). However, this approach falls a bit short in our view.  In our experience, it is not about choosing one operating model approach, but rather about evolving the operating model in line with the short and the long-term milestones. Instead of aiming at following just one digitalization goal such as customer centricity or data-enabled business model, companies actually should strive for all of these goals over time – in different stages over a certain time horizon, depending on a company’s individual digital maturity state, market situation and resources. This allows for tailoring the digital operating model individually to the firm’s situation, while following digital innovation blueprint principles. The visual below shows the relationship between digital strategy and the corresponding digital operating model, its suggested evolution over multiple stages or periods and some examples of digital strategy and operating model adustments we regularly see in companies.

The link between digital strategy and operating model evolves over time and occurs in a multi-stage process. The first strategic milestone is typically to deliver digital products, as we observe in many companies now working to become more digital. The operating model has to align with this target by aligning the respective DIPOC elements, e.g. the digital innovation or product development process that now needs to embed digital elements. Decision makers need to follow a new decision making logic, now involving more functions much earlier in the process (e.g. digital marketing already when designing the product). Knowledge capabilities have to be built, etc. In the second phase, companies typically shift from product-centricity to strengthening customer-centricity. This shift leads to further changes in the operating model, e.g. adapting and customizing the customer journey (processes and decision making). Once this is achieved, the strategy moves on to full-scope data analytics utilization. Thus, the operating model has to take care of implementing data collection capabilities and a further revised and more data-based decision making logic. This continuous alignment between digital strategy and operating model continues until some level of a digitalization vision is achieved – and beyond, as the business will further evolve.

The digital operating model: How corporates can make digitalization happen (3/4)

Elements of the digital operating model: DIPOC

The digital operating model consist of five elements that logically build upon one another: Processes, decisions, capabilities, incentives and organizational structure, which we call DIPOC (for practical reasons). Processes are the overarching element of the operating model, connecting the what and the how in the strategy pyramid elements. Processes have to be transformed in line with customers, products, and people. New processes require a refinement of the decision making logic to account for other parties taking new decisions in different succession over a different time-span. To run adjusted processes and new ways of decision making, the right capabilities need to be attained and deployed – by mobilizing existing ones, building new ones and disposing of obsolete ones. Consequently, the incentive structures have to be adapted to fit the new processes, drive the decision makers to make optimal decisions and sufficiently incentivice required digital capabilities. Finally, the elements and reporting lines of the organizational structure have to be adjusted to reflect the changes made to the operating model.

Processes

As processes describe how an organization works, digital processes need to capture how an organization works in the digital world. Embedding digital capabilities and technologies into process steps (and deploying a CRM system, for example) is one (rather straightforward) way to adjust processes and had been done already before it was labelled “digitalization”. The more challenging, but also more impactful way is to adjust processes such that their ouputs deliver on the digital promise of the strategy. Primarily, these will likely be digital or hybrid products and digital business models.

 

As part of the digital operating model, the key 3-4 processes that are crucial for digital impact need to be tackled first. Typically, these are product development and creative processes, customer interaction processes, sales and marketing processes as well as data gathering and analytics processes. When laying down new processes (and, for that matter, understanding the current ones), finding the right balance between documentation and flexibility is key – we advise doing as little documentation effort as possible, as much as necessary.

 

Taking product development as an example, the process has traditionally followed a waterfall model of innovation. Starting with a scope and resource estimation, this process followed a list of tasks that the development team completes sequentially. Product development needs to be reenvisioned as it will increasingly be supported by technologies and will result in products with digital compontents. The new product development process incorporates crossfunctional input from various departments, e.g. Marketing and Sales already in the ideation process to achieve a customer-centric perspective. Agile development methodologies and direct customer feedback from the beginning allow ongoing refinement of scope in continuous learning from the customer. The overall premise of a digital and agile approach will need to come to life in this future product development process, resulting in a substantial change with more feedback loops, trial-and-error elements and more pragmatic involvement of different participants at different stages.

 

As an example, LEGO, the Danish toymaker, has successfully transformed both its business model and its operating model (MIT 2016, Transforming the LEGO Group for the Digital Economy). At first, LEGO failed when diversifying itself into the digital space. The management got distracted from its core physical products, which it realized and bridged the gap between digital media and the physical LEGO brick by adapting its operating model. Through an advanced hybrid product development process, redesigning software and hardware, LEGO launched the game “Life in George”, where users could construct physical LEGO bricks which were scanned into the game. After the success of this hybrid product, LEGO further developed its product development process by applying crowdsourced designs through communities of fans online and became the Apple of toys.  LEGO showed early on how to adapt the operating model through a step-by-step change of key business processes.

Decision making logic

Once it is clear which digitally enabled processes need to run in the company in which way, accompanying key decisions for these processes must be specified. In many cases, this calls for a much clearer specification than in the the past, when nobody could say with certainty who is actually involved in deciding, e.g. the pricing for a new product. The decision making logic is critical, as it defines which stakeholders will be involved in which decisions in which way – as a contributor, a final decision maker or as the one who needs to execute. More often than not, companies fail to make this clear enough, leaving their teams with figuring things out on the fly. This could lead to inconsistencies, yield loss and, ultimately, a perception of chaos.

 

The decision making logic changes significantly with the move towards a digital operating model, because there are new types of decisions that need to be made (e.g. which digital features to build into previously purely physical products), there are new sources of information available (e.g advanced insights based on real time customer data from product use), there are substantially shortened time horizons (e.g. software development cycles of a few days vs. hardware development cycles of months and the interlinkage thereof) and new configurations of decision makers and new roles, such as the Chief Digital Officer.

 

Looking at these impacts driven by digitalization and the increasing need for more agility, companies typically follow a few paradigms when designing the future decision making logic in a digital space, such as:

  • Leverage (more and better) data: The decision logic should follow data driven insights instead of internal politics and (just) managerial instincts, e.g. real-time data on which product functionality is used most by a certain customer group would help decide the functions to be included in the next version
  • Make decisions where they belong: Empower people close to the business (decisions as “low” in the organizations as possible, as “high” as necessary), e.g. product owners should decide on scope of product functionality, not the management board
  • Ensure speed & consistency: Leverage direct communication and decision making tools to make decisions on the spot as opposed to long-planned meetings, e.g. tools like Slack or MS Teams

 

A digital operating model should make it easier to make critical decisions quickly and effectively. There are established decision making frameworks that can also be applied for a digital operating model. We suggest, among others, the RACI model. The following example shows how part of a future product development process could be run and how we believe key stakeholders could be involved. This, of course, will always need to be specifically designed for each company.

Capabilities

Capabilities ultimately bring an organization to life and are vital to have processes and decisions work out the way they are designed as per the above. Digitalization drives the need for a whole new set of capabilities, some more technology-focused such as programming and digital marketing capabilities, some more soft such as agile team management. Capabilities are also probably the hardest to change and build in a sustainable manner. Future processes and decision making logic should guide the future setup of capabilities and define which capabilities are and will be needed. Based on that, capability gaps and redundancies can be identified. Ultimaltely, building the right set of capabilities should follow a specific approach to ensure they fit with the process and decision requirements.

1. Craft the capability target picture

Based on the digital strategy, the processes and the decision logic, a holistic set of capabilities needs to be defined, encompassing topics like digital marketing, advanced analytics, app development, agile project management, etc. (we typically work with a set of 30-40 capabilities). Put into a capability framework, the target picture will give clear guidance on which capabilities are needed in which quality and quantity to enable the digital operating model, stringently aligned with the strategy.

2. Understand the capability as-is situation and spot gaps and redundancies

Often eye-opening, mapping the current state of digital capabilities (along the abovementioned framework) and comparing it with the target picture reveals substantial need for action. A heat map shows where quality and quantity are in line with the target picture vs. where biggest needs are. Often, these are – amongst others – in the areas of digital development, where neither enough, nor good enough people are on board to build the products and prototypes needed in the future. Also, the analysis may show capabilities (like outdated IT development capabilities) that are not needed in the future and may need to be reduced in capacity.

3. Build a realistic plan for action

In line with the staged development of the digital operating model and linked with the digital strategy, a step-by-step hiring and training plan needs to be set and acted upon. Comparing with how companies have built capabilities in the past, building a new set of digital capabilities typically requires a substantially adjusted hiring approach, using different channels (such as social media) and different messaging (e.g. designed for the generation Y). As with any outsourcing question, the criticality and availability of talent for each capability needs to be assessed and an internal/external sourcing decision needs to be made. Often, critical capabilities may not be available for hiring (e.g. agile coaches are currently sought after and many prefer to work in a freelance mode).

 

The following visual shows an example heatmap of existing and lacking digital capabilities that are necessary to transform the operating model. Red would typically be used to indicate a more urgend need for action.

Incentives

The right capabilities are of little relevance without adequate incentives to put them to action and create the right culture. Many leaders talk about innovation culture as a mythical, intangible concept. In reality, having rooms with business model canvases, bean bags and sticky notes does not yet create an innovation culture. Company culture is created by tangible and targeted (not necessarily monetary) incentives to recognize, reward, celebrate and challenge the team and their activities on a daily basis. We perceive incentives and reward mechanisms as key drivers of execution, despite the general notion of “we love to change the world”, which is often used to describe incentivation of tech founders in the Silicon Valley.

What to incentivice on?

Contrary to the team- and company-based incentives currently en vogue, we believe individual performance-linked bonuses to be a stronger motivator in high performing organizations.  When incentives are solely set for revenue growth of core products (on corporate or individual level) or bottom-line impact, likely few to no employees will initiate internal innovation projects or dedicate time to building digital capabilities. Thus, bonuses should be strongly connected to success with innovation efforts, innovation team performance and capability build-up. These, admittedly, are not always easy to measure and would require a thoughtful leader to assess individual contributions, e.g. How well did a leader provide freedom to innovate, to work in an agile way? How effectively did team members build up digital development capabilities (quality/quantity)?

How to incentivice?

With our clients, we usually work out individual incentivation schemes, composed of fixed and variable compensation elements, the latter ideally represented by equity/phantom shares. Tending towards an equity/phantom share model is very effective to foster entrepreneurial motivation and is often applied in experimental and innovative corporates. It is, however, not yet mainstream. We typically see a spectrum on which companies position their model between the classic fixed+bonus structure and a fully equity-based model. What we generally do not see work well are models in which employes only enjoy the upsides without experiencing the risks that are inherent to the startup environment.

Organization

Contrary to common corporate intuition, adapting the actual organizational structure should follow, not precede changes to the previously discussed digital operating model elements. Too often we see new organizational units being set up and staffed before a clear picture has been developed for which processes and decisions are to be run how. Once these are clarified, the roadmap for new or different roles, boards, organizational units emerges.

 

These roles will have to be represented by new or re-aligned organizational units with defined reporting lines into the current org structure.

Organizational changes can be more or less substantial, at the minimum defining new committees, e.g. a digital steering committee, composed of the heads of marketing, sales, digital factory, business units, etc., headed by the CDO. They meet regularly to take an integrated, holistic perspective on digital activities across the business, give direction and make key decisions. A digital operating committee on the other hand should translate the strategies of the digital steering committee into specific activities and, e.g. take ownership of business innovation projects. In contrast to the digital steering committee, they meet on a more frequent basis with 4-5 full-time members that report to the board and the steering committee.

 

At the maximum, we see companies establish whole new units to drive digital transformation and innovation, many following the Excubation approach: Set up an innovation company that will be tasked with building and managing the portfolio of new digital business models and smartly separated from the core business. A model, that has already been implemented by IBM many years ago with their “Emerging Business Opportunities” (EBO) unit that was successful in developing IBMs service and open source business, for example.

The digital operating model: How corporates can make digitalization happen (4/4)

Implementation – The DIPOC action plan

After outlining how the DIPOC elements should be designed to build a functioning digital operating model, we will now give an overview on how to implement it in an actual project. This clearly depends on the individual organization, but there are general best practice approaches that we can share.

 

Making any change to a company’s operating model is difficult and goes against the human nature to protect the status quo. Thus, besides the actual project and the plan to go about it, the operating model transformation needs a board-level sponsor and the full backing by the top management to make it move beyond just a thought experiment. This process should not be started unless there is a clear commitment to actually make painful changes. Ideally a management board member takes the sponsor role for the digital operating model project and allocates sufficient time to it.

In the first actual project phase, focus should be on fully understanding the status quo. The current operating model, the digital measures already taken and the state of the DIPOC components (processes, capabilities, …) are assessed. This understanding is typically best achieved via interviews with key stakeholders, customers, employees and executives as well as an analysis of existing materials. After diligent structuring and documentation, the project team collaboratively crafts a target picture of the future state and its development over time. At this stage, it is vital to define design principles, fitting with the organizations DNA and vision. These principles can refer to a working mode e.g. “make decisions as low in the organization as possible, as high as necessary”, express a focus e.g. on “customer-centric design” or values such as consistency, speed, accountability. These sources of value should be reflected in the design of each of the DIPOC elements.

 

After defining the DIPOC elements’ target picture, the specific design of DIPOC can then be tackled. An implementation roadmap should guide the implementation over a time horizon of 2-3 years, following an agile build-measure-learn approach. Thus, rather than overanalyzing every detail of the DIPOC elements in the beginning, a quick implementation start and flexible adjustments based on initial learnings are more effective and we typically allocate not more than 5-6 months for this first phase before actual implementation. At the start of the implementation, however, it is crucial that the digital units or commitees that have been agreed on to be implemented, take clear ownership of the implementation process.

 

Overall, setting up the operating model for a successful path into digitalization is a hairy endeavor. Not only does it require the smart design of the different operating model elements in line with the digital strategy, which often still is a moving target, it also needs stakeholders to make difficult changes to how they operate day-to-day and, thus, must be tackled with a sufficient level of empathy. Excubate has experience in helping companies define and make these changes. We are happy to share this experience and welcome the opportunity to have a conversation: innovate@excubate.de

Corporate innovation needs a major makeover

The 7 rules of excubation

For years, corporations have been going after the holy grail of innovation. The challenge of finding the right approach has now become even tougher as digitization and lowered barriers-to-entry speed up and heat up the competition with greenfield start-ups that disrupt corporations’ existing business models. As intrapreneurship and incubators continue to fail, excubation could be the long wished-for solution to the innovation challenge.

 

In a nutshell, excubation is the smart separation of corporate exploitation and exploration endeavors. For exploration, new ventures are given access to existing corporate assets (client base, etc.) while also being allowed to bypass the typical limitations engrained in corporate conventions and processes. The “smartness” of this approach lies in ensuring a cohesive, tight exchange between the in- and out-flow of innovation.

Re-integration as the biggest challenge of corporation innovation

Separating corporate entrepreneurship activities too much or too little from the core business has been a hurdle for innovation success. Current approaches like intrapreneurship programs, corporate incubators or accelerators have been failing for this very reason, as innovation efforts were either suffocated by the core business or starved as an external start-up that could not be integrated because of culture and process divergence. Re-integration has so far been the biggest challenge for most corporate innovation approaches that – more often than not – has resulted in pure financial engagement of a corporation with a start-up firm and fallen short of the core purpose of corporate innovation.

The recurrent flow between execution and innovation entities, where innovative ideas are fed forward and new businesses are fed back, is the critical element of the excubation approach. It ensures that the innovation entity receives sufficient support and resources; more importantly, it ensures that a certain part of the execution DNA is incorporated into new ventures, which in return will make it much easier to re-integrate the venture once it has taken off.

 

Importantly, establishing your “excubator” does not immediately require creating and heavily funding a new legal entity. Running a pilot, start-up-like excubation project that successfully creates an innovative product or business model will provide valuable experience and help build a repeatable model for future innovations.

Excubation vs. other means of corporate entrepreneurship

Experience shows that, while there is not a clear pattern for companies choosing a given approach, the more traditional innovators (GE, 3M, Nordstrom, even tech companies like Qualcomm and Adobe) tend to experiment with intrapreneurship models, while smaller companies and players with less history in traditional innovation (Otto Group, ProsiebenSat1, Commerzbank, Bayer) more often run accelerator programs.

 

The term “excubation” is derived as a contraposition to “incubation”. Given this, start-ups are developed outside of the cooperation as opposed to being developed within the cooperation. Excubation aims for a better balance along a set of key parameters that can be grouped into “innovation level and source”, “anchoring within the organization” and “financial engagement”.

Excubation takes a more balanced approach to the sourcing of teams and ideas, leveraging internal and external resources synergistically. Regarding anchoring, the approach is more aggressive, offering more independence and decision authority for the start-up team, which is different from what is typically found in intrapreneurships and incubators. Looking at examples, you will find companies like Microsoft Techstars, BASF, SAP (Innowerft) and eon already running excubation-like approaches.

 

Boiling down the excubation approach into actionable and implementable elements, seven “rules” of corporation entrepreneurship for every corporation to follow, can be defined.

 

  1. Separate innovation from execution: Find a smart balance between moving the start-up closer vs. further away from the core business with respect to organization, processes and incentives.

 

  1. Attract entrepreneurial talent: Ensure availability of internal and external entrepreneurial talent with the right skill and will profile, set incentives for effective development of innovations.

 

  1. Facilitate innovation flow: Run an effective process for developing digital innovations, leverage corporate resources, give decision authority to the team, manage towards a tangible outcome.

 

  1. Manage innovation portfolio: Ensure a balanced portfolio of tangible digital business innovations with sufficient potential revenue contribution, comprised of the corporation’s own start-ups and external start-up investments.

 

  1. Inspire employees in the core business: Create a passion for corporate innovation activities and followership within the core employee base to trigger support and motivate potential intrapreneurs to partake in innovation activities.

 

  1. Educate employees: Provide training and education for employees in the core and innovation business, enabling them to get used to the day-to-day deployment of innovation methodologies and entrepreneurial thinking.

 

  1. Support idea flow: Ensure that sufficiently many and tangible new business ideas are generated from within and outside of the company.

 

While the implementation of these rules needs to be tailored to the starting point of the respective company, as a whole they outline the necessary, mutually reinforcing steps that serve as a reliable guideline for excubation.

RULE #1: SEPARATE INNOVATION FROM EXECUTION

One classic dilemma every successful organization faces is the challenge of delivering innovation beyond the core of its current business. While the current business is focused on execution and exploitation, innovation requires exploration and development of new competencies.

 

Corporate mechanisms and organizational structures generally do not allow for the fast and agile development of radical business model innovation. Therefore, the tasks of optimizing the core business and innovating new businesses need to be separated organizationally so that the respective units can tailor their approaches, processes and incentives specifically to these tasks.

The excubation approach dives deeply into the relationship between the core business and the innovation unit to leverage the strengths of both. Within this model, two separate units can be identified: “execution company” (focusing on exploitation) and “innovation company” (focusing on exploration), sometimes set up as an individual legal entity.

The core of the problem

Many companies using traditional approaches to building ventures find themselves facing a set of practical challenges. For instance, since assets are tailored to execute the existing business model, innovation venture “access” to it could become an inflexible liability. As a result, internal ventures fight on two fronts, balancing their needs with the needs of the core company. And at the same time, strategic and resource dependency leaves the new business at the company’s mercy. In light of these challenges, it becomes clear that using a smart approach to separation is critical, given that neither fully external nor fully internal venturing approaches have been sufficiently yielding meaningful results for corporates. With internal venturing, synergetic benefits between the core company and the venture are typically overestimated and are most often not achieved, as experience shows.

Finding the right level of separation

To find the right level of separation, the core business and the new venture should be looked at from three different angles (see the figure below). This helps us evaluate how close the two are in terms of strategic success factors (management capabilities, operating capabilities and proprietary assets that both the new venture and the core business make use of), their business models (synergies and risks) and the capacity to innovate and scale.

RULE #2: ATTRACT ENTREPRENEURIAL TALENT

Google, aka Alphabet, is already a very valuable company, but it could have been even more valuable had it been able to retain the entrepreneurial talent that left the company to found Instagram, Pinterest and Twitter. But Google – as innovative and entrepreneurially driven as it is – didn’t manage to provide an environment compelling enough to keep these founders in-house.

Outside a company, and even more so within a company, there is a limited number of entrepreneurially talented people with the right skill / will profile for successfully building new businesses. Statistics show that only up to 10-15% of employees fit these requirements. It is equally important to identify and to incentivize this talent the right way and to combine it to build the most effective teams.

Three motivators for entrepreneurs

In each company, there is a group of entrepreneurially minded people who have gained significant work experience and would like to found their own company. However, many do not find a way to transition from their fixed job into an entrepreneurial role or lack the right idea, the team and / or financial support. By consequence, each company needs to set up a recurring mechanism to identify those talented individuals, bring them into a community of like-minded people and link them with compelling corporate start-up ideas. To operationalize this, companies can apply a model called “corporate founders club”.

 

There are typically three important motivators for potential entrepreneurs: ownership and decision responsibility, effective boundary conditions (access to resources, technology, IP, processes) and financial upside in line with the success of the business. The challenge for a company is to design these elements carefully in a way that is beneficial for both the core business and the venture.

 

Entrepreneurs want to move fast and make quick decisions on their own responsibility. This is what they find in greenfield start-ups and what companies need to enable too, by modeling a start-up environment. Separate team, separate budget, separate processes and separate location, yet intelligently supported by the company with resources, people and expertise and guided by a disciplined process – this is at the core of the excubation approach.

Defining incentives and participation models

Creating a startup-like incentive model is both extremely difficult but actually also quite easy for a corporate – if it is approached with the right mindset.

Entrepreneurs, depending on their own lifecycle stage, need to balance financial security with financial upside and are not necessarily only driven by the latter. However, it is crucial to build at least some form of financial participation model into the incentives structure, either by giving the entrepreneur an equity share or an equity equivalent (phantom shares).

 

Big companies – in contrast to greenfield startups – have additional options to create a compelling value proposition that pure start-ups don’t have and that put corporates in an even better position: additional fixed salary, additional perks or the option to return to their original job position should the start-up not work out. The latter, however, might be questioned from a motivational perspective and could create a too laid-back perspective (“burn your boats” approach).

RULE #3: FACILITATE INNOVATION FLOW

For a corporate entrepreneurship approach to be successful, the innovation flow and the innovation development process need to be thoroughly facilitated. It occurs just too often that corporate entrepreneurship programs define the starting point and end point of an innovation process, but are not clear and disciplined enough on the process, go/no-go milestones, activities and deliverables in-between. Thus, the third excubation rule “Facilitate Innovation Flow” addresses this issue and defines best practices for running the innovation process within a corporate innovation company, sufficiently facilitated by the execution organization.

The objective of this rule is to generate a competitive advantage via providing ideal conditions for the start-up to move faster and more effectively than others. The key questions to be addressed at this stage by both the execution and innovation company are:

 

  • How can innovation teams be supported most effectively to enable quick development and validation of their business models?
  • How can mentoring be defined along all stages of the innovation process?
  • What tracking mechanisms can be established for fast decision making, access to core business strengths, networks, and sales / delivery resources?
  • How can time-to-market be reduced, and the competitiveness of innovation development be maximized?

Facilitation is needed on two levels

Effective facilitation of the innovation flow happens on two levels – macro-level (basic support) and micro-level (specific execution support). The macro-level is all about accelerating access to resources which the innovation company needs to be successful, such as access to materials, experts, technologies, customers and intellectual property, functional support such as HR, finance, legal support, free budget, and mentoring from senior players in the enterprise.

 

A pragmatic way to establish this is to assign individual people within the execution company’s HR, finance, legal departments to quickly support the new ventures. Based on this, a growing support system within the execution company will emerge, knowing and understanding the new venture activities of the innovation company and facilitating the innovation flow in an optimum way.

 

Support on the micro-level, in turn, focuses on an output-oriented process for developing individual innovations and business models. This is significantly different from existing product development processes within corporates and follows a few key paradigms.

 

  • Fail fast, fail cheap
  • Trial-and-error
  • Fake it before you make it
  • Go for what’s good enough
  • Two steps forward – one back
  • Start qualitative, end quantitative

These paradigms are at first sight straightforward, but are actually hard to implement in a corporate setup.

RULE #4: MANAGE THE DIGITAL INNOVATION PORTFOLIO

Being successful with digital corporate innovation requires a well thought-through approach to managing a digital innovation portfolio. It consists of the right type, number and magnitude of innovations. Experience shows that managing a portfolio of 10 – 15 digital innovation businesses, each having the potential to contribute a single digit percentage to corporate revenue, is a reasonable task: this is a good number. However, it is important to underline that it is not enough to limit portfolio management to the innovation itself. To get digital innovation portfolios right, it is necessary to attract and retain talent, i.e. to incubate, acquire or invest not just in new ideas, but primarily in entrepreneurial talent and digital capabilities.

Getting the right portfolio composition makes the difference

The innovation portfolio should comprise three portfolio components, each with a suggested budget allocation: own innovations, developed in a start-up-like approach (50% of the budget); acquisitions of external start-ups that fit the digital innovation approach (20%); and co-investments in existing start-up companies (30%). The innovation portfolio needs to represent an effective mix of core-related, adjacent and transformational innovations and the respective talent behind them. To define those ideal proportions, a clear scoping in line with the enterprise’s business and digital strategy is essential. It helps to avoid unfocused activity.

 

Measuring the success of the innovation portfolio should follow a pragmatic, yet structured approach along a set of simple performance indicators and criteria, such as:

 

  • Input: financial investment and time effort in relation to ideas developed
  • Throughput: number and quality of ideas run through the portfolio
  • Output: number / share of innovations eventually hitting the market
  • Leadership: intensity of management attention and entrepreneurial freedom given
  • Competence: share of employees and intrapreneurs being trained as innovators
  • Entrepreneurial climate: extent to which entrepreneurial behavior is encouraged
  • Balance: relation of different types, risk profiles and time horizons of innovations

Selection and preparation of ideas and talent

It’s critical to evaluate project and business ideas along a crisp set of clearly defined criteria before including them in your innovation portfolio. Similarly, it is also crucial to select the right talent and team along with the idea, since only the combination of both will deliver success. Typical criteria for an idea with substantial value creation potential that should be considered when filling the portfolio funnel are novelty of the idea, uniqueness of the value proposition, sustainability of the potential business, timing, business potential and scalability, as well as strategic fit with the core business strategy and valuation potential five to ten years after initial investment.

 

Equally, if not more, important than selecting the right idea is selecting the right team for which a set of criteria should be applied, based on longer term experience with founder teams. Such criteria include, to name a few: vision, ambition, passion for being and acting like an entrepreneur, availability of skills and experiences, ability to focus on value creation and benefits for customers, not only technology, as well as flexibility and self-reflation to assume feedback and pivot the business model if needed, and, last but not least, chemistry and an effective working mode between the founding team members.

ULE #5: INSPIRE EMPLOYEES

As the recent PwC benchmark study has shown, over 60% of corporate executives consider their employees their most important partners in innovation. It is thus crucial to inspire employees in the core business to partake in innovation activities. The main objective is to win entrepreneurial talent from within the company. In corporate practice, a few key measures are typically employed to achieve this:

Job rotation

Allowing employees to take over a different role for a while, enables them to look at things from a new perspective and to think out of the box. This can be facilitated virtually, e.g. in an intranet forum, or as actual job-swapping. An example for a virtual job rotation is a forum where employees discuss what they would do differently if they were the CEO of the corporate.

 

A more disruptive approach is releasing the employees from their day-to-day business for a pre-defined period of time, e.g. three months, to work in a startup and learn new and agile methods and working styles. Another example is sending off the corporate’s finance employees to take over the CFO position of a startup for a week and deal with different financial challenges for a change.

 

But job rotation also works the other way around: by bringing in external startup CXOs onto the corporate management team or into relevant boards of the execution company, the decision-makers can be inspired by new perspectives and opinions on old problems.

Connection of employees within the startup community

Startup events and fairs are an inspiring source to keep up-to-date on latest technologies and developments from a startup perspective. Sending employees off to those events helps them to get connections within the startup community. Furthermore, internal roadshows and TED talks can be organized to present new technologies and research results or the latest innovative business models from the innovation company.

Rule breaking

A more radical approach is the reduction of implemented rules and guidelines, like working hours and location, process adherence, and corporate identity guidelines. For example, in some cases it may be stimulating to offer flexible workspaces instead of having fixed offices and working desks. This enables a better exchange and communication between the employees and may lead to a more fertile and productive environment.

 

Furthermore, awards such as “Employee of the Month” should be abandoned, as those are just tools to reward those who “stick to the rules”.

 

It is fairly easy to put these measures in place in a larger corporate context and leverage this activity as a communication vehicle to bring the larger employee base on board. As with all start-up activities, a “minimum viable” approach is more effective than a perfectly set-up inspiration program that takes long lead times. Trying things out and tailoring them over time already puts the leadership team into the right mindset.

RULE #6: EDUCATE EMPLOYEES

Besides the inspiration of the core company’s employees, their education in start-up and innovation-related matters is necessary for the development of entrepreneurial talent. Teaching employees core methodologies and approaches for developing radical innovations equips the 5-15% entrepreneurially minded people in the organization to participate in corporate start-up activities. To achieve this, a few key activities can be deployed comfortably in parallel to the core business.

Start-up library

The implementation of a physical or virtual startup library can be used as a platform for employees to get more information on startup-related topics, to share notes and to discuss developments with colleagues. Online resources like webinars, forums, open online courses (MOOCs) can be used to train employees.

Fablabs for experimentation

Fablabs are work spaces and workshops where employees can develop prototypes and mockups for their product ideas. Simple tools and basic materials are often sufficient to transport the product idea and discuss potential features. Apps like POP (Prototyping on Paper) are great tools to visualize first drafts for mobile apps and websites.

Co-working spaces

Co-working spaces can be used to foster collaboration activities between startups and the corporate’s employees. Offering work space to startups that work on a technology or topics that are relevant for the core business does not only bring important knowledge into the company’s ecosystem. It also creates a disruptive work environment and can be used to hold workshops and events.

Quarterly boot camps

Boot camps are 2-3 day events where employees develop and pitch new ideas. The results (ideas and teams) can then be channeled into the innovation company.

 

The opportunities are almost limitless. All that is needed is to provide some structured guidance to those interested in innovation methodologies to equip them with the basics. It is not about following a textbook approach (and there are many) or having employees take all kinds of courses and gather certificates in design thinking. Applying the learning, and making things real, is crucial.

RULE #7: SUPPORT INNOVATION FLOW

The implementation of a physical or virtual startup library can be used as a platform for employees to get more information on startup-related topics, to share notes and to discuss developments with colleagues. Online resources like webinars, forums, open online courses (MOOCs) can be used to train employees.

The objective of this rule is to secure a constant flow of innovative ideas from the core company into the innovation company. As the core company and its employees are faced with basic elements of the core company’s business model on a daily basis, ideas on how to substantially improve and ideally disrupt the business may also come from these sources. To support employees in identifying and bringing forward innovative ideas, a few measures should be implemented:

Overall this rule is about enabling the innovation activities as effectively as possible and ensuring a sufficient leverage of the capabilities and capacities available in the execution company. It is that support, after all, that creates the strategic advantage of a corporate start-up over a greenfield start-up and that increases the probability of the start-up’s success from the often cited 10% to 20-30%.

 

For more information, experience and an individual approach for your corporate innovation makeover, talk to Excubate: innovate@excubate.de