How corporates can externalise their innovation
For much of the 20th century the practice of technological innovation was ascribed to a company’s research and development (R&D) department that was embedded within the company. This R&D team were responsible for bringing new technologies to the market through generating new ideas for products and services. Yet in recent years there has been a growing recognition that the knowledge that is necessary to generate innovations is increasingly found outside of a company and that such external innovation, especially from start-ups, is seen as being a valuable source of innovative knowledge and ideas. Companies are now moving to embrace collaboration and exchange information with external stakeholders in order to leverage complementary assets and capabilities.
This recognition is part of a wider emerging trend for companies to externalise their innovation efforts through a variety of approaches and collaboration efforts. This allows them to ‘tap’ into new ideas and ways of thinking whilst also providing a lean and efficient mechanism for external experimentation. This has led to many companies to utilise a ‘mixed’ innovation strategy that combines their long-established internal methods and external drivers as a way to stay competitive in an increasingly competitive business environment.
Proto Innovation focuses on working with a range of companies to assist them with structuring the best way that is bespoke to them for working with external partners. So we thought we’d provide a run-through a few approaches that we consider to be important.
Accelerators and Incubators
Incubators and accelerators have emerged as one of the most important mechanisms for corporates to externalise their innovation. The growth of start-up accelerators over the past twelve years, from only 1 in 2005 to over 579 programs in 2016 (Global Accelerator Report, 2016), has led them to become a key way in which start-ups are working to innovate and to develop new ideas and approaches to innovation, often in partnership with corporates. Successful accelerators typically do not operate in a vacuum and instead form partnerships with corporates and a range of other parties. These efforts are typically sector focussed in a handful of specific areas of research or fields.
This sector specific focus has led to accelerators funding themselves along themes and specific industries that they are familiar or knowledgeable with. Accelerators operate by assisting the entrepreneur’s with building the venture team, fine-tuning the idea, and mentoring the business from idea through to prototype, product development and commercialisation. The shape and form of many of these accelerators varies greatly from non-profit to corporate sponsored accelerators taking start-ups ranging in size from half a dozen to over 100 typically over the period of around three months.
Depending on the type of accelerator, corporates are often involved in various aspects of accelerator programs, either directly as corporate sponsored accelerators or indirectly through mentoring, funding and in other ways. There are many benefits in companies doing this, whether its providing a way for companies to get to know the start-ups, to become familiar with new ideas and practices or to potentially partner on new technologies. A less obvious but crucial indirect benefit is that this collaboration may provide a mechanism for companies to develop the entrepreneurial mindset and tool-set of their staff, which may have the knock-on effect of leading to a greater intrapreneurial activity within the company.
Corporate Venture Capital
Corporate venturing is the process by which large companies either develop, sponsor, or invest directly in start-up companies in order to develop innovative products or services. Typically, corporate venturing takes place within the core industry in which the company operates. For example, the energy giant ExxonMobil backs new energy tech ventures via its ‘Technology Scouting and Venturing Group‘, whilst a large pharmaceutical firm such as Merck or Pfizer concentrates their venturing efforts on the pharma and/or healthcare sectors.
Some companies take a radically different path to structuring their corporate venturing activities by structuring them as stand-alone venture capital arms or private equity funds, investing in opportunities where they can add value regardless of the industry. An example of this is the US$50m STC Ventures Fund, which was established by Saudi Telecom Company in 2012 with the remit of investing in the most promising technology start-ups primarily within the Middle East.
According to research conducted by BCG the use of corporate venturing increased from 27% in 2010 to 40% in 2015. Among the top ten companies in each of the seven sectors studied, it has jumped from 41% to 57%. Companies use their venture capital investments as a mechanism gain minority positions in what they consider to be the most promising start-ups and an early understanding of new markets, trends, and technologies that may be emerging. Others see corporate venturing as purely financial investments or as a way to bring in new products or services into the company that they can offer their customers.
How these investments are run is something that varies greatly between different companies. Some corporate venturing activities are managed in a more ‘hand’s-on’ and controlling manner by the corporate whilst others empower business units to operate independently of the corporate with minimal interference from the corporate venturing team.
Often the main aim of the corporate venturing team is for the company to work increasingly closely with the startup until it is eventually consumed by the corporate. This then enables the corporate to gradually bring the external capabilities in-house, whilst also reducing the risk of making a ‘risky’ investment by working with the start-up over a period of time through its corporate venturing arm.
Academic Partnerships and University Research
Partnerships between companies and universities are key drivers for company research, especially in research intensive industries such as healthcare and engineering. Typically companies structure these activities by providing funding for talented faculties and students to conduct industry-relevant research.
The company focus on working more closely with universities makes a lot of sense considering that universities are now increasingly focussing on developing entrepreneurial thinking as part of their academic syllabus as a way to boost innovative thinking and potential research amongst their students. This increasing focus on developing entrepreneurship is evidenced by the fact that the Global Consortium of Entrepreneurship Centers now has over 250 members ranging in age from well-established and nationally ranked to new and emerging programs
In 2019, Chinese telecommunications company Huawei launched its European Research Institute in Belgium, which works alongside the 5G Innovation Centre at the University of Surrey in the UK, in which Huawei has invested £5 million, and Aalto University in Finland, where research is focussed on how 5G services might work on moving cars and buses. Huawei is also collaborating with McMaster University in Canada, which has a significant focus on medical and health sciences. Huawei is one of a number of industry collaborators with the university, including Chrysler Group and IBM, that have helped produce 415 commercially co-authored publications. These initiatives by Huawei show how it is placing a strong emphasis globally on university partnerships and research to drive its innovation capabilities.
Innovation labs are a form of hybrid internal/external R&D mechanism that are used further along the development chain to accelerate time to market. They are in-house units designed to complement the traditional internal R&D capabilities of the company and interact more closely with external entrepreneurs than internal R&D would. They are often not restrained by the bureaucracy and ‘red tape’ of the corporate and instead operate independently, which gives them considerable speed and agility in how they operate and carry out their research. However, their research typically remains strongly aligned to further developing the products or services that are close or adjacent to the company’s offering.
Joint ventures, partnerships, and collaborations
Joint ventures, partnerships, and collaborations provide another avenue for companies to externalise their innovation. Collaborating with other companies provides the skills, assets and support they need which they may otherwise struggle to develop internally on their own. Shareing an asset or capability with one or more partners can create new possibilities for all parties without infringing on the company’s ongoing use of the asset. Participants are able to develop new products and services rapidly by piecing together components from a network of collaborating partners with each partner providing the complimentary expertise and experience needed.
This collaboration is becoming increasingly important as modern innovation depends increasingly not only on sector-specific domain knowledge and customer relationships, but also on expertise in a range of technological areas such as analytics, cloud services, software, and security, which very few organizations possess all of. Its no surprise then that a range of companies from different industries have chosen cross-collaboration as a way to develop new products or services, for example Several automakers have established partnerships with tech companies to work on autonomous vehicles, including Fiat Chrysler with Google, GM with Lyft, and Volvo with Uber.
One of the most successful and innovative initiatives is P&G’s ‘Connect + Develop’ program which helps initiate partnerships to the needs and challenges that P&G states it is facing, with a focus on new products, technology, in-store, ecommerce and the supply chain technologies. The program is open to a range of potential partners ranging from individual inventor, a small business, or a Fortune 500 company, with a structure that is flexible enough to help innovators and patent-holders connect with P&G and to solve particular problems that they state they are facing.
Use of Strategic Scouts
Strategic scouts are used by many companies to recognise and analyse new technologies, trends and to identify potential start-ups to invest in. External ‘experts’ who have expertise within a specific sector or field are hired by the corporate to act as a form of ‘scout’ for the corporate. These scouts will likely have a more hands-on approach to the industry and use a range of software and tools to quickly and more efficiently identify trends, new opportunities and potential industry investments. Consequently, these scouts help the corporates to improve their own external innovation and to work with start-ups they may never have otherwise been able to work with.
Creativity competitions and Hackathons
Hackathons provide a means to accelerate innovation by enabling companies to work with new talent as a test-bed for ‘crazy’ ideas and a place for cross-functional and cross-cultural collaboration. They also provide means for identifying and promoting entrepreneurs, and an opportunity to create new businesses and business opportunities. The first hackathon called OpenBSD was held in 1999 and since then many leading companies, including Fortune 500 corporations such as AT&T and American Express, have used them to spur the development of cutting edge products and prototypes.
Such hackathons are often held as one-off events usually with a specific target, field or aim in mind. Participants spend a defined period of time, often no more than a few days, working in an intense collaborate and yet competing manner to meet the target set by the company and in doing so gain a reward or prize for achieving aims. They also provide an opportunity to show how startups can tailor their technology to solve the business problems of the company and in doing so could give access to technology and platforms within which they can test and build their ideas.
We have highlighted how companies can use a range of external mechanisms to enhance their innovative capabilities. Each approach serves a different kind of function, so companies need to decide what they want to focus on or whether to perhaps use a blend of different approaches in an ad-hoc or bespoke manner. Some methods, such as corporate venturing and research partnerships with universities, have been around for decades and form the corner-stone of many larger corporates external innovation. Newer, more innovative and agile approaches, such as using accelerators and hackathons, are only now emerging as important tools in the ever increasing arsenal of methods that corporates can use to innovate.
A company’s choice is further complicated by differences in the speed of innovation between industries. Some industries, such as chemicals, move more slowly so longer running and less risky approaches, such as corporate venturing, may be more suitable. Faster and more innovative industries, such as software, require more agile and quicker moving innovation mechanisms, so hackathons and accelerators are likely to be a better fit.
Whatever happens its clear that companies need to use some the mechanisms we have highlighted in order to compete in an increasingly competitive and fast moving commercial environment. Only by doing so can they hope to remain ahead.
1. Why commercial investment in university research will only grow, Time Higher Education Suppliment, Nov 2020 – https://www.timeshighereducation.com/hub/huawei/p/why-commercial-investment-university-research-will-only-grow