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The Three Greatest Challenges of Corporate Innovation

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by Evan Shore

The single greatest challenge for us is identifying and executing innovations outside the boundaries of our business models.

This sentiment was echoed in nearly every interview I conducted over the past three months with over 40 CEOs and C-Suite executives. These firms spanned multiple industries and ranged from large Fortune 500 companies to small startups, and from fast-growing companies to those approaching bankruptcy.

Following these customer-discovery interviews for my Launching Technology Ventures class at Harvard Business School, I would like to offer three problems I see with the current corporate innovation ecosystem that inhibits corporations from innovating outside the boundaries of their current business models:

  1. Strategic Myopia: Corporations often do not see opportunities outside their immediate field of vision.
  2. Structural Inertia: If they do spot opportunities, the corporations are not set up to execute them internally.
  3. Inefficient Relationships with External Innovators: Corporations take a reactive approach to engaging with external innovators. Corporations are often hesitant to share their priorities and pain points with external innovators. This results in an information asymmetry. Additionally, external innovators often approach corporations with ideas or companies which corporations are not primed to accept. Ideally, corporations should be involved at the problem identification stage, rather than at the solution selection stage.

STRATEGIC MYOPIA

It is difficult for innovators to spot problems and opportunities outside their field of vision. Upon reflecting on my Managing Innovation class project with Ford, for example, my team looked through the lens of our own experiences commuting to work, rather than surveying the world for pain points, and decided to help commuters “get their lost hour back.” A few weeks later, I discovered at an RFID seminar that RFID chips were being installed in trucks to solve a pain point that construction workers had regarding their taking inventory of their tools. I neither knew of this pain point nor of this RFID tag capability. Overcoming information asymmetries of both pain points and potential solutions is thus difficult for innovators who start with a more limited perspective of customer experiences, available technologies, and business models.

Further limiting the vision of corporations are the Product-Centric and Resource-Based Lenses they apply to new growth opportunities. They ask, “How else can we leverage our core competencies to new areas?” Focusing on current products and resources tends to generate incremental ideas and blinds companies to both potential disruptive threats and opportunities.

STRUCTURAL INERTIA

Even if corporations spot ideas, they are limited in their capacity to act on them. In my interviews, most companies (except the large, multi-business unit conglomerates) admitted that they lacked the “internal DNA” to execute on innovations outside their core businesses. High potential ideas are de-prioritized if initiatives are too small, too uncertain, too long term (particularly if a publicly traded company), or too far removed from their core product offerings. The core tends to either co-opt or kill new initiatives if existing processes, performance metrics, or resources are applied to new business ventures, and internal approval processes limit nimble execution. For example, a radical new growth platform will be less attractive than a derivative product on an NPV basis because the upfront, fixed costs for the derivative product have already been incurred.

In the Innovator’s Solution, Professor Clayton Christensen suggests corporations could execute on radical and disruptive innovations that fall outside their existing business models by creating separate business units. But what if our recommendation to Ford were to create an entirely new type of car company focused on integrating technology into vehicles as fast as possible (1 year cycle time), which would replace its current business model focused around design and metal bending (2-4 year cycle time)? My interviews suggested that CEOs were more comfortable focusing on improving their core than disrupting it. Additionally, CEOs of smaller and mid-sized, single business unit companies do not have experience with managing multiple business units. Therefore, many seemingly good ideas are just not executed.

Much of this inertia can be attributed to the Product-Centric and Resourced-Based approaches that corporations take. I discovered that the firms that take more Customer-Centric and Problem-Solving approaches are less wedded to the ways of the past, and more nimble to changing customer needs. A large medical device company said that in the face of disruption, he did not face the “Innovator’s Dilemma” because he simply “swapped out one product for another. There was no organizational friction because which products are sold is an afterthought. We’re solely focused on alleviating the pain points of each of our customer groups, regardless of the product.”

INEFFICIENT RELATIONSHIPS WITH EXTERNAL INNOVATORS

Corporations currently take a reactive approach to buying external innovations. Entrepreneurs define problems and create solutions, which they then pitch to corporations, who then overpay for acquisitions, inherit scaled-up business models, and engage in costly post-merger integration processes. Entrepreneurs are hesitant to engage with corporations for fear of limited flexibility, control, and exit price.

In addition to misaligned incentives, both corporations and entrepreneurs face high search costs and information asymmetries. Acquisitive companies have dedicated teams that survey the external landscape for innovations. Because of their Resource-Based view, these teams are biased towards searching for opportunities that are accretive to their current business model and may miss opportunities at the fringe. Additionally, as each company is surveying the same landscape, there is likely an opportunity for a “business development search engine” that could reduce search costs. Similarly, entrepreneurs seeking to partner with or sell services to larger corporations face resistance from corporate business development managers who filter out opportunities that do not look like their current business.

Additionally, entrepreneurs develop businesses around perceived pain points. With Ford, we had little insight into the pain points of all car drivers and therefore decided to focus on problems we experienced ourselves. As corporations erect a “walled garden,” the outside world has little information about their own pain points. From interviewing a number of entrepreneurs at Harvard Business School, one reason they focus on consumer-internet businesses (besides the low cost of developing websites), as opposed to B2B businesses, is that they face Strategic Myopia – they do not know the pain points that corporations face so design solutions based on their own experiences (as we did with Ford).

Perhaps the pace and success rate of innovations would increase if corporations took a more open approach to identifying and communicating to the outside world the pain points and jobs-to-be-done that they are not willing or able to address within their core business model.

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