Corporate organisations are fairly good at ‘small’ innovation, building on their existing products, technologies or markets. Detergent X, now with revolutionary stain remover! Large companies are less strong in taking completely new paths, leading to groundbreaking propositions and new customer groups. Why is that? And are there ways corporates can strengthen their innovation power?
It has always surprised me that a food giant like Ahold Delhaize did not introduce a meal box subscription much earlier. They left the development of this proposition ten years ago to HelloFresh, a start-up company from Berlin, which has now grown into a global player. You could say that Ahold had all the cards in hand to beat HelloFresh: knowledge, distribution, customers and cash. It may be that Ahold deliberately let the meal box market segment go at the time. But possibly there was something else going on and this case also illustrates a lack of innovative power of Ahold and similar corporate companies.
Balance between ‘core’ and ‘future growth
In ‘The 10x Growth Machine‘, startup and innovation expert Misha de Sterke sketches a picture of what can go wrong when corporate companies start innovating, or even worse: when they fail to do so. In essence, there are three areas where companies can focus their innovation:
- Optimising the core: limited adjustments of existing propositions, within existing markets
- Renew the core: adapted or new propositions, within existing markets
- Future growth: completely new propositions, within new markets
All three variants are important, which means that the right balance must be found, with due attention also being paid to disruptive innovations that can ensure future growth. That finding the right balance does not always go well is demonstrated by the recent history of Kraft Heinz. Since the merger between Kraft Foods Group and H.J. Heinz Company, the new company Kraft Heinz focused far too single-mindedly on cost savings from 2015 onwards and forgot to develop new products and markets. The result of this short-term strategy: record losses and a minimised share price.
Besides wrong strategic choices, there are also other causes for the failure of innovation in corporate companies. Perhaps the biggest issue for innovation in large companies is that the innovation team receives insufficient attention, resources, budget and appreciation from the core business organisation. In itself, the scepticism of the existing organisation is not so strange. After all, the existing business is making money now, while it remains to be seen which of the innovation projects will ultimately be profitable.
In ‘The 10x Growth Machine’, De Sterke outlines a model that allows companies to find the right balance between their core business and innovative projects.
What is immediately striking about De Sterke’s model is that the innovation ‘growth machine’ is embedded in the existing organisation, but can also function autonomously to a certain extent. Within the organisation, the growth machine is responsible for initiating, validating and scaling up innovative initiatives. Successful projects can then be incorporated into the existing business or continue in an independent form (spin-out).
How do corporates innovate like a startup?
In addition to the above model, I will briefly give you 5 important innovation lessons from the book ‘The 10x Growth Machine
1. Build an innovation portfolio
As indicated above, every large company will have to divide its innovation investments into three segments: optimising the core business, renewing the core business and future disruptive growth. In many traditional industries, most of the budget goes into supporting the existing business, whereas a more balanced ratio is necessary to secure future growth. For example, an investment ratio of 50% in optimisation, 30% in renewal and 20% in disruption. How many innovation projects should be set up per sub-area is a matter of back-calculation. If, for example, it is clear that 10% of the disruption projects eventually make it to the finish line, it is possible to determine how many of these kinds of initiatives must be part of the portfolio pipeline in order to achieve the growth targets.
2. Use a Venture Board
Startups often depend on venture capitalists for their funding. Venture capitalists invest in promising startups that fit their portfolio and closely monitor the progress of their investments. Internal start-ups that are created within corporate organisations do not have to deal with an external venture capitalist, but will need an internal investor and discussion partner. A Venture Board can provide this. The Venture Board is a compact group of senior directors, including the CEO, CFO and business unit manager, who act as the first point of contact within the corporate organisation for the internal startup teams. On the one hand, this role is critical and projects can be stopped as soon as there is no confidence in a successful outcome. On the other hand, the Venture Board is also a cast-iron sponsor for the fragile innovation projects. As soon as criticism about an internal start-up arises from the core business (unjustified), the Venture Board has the authority to protect it.
In the initial phases of an (internal) start-up, it is particularly important to measure what might be created in the future, rather than what has been.
3. Measure the right things
Venture capitalists know better than anyone how to assess the growth potential and progress of startups. It is clear that the ultimate goal in most cases is financial success. However, in the early stages of a startup, there is (usually) no profit yet and non-financial ratios are also important, such as the conversion rate of a test campaign. At this stage, the conversion rate does not immediately translate into financially interesting figures, but it does help to estimate how successful the product may become in the long run. In the initial stages of an (internal) start-up, it is therefore important to measure what might be created in the future, rather than what has been. Corporate organisations basically work the other way around and focus heavily on the finances that have already been realised. It is therefore important that corporates assess their own internal startup along the axis of predictive growth metrics rather than just historical financial metrics. (More on this subject can be found in the acclaimed book ‘Lean Analytics‘ by Croll & Yoskovitz).
4. Follow an innovation process
To keep innovation on the right track, it is important to follow a well thought-out and lean innovation process: a phased route from the first idea to the actual roll-out. An innovation process could include the following phases:
- Ideation sprint (1-3 weeks): initial idea formation, definition of promising areas
- Customer discovery (10-13 weeks): understanding customer needs and possible solutions
- Growth (12-15 weeks): research of the right market approach
- Launch (13-26 weeks): launch, grow and decide on organisational model
Such a process must provide room for creativity and experimentation on the one hand, and structure and discipline the approach on the other. The absence of a formal innovation process can result in tinkering with projects with little chance of success for too long. More importantly, especially in the corporate environment, a clear process can protect promising projects and give them a fair chance to mature.
5. Create the right mindset
Corporate companies that want to work intensively on disruptive innovation often have to deal with change management. Not only the existing processes and methodologies need to be examined critically, the mindset of employees and management may also need a new impulse. One of the issues that needs to be addressed is the speed at which decisions are made (in a well-founded manner). Startups are usually very adept at fast decision-making. This is different for corporate companies, which have much more complex and sometimes ‘viscous’ decision-making processes. How do you break through this? As always with change management, there are many ways to make adjustments. It is essential to use strong sponsors and ambassadors who ‘sell’ the innovation projects internally and communicate it clearly to the rest of the organisation. In addition, it may be necessary to hire new employees, with specific experience in the field of disruptive innovation, to further accelerate the growth path.
This blog was also published (in Dutch) on Frankwatching.
Subscriptions are a common thread in Bas Verhoeven's career. As a marketing manager, he introduced numerous subscriptions to the market for multinationals such as Wolters-Kluwer and Vodafone. As a consultant and interim marketing manager, he also helped many SME organisations to increase their recurring turnover.