Corporations from a variety of industries continue to arrive in Silicon Valley in order to tap into its innovation ecosystem. Many of these corporations establish Innovation Outposts (and here), organizations of varying complexity that operate in the ecosystem and whose mission can be broadly characterized as sense and respond. Establishing, growing and making successful an Innovation Outpost is challenging. In this post I discuss the strategy for:
- Determining whether a Corporate Innovation Outpost is necessary.
- Establishing an Innovation Outpost.
- Expanding the Outpost.
Sense and Respond
The first objective of the Innovation Outposts operating in a particular startup ecosystem is to sense, i.e., look for or monitor the development of, potential innovations that:
- Can become threats which could lead to the disruption of the corporate parent. For example, American Express’ Silicon Valley Innovation Outpost is monitoring innovations in financial technologies that are created by companies such as Square.
- Would allow the corporation itself to disrupt by entering adjacent markets to the ones it currently serves or create and introduce novel and disruptive offerings for new markets. For example, USAA is looking for software innovations that will enable it to introduce Usage-Based Insurance products to disrupt the car insurance market.
The second objective of the corporate Innovation Outposts is to respond to the identified threats and the potential opportunities. The response takes five forms:
- Invent: Establish project-specific R&D efforts, e.g., Delphi Automotive’s autonomous car navigation project, or broader R&D efforts that take advantage of, or investigate, technologies and business models the innovation ecosystem is known for in order to create new products and services. For example, Verizon’s Silicon Valley R&D center focuses on big data and software technologies, as well as online advertising-based business models. Sometimes these efforts may be associated with a moonshot the corporation would like to pursue as is the case with Google (Google Car), Apple (iPhone) and IBM (Watson).
- Invest: Allocate a corporate venture fund that invests in startups working on technology and/or business model innovations of interest. For example, UPS recently invested in Ally Commerce in order to understand the logistics opportunities arising from manufacturers selling directly to consumers rather than through distributors.
- Incubate: Support the efforts of very early stage teams and companies that want to develop solutions in areas of interest. For example, Samsung’s incubator focuses on startups working on Internet of Things. But also experiment with new corporate cultures and work environments. For example, consider Standard Chartered Bank’s startup studio.
- Acquire: Buy startups in order to access the innovations they are developing and their employees, and in the process inhibit competitors from getting them. For example, Google acquired several of the robotics startups with what was considered as the best intellectual property.
- Partner: Collaborate with startups in order to develop a disruptive new solution using their innovations along with the corporation’s, or to distribute innovative solutions they have developed. For example, a few years ago Mercedes partnered with Tesla in batteries for electric vehicles.
Each response type is served by a different type of group. I have called these groups innovation enablers. Important to the type of response is the timeline to ROI and the amount of risk the corporation is willing to assume. For example, acquiring a growth stage private innovative company, such as Google’s acquisition of Nest that allowed it to enter the connected home market immediately, can provide a faster ROI at lower risk, than the acquisition of an early stage startup, such as the acquisition of Oculus by Facebook which will enable it to offer a VR solution but still requires significant level of product development, the identification of a viable business model, and the target market may never materialize.
Deciding to Establish a Corporate Innovation Outpost
I have worked with over 100 corporations many of which ended up establishing Innovation Outposts in Silicon Valley. In the process of establishing an Innovation Outpost, I advise corporations to follow a three-step process:
- Step 1: Explore. In this step corporate delegations have to visit the innovation ecosystem and appreciate how it can contribute to addressing the corporation’s innovation challenges. It is important for such visits to be led by the CEO, and maybe even the corporation’s board of directors, along with executives that are expected to be innovation change agents for the corporation. I’ve seen many instances where after a single such visit a corporation determines that the particular innovation ecosystem wouldn’t be appropriate for them. This may mean that the ecosystem does not focus in the corporate areas of interest. For example, Nordstrom determined that Los Angeles would be a better innovation ecosystem to focus on because it has more e-commerce startups, which was the area of interest. Similarly, Coca-Cola decided to focus in Israel because they are particularly interested in cyber security innovations. Exploration may require several visits to each of the innovation ecosystems of interest.
- Step 2: Define. Once the exploration phase is completed, the corporation must define 1-2 problems or goals, but no more, that will need to addressed through its presence in the innovation ecosystem. For example, one of Verizon’s goals for its Silicon Valley organization is to create disruptive solutions (technologies and business models) for the monetization of online video consumed by its subscribers over their mobile devices. In the process of defining the problems and goals, the corporation must understand why these can be addressed in the particular innovation ecosystem. They may require the utilization of technologies that are prevalent in the ecosystem, e.g., big data or 3D printing, specialized business models, e.g., on-demand services, specific innovation practices, e.g., design thinking and lean startup, or the development of a particular type of partner ecosystem, e.g., IBM’s Watson partner ecosystem.
- Step 3: Establish. Only after the problem(s) and goal(s) have been agreed upon, the corporation is ready to establish the Innovation Outpost. Establishing an outpost enables innovation but does not constitute innovation. The process leading to the decision to establish the Innovation Outpost will be the topic of the next post.
Establishing an Innovation Outpost
Initially, a newly established Innovation Outpost must be able to at least sense innovations. For this reason, its team must consist of a small group of individuals reporting to a single leader, who in turn reports to the CEO. This team’s members must be super connectors. On the one hand, they must have deep understanding of the innovation areas the corporation is interested in. They must also have strong business development (partnering) experience so that they can network broadly within the startup ecosystem (the entrepreneurs, startup management teams, venture investors and other intermediaries). They must be able to understand which startups and which investors they should focus on because they may be relevant to the corporation’s innovation goals, and which entrepreneurs and management teams to just include in their network. In the process they must establish the value exchange between the startups and the corporation. On the other hand, they must be well-respected and networked within the corporation so that their recommendations can be adopted by the CEO and the board, as well as by business unit (BU) executives as they start establishing connections between the startup ecosystem and the corporation.
In addition to the networking and partnering functions, the team forming the Outpost should also be able to assess whether other forms of response, e.g., incubation, investment, R&D, are appropriate for the corporation. The success of these initial efforts define the trajectory of the Innovation Outpost. For this reason, I recommend that the business development group be the first innovation enabler the corporation sets up in the outpost so that in addition to sensing it can also provide the initial response capability.
Unfortunately, the majority of corporations make their venture group the first innovation enabler in the Outpost they establish. I have discussed elsewhere (and here), why this may not be the optimal way to start the Innovation Outpost. This does not mean that the corporation may not choose to make a few select investments in startups or in institutional venture firms operating in the selected innovation ecosystem.
Expanding the Innovation Outpost
While the majority of corporations that this Stage 1 Innovation Outposts are sufficient for their needs, others decide to expand the role of their outposts over time. I have found that successful expansions occur in two stages. During the first of these stages, called Stage 2 in Figure 1 below, the corporation adds to the Outpost groups that provide more innovation enabling functions.
Figure 1: Three stages of Corporate Innovation Outposts
As is shown in Figure 1, before deciding to move to Stage 2, the Innovation Outpost must have satisfied three preconditions:
- Named the Innovation Outpost’s leader. I have already noted the importance of having a single executive running the Innovation Outpost and reporting to the CEO. I have often found that corporations give the Outpost’s leadership to an executive as a temporary assignment and even assign the Outpost’s other members in this way. This approach increases the risk of failure, but also leads to weak relations between the members of the innovation ecosystem and the members of the corporate Innovation Outpost.
- Demonstrated understanding of the innovation ecosystem where it operates. As I mentioned above, as part of the activities performed by the Stage 1 Outpost, its team must have successfully established partnerships with startups that can contribute to the solution of the identified problems and innovation goals. In a few select cases, the corporation may have also invested in startups operating in the particular ecosystem. In addition, the Outpost’s team must have assessed and justified whether incubation, acquisitions, venture investments, and ecosystem-specific R&D are activities that must also be undertaken by the Outpost.
- Established value exchange between the corporation and the innovation ecosystem. The corporation must acknowledge that the startups can make an important contribution to the achievement of their innovation goals. They must be willing to share with them knowledge, data, technology, and processes. In return, the startups should be willing to provide them with their disruptive ideas, technologies and business models. It obviously takes time and effort to establish the exchange of the appropriate value.
I am often asked how corporations should decide which innovation enabling groups to add to their Stage 2 Innovation Outpost. I have found that the answer often depends on the R&D model used by the corporation. Ikhlaq Sidhu has identified six models for corporate R&D and they provide an excellent guide. Of these, Sidhu’s Models 3-6, are most pertinent to such an analysis, as they support innovation for entering adjacent markets and introducing new and disruptive solutions. In particular,
- Model 3: All innovation enabling groups contribute to the success of the corporation’s fully integrated R&D efforts. The Outpost’s R&D organization contributes technology, the corporate development group acquires startups whose work is directly relevant to the problem being addressed, whereas the business development group partners with other startups that have relevant IP. For example, BMW uses the innovation enabling of its Outpost in its work on autonomous, electric vehicles. Other corporations that are successfully using their Innovation Outposts to support this model include Google, Apple, Amazon, IBM, and Verizon.
- Model 4: In this model, which is often used in corporate moonshots, and is driven by the corporation’s central R&D organization, in addition to the Outpost’s R&D group, the corporate development group also becomes involved in order to identify and acquire startups that can contribute to the IP being developed by the R&D organizations. In addition, the corporate venture capital and incubation groups play an active role as invest in and incubate startups that can provide pertinent over the horizon IP. For example, Google has acquired several startups, including robotics startups, whose technology is being used in the Google Car moonshot project. Other corporations that are successfully using their Innovation Outposts to support this model include IBM, Qualcomm, and Amazon.
- Model 5: Corporations using this R&D model may not even need to have a development group as part of their Innovation Outpost. The corporate development group is the most important innovation enabler in the Outpost, followed by the venture investment and business development groups. The corporate development group acquires startups of interest. Such acquisitions may be preceded by a corporate venture investment or a partnership, as a means for the corporation to better understand and appreciate a startup’s IP and team. Corporations using this model include Cisco, Roche, Johnson and Johnson, and many other pharmaceutical companies.
- Model 6: Similar to Model 5, in this model the most important groups in the Innovation Outpost are the corporate venture capital and business development groups. Corporations using this R&D model bring to market innovations they source from startups. They access these innovations by investing in startups or by establishing partnerships. Corporations that are successfully using their Innovation Outposts to support this model include Coca-Cola, P&G, Unilever and other consumer packaged goods companies.
The next stage (Stage 3) of an Innovation Outpost’s journey involves the creation of a complete organization to bring to market the solution to the problem that led to the establishment of the Outpost in the first place. Upon embarking for Stage 3, the corporation is ready to identify new innovation challenges for the Outpost to start pursuing so that the innovation cycle can repeat. Of course, this does not mean that this new journey needs to start from Stage 1, since the Innovation Enabling groups are already in place. However, the corporation may need to make a few changes to the Outpost’s staff since some of the staff will most likely be assigned to the Stage 3 organization, and new people with experience in the new problem that will be pursued next will need to join the Outpost.
Of course before moving to Stage 3, the Innovation Outpost must have satisfied four preconditions:
- Identified the solution to productize. This implies that not only the initial definition of the solution has been accomplished but that the target market has been identified along with the business model that will be initially employed.
- Established the roadmap for this solution. Corporations are most comfortable operating with product roadmaps that fit with either existing business processes, or new processes that can establish for the new solution.
- Established the productization organization. This organization may be a new business unit, particularly when the corporation is going to introduce a disruptive solution to the market, or an extension of an existing business unit.
- Named the leader of the productization effort.
Three excellent examples of this transition include BMW’s ibrand, Verizon’s online video business unit, Telefonica’s Open Future business unit, and Samsung’s Connected Home business unit. The Google Car organization is in the process of making this transition. Google just named the organization’s leader.
Deciding whether a corporation needs to establish an Innovation Outpost in a startup ecosystem, forming such an Outpost and expanding it over time in order to address innovation goals while addressing important, some even existential, problems for the corporation requires a complex decision process. The approach presented in this post is the result of advising several corporations on their Outpost efforts as well as discussing with many others the successes and failures of their innovation efforts.
(Cross-posted @ Re-Imagining Corporate Innovation with a Silicon Valley Perspective)