6. Overcoming the Innovation Paradox
Designing the Startup Corporation

THE PREVIOUS CHAPTERS looked at the various causes of the innovation paradox, as well as why the Startup Corporation can be beneficial for leveraging the resources of established companies toward breakthrough innovations. We have also examined a number of solutions that organizations can implement to better pursue breakthrough innovation. This chapter explores different ways of combining these solutions, depending on the characteristics of the company.

Breakthrough innovation is both risky and difficult. More often than not, the resources that are supposed to go into strategic discoveries end up supporting an incremental innovation or a new product platform for an existing business. In other cases, valuable time and resources get expended on apparently useless efforts, resulting in very little to show in terms of concrete innovations. However, the fact that an endeavor falls short or becomes a new technology for an existing business is not a sign of failure; it is simply part of the game. Strategic discoveries are rare, and they do not happen overnight. They are frequently the outcome of sustained efforts smartly deployed. Apparent failures can turn out to be great businesses as people return to old experiments and build them into new solutions.

This is what makes the innovation paradox so counterintuitive. The elements that allow established companies to scale up keep them from developing breakthrough innovations. On the opposite side of the same coin, the greatest ideas are little more than smoke without the ability and resources to execute. Successful organizations can’t simply sit back on their haunches when their current business models are succeeding; neither can those with breakthrough ideas bank on their wits alone. To overcome the innovation paradox, the Startup Corporation takes advantage of established companies’ unique set of capabilities to address complex innovations, bringing together disparate technologies and partners to create a new market or industry. It also overcomes the innovation paradox by allowing established companies to avoid the creative roadblocks of routinized processes and leverage their resources to scale up when breakthroughs do occur.

The design of this kind of innovation effort relies on:

1. following a structured process that gives both direction and boundaries as well as the freedom to go back and forth as the solution is crafted

2. management solutions that combine market and company forces in different ways and at different stages of the innovation process

3. combining internal resources with access to rich networks

MANAGING BREAKTHROUGH INNOVATION PROJECTS

Breakthrough innovation is about managing ignorance. The vision of arriving at a strategic discovery is inspiring, but it almost never provides a map of how to get there. The management of breakthrough innovations cannot rely on existing knowledge, because oftentimes there is none. There are no visible milestones, and visualizing the future is hard. Breakthrough innovations require a frame of mind different from that of typical business units.

Managing inspiration stimulates creativity in various ways. It exposes employees to new ideas and environments—having them visit customers, distributors, and trade shows throughout the world. Such journeys can bring together cross-functional teams made up of people with different perspectives and create trust across an organization. These teams also forge ties between technology and markets, creating working groups of engineers and marketing people.

In addition to inspiring their own employees, companies successful at fostering breakthroughs often have a department dedicated to attracting noteworthy startups. When an idea is deemed interesting enough to be evaluated, the team presents it to top management. To ensure that breakthrough innovation ideas do not compete against incremental ideas that nurture existing businesses, top management may have a budget earmarked for breakthrough innovations.

If top management sees that an idea has potential, it gets an initial allocation of hours for chosen team members—anywhere from 20 to 80 percent of their time—as well as money. With these resources, team members further explore technology and possible customers. Once the team needs additional resources, it goes back to top management armed with fresh knowledge. The project is then evaluated based on the new information the team has generated. At that point, a decision is made to either kill the project or provide it with further funding. This determination always involves top management but may include industry experts and venture capitalists as well. “Go/no go” decisions are based not on milestones and quantitative information, but rather on the business’s overall potential. The process progresses through various rounds until either uncertainties are low enough for executing a clear business model or the project is scrapped.

Even when an innovation reaches the market, work still needs to be done to fully realize an effective business model. Often the initial business model lacks strength, and the original customer segment is not as interested as anticipated. Nespresso targeted hotels, restaurants, and offices before a new manager figured out they should target end customers with a premium price product. The i/o pen from Logitech attempted the retail market before it became apparent that a business-to-business model was more adequate. The Silicon Valley–based startup specializing in supply-chain software (presented in chapter 3) went after small and medium enterprises (SMEs) before serendipitously discovering that large companies were a much better target.

As innovations move through the innovation process, challenges become greater. Scaling up is often much harder than coming up with an idea. Even so, most efforts at companies, nonprofits such as business schools, and governments focus on idea generation rather than scaling up. Combining and learning are more difficult than inspiring and attracting ideas. Leveraging and integrating provoke companies, especially when existing businesses view innovations as threats to their own success.

INSPIRING THE STARTUP CORPORATION

Successful management of strategic discoveries depends on managing the portfolio of mechanisms that shape the Startup Corporation—inspiring, attracting, combining, learning, leveraging, and integrating. A company with well-designed foundations that understands the specific needs of breakthrough innovation can better move to structure this portfolio. Without the right foundations, implementation is bound to fail.

The inspiration phase is mostly an internal process; it stimulates the creativity of employees and their networks. Design units, stealth innovation, and bounded innovation each use different techniques to elicit and support internal inventiveness. All heavily depend on interacting with the business environment, but they ultimately place their trust in employees to discover radical ideas. Companies that have hired and developed passionate people and have created a risk-taking, trustworthy organization can best leverage these techniques. These organizational designs protect people from market and company forces that identify the still-weak aspects of a concept, while downplaying its potential before it is fully developed. They provide resources for experimentation, as well as encourage stimulation through interactions with open networks.

Design units bring people with different backgrounds together around the shared objective of coming up with strategic discoveries. Access to resources and an experimental approach support this structure. Sources of inspiration range from ethnographic approaches for discovering customers’ needs to data mining, to uncover hidden behaviors.

Stealth innovation relies on the organization giving some employees—usually those involved in technology and markets, but in certain cases people in other functions—room to experiment. In the early stages of a strategic discovery, ideas are often imported and adapted from other industries. This process is open in the sense that solutions in other industries are the real source of inspiration. With a “clean sheet” design approach and few constraints, talented individuals and teams can borrow freely from diverse industries—to devise a driverless car, a personal flying machine, or an ageless life.

Bounded innovation challenges people to overcome assumptions that are viewed as insurmountable or seen as immutable characteristics of the business. Both frugal and reverse innovation pursue solutions that start at the bottom of the pyramid,¹ but use creativity to keep getting better within their economic constraints and challenge more sophisticated markets.

Companies rely on these tools to different extents. Each requires a strong culture of innovation, passionate people, and dedicated resources for people to travel, explore, and interact with relevant networks. They work best when employees can easily establish relationships across functions and across networks. Design units work best for companies that prefer to have an innovation department focused on identifying ideas. Stealth innovation is preferred for more decentralized cultures, in which resources and a passion for breakthroughs exist in every corner of the company. Bounded innovation is used when top management has a specific vision but wants to leverage the creativity of internal people—in the form of a targeted design unit, or as an open challenge to the organization. A combination of the three solutions creates the greatest value in this front-end process, although it also requires more resources. Each solution needs space to breathe, and they are rarely successful when day-to-day pressure leaves little time and resources for exploration. Table 6.1 illustrates differences among tools for inspiring.

ATTRACTING IDEAS INTO THE STARTUP CORPORATION

As you know, managing inspiration is simply the first step in supporting strategic discoveries. Companies often do not follow inspiration with putting in place the structures necessary to move strategic discoveries forward. But innovation benefits from tapping the environment not only as a source of inspiration but also as a source of ideas. What we call the “Not Invented Here” syndrome rejects ideas from the outside as irrelevant to fueling the innovation process. While this syndrome was prevalent in organizations a decade ago—both in R&D departments and in market-facing departments—most companies have become aware of its limitations. Attracting ideas has become an important activity for innovation, benefiting from tools such as corporate venturing, discovery units, and innovation tournaments.

Table 6.1. Tools for attracting

Corporate venturing scans the environment to identify startups that can potentially stoke the innovation process. Strategic acquisitions can add new products to a company’s portfolio, or they can be part of an effort to craft a breakthrough solution. In the latter case, acquisitions are combined with efforts inside the company. Corporate investing provides options to promising startups that can later be integrated into the organization itself, or that can feed the larger ecosystem an organization is creating. In that instance, each investment is evaluated not on its own merit but by its contribution to the larger ecosystem.

Discovery units can be designed in different ways, but their purpose is to interact with innovators and establish relationships. Therefore they are generally located close to an innovation hub—a university, a research center, a neighborhood, or a region. Discovery units identify promising ideas and promising people and connect them with the company.

Corporate venturing as a mechanism for attracting ideas requires a relatively large investment, and hence is better suited for large companies. Although medium-sized established players have used startup investing to attract ideas, their process is less structured than that of a formal corporate venture division. Corporate venturing is best suited for industries with strong entrepreneurial activity, and often requires a presence in regions where such activity takes place.

Discovery units are frequently part of an innovation department. They require dedicated people to spend time establishing relationships within relevant networks and managing partnerships. Discovery units in large companies must bridge internal and external networks. For instance, Honda’s discovery unit in Silicon Valley is deeply involved in the various regional networks. But its challenge is to manage not only its relationships with those networks but also its relationship with the R&D department of Honda. The combination of fast-paced startup networks with slower-paced internal networks can be difficult.

Table 6.2. tools for attracting

Innovation tournaments attract ideas by offering financial prizes that encourage internal and external parties to explore solutions. The framing of the question—whether it is narrow, as in addressing a specific technology challenge, or broad, as in seeking the best general breakthrough idea—determines whether the resulting ideas feed incremental or breakthrough innovation. Innovation tournaments can be single or recurring competitions, but their structure largely determines their output. Table 6.2 compares various tools for attracting ideas.

COMBINING THE PIECES OF THE STARTUP CORPORATION

The activity of combining benefits from integrating internal and external ideas—bringing elements together to craft a new business model. The more complex the strategic discovery, the more relevant this collaboration and coordination role becomes. In a reverse of the “Not Invented Here” syndrome, many established organizations seem to suffer from the “Not Able to Invent Here” syndrome. They rely on attracting ideas from outside and ignore their employees’ inspirations.

Relying on external ideas—typically by collaborating with other companies or acquiring successful startups—is a powerful way to expand the portfolio of businesses into growth industries and to accelerate the innovation process. However, this strategy at times lacks an integrated solution. Without knowing how the structure of a new industry will work, and without understanding how the different pieces of the industry fit together, outsourcing the inspiration phase often leads to portfolios of interesting products that are only loosely related to each other.

Incubators are often more related to internal resources than are collaborative solutions or corporate venturing. They are a preferred solution for combining when the business model for a new innovation requires extensive experimentation. Incubators can establish relationships with external networks, but their reach is generally limited. Their structure is best adapted to moderate external coordination, limited to a few partners. Incubators efficiently work through experiments and are best suited for learning in highly uncertain environments.

Collaboration units are devoted to small partnerships and relationships with specific open networks. These units gain importance as external links become more critical. For instance, strategic discoveries that require significant contributions from universities or research centers weight these collaborative solutions more heavily. Innovation cells are related structures that integrate established companies into these critical centers of knowledge. Table 6.3 compares characteristics of different approaches to combining.

LEARNING FOR STRATEGIC DISCOVERIES

Discovering the technology and the right business model for a breakthrough requires fast experimentation cycles that maximize learning. Prototypes are a useful way to experiment. In early stages, they do not need to be elaborate or expensive—just enough to answer the question at hand. As learning progresses, they become more detailed to address more specific questions. Prototypes are not restricted to physical products; they can also be utilized for testing assumptions of the business model: what segments of the market are potentially interested, how the product or service can be delivered, or what complementary services can be offered. Software and Internet companies use the concept of the minimum viable product to describe the most basic version of a product that can be released to the market. The minimum viable product often lacks many of the features that will eventually be part of the product, but it offers enough functionality to learn from customers’ reactions, and it provides a platform for adding new designs and features. Its objective is to quickly enter the market to accelerate the learning from interacting with customers.

Table 6.3. Tools for Combining

Table 6.4. Tools for learning

Prototyping is a central aspect of learning. Incubators, stealth innovation, and bounded innovation all rely on different types of prototyping. The learning stage requires both the resources to carry out experiments and the passion to continue despite dead ends and discoveries not fully aligned with expectations. As learning advances, prototypes often become more costly and complex. Business model experiments can require the collaboration of a number of people and organizations.

Companies that follow aggressive, play-to-win strategies use incubators in different innovation hubs around the world, as well as ones close to R&D facilities or key markets.² These internal structures are connected to each other, and top management supports them by tapping the resources of the larger company. Table 6.4 compares the various tools for learning.

LEVERAGING STRATEGIC DISCOVERIES

Strategic discoveries that advance to the execution stage must make the transition from an entrepreneurial to a managerial approach to organizing. An entrepreneurial approach works best while the Startup Corporation team is determining whether and how their breakthrough idea can become a business. But once the team has discovered a scalable model, scaling becomes the focus.

All three aspects of leveraging—culture, growth, and management infrastructure—are relevant to any strategic discovery. Yet their importance varies depending on the fit of the strategic discovery within the company, and the leverage of existing resources in other parts of the company. Strategic discoveries that are similar to or compatible with an existing business unit will benefit from being able to leverage the unit’s existing culture and infrastructures to quickly scale. Leveraging existing resources makes fast and global deployment possible.

Strategic discoveries that do not naturally fit with existing businesses face a more difficult challenge. These Startup Corporations have to develop their cultures, growth strategies, and management infrastructures from the ground up. The team needs to decide how much of the company’s culture the Startup Corporation will maintain, and how much of their culture will be unique. If the expected outcome is to become a new division of the company, the Startup Corporation will benefit from adopting the core values of the company as its own. This common ground will facilitate communication and coordination going forward. Still, even if the core values are the same, the new division’s culture can have unique aspects. For instance, the new division might be more technologically driven and have a more technology-oriented local culture. Alternatively, it might have a more frugal approach to the business model, emphasizing emerging markets and cost consciousness.

Management infrastructure faces decisions similar to those surrounding culture. Strategic discoveries that will be integrated into an existing business unit benefit from using the current management infrastructure. Strategic discoveries that are likely to become a separate division or be spun off have more alternatives, either growing as an almost independent entity or leveraging existing business units’ resources. The final solution generally falls in the mid-range, between independence and full leverage.

The more the Startup Corporation can leverage the existing infrastructure, the faster it can grow. However, the existing infrastructure may not fully align with the needs of the new business, and the negotiation process with business units can be difficult. At a minimum, the Startup Corporation should leverage the global presence of the established organization as well as its relationships with supply and distribution chains. From this starting point, the Startup Corporation can negotiate sharing resources as a way to deploy quickly and to lower costs in initial stages. Business units with extra resources are likely to be happy to see them used, but business units working at capacity may have a hard time finding resources to share. Such situations require a more independent approach to leveraging. Table 6.5 lists the different tools for leveraging.

INTEGRATING STRATEGIC DISCOVERIES

The three options for integrating a strategic discovery are as a new division, spinning it off as a separate company, or reconfiguring it into an existing business unit. The fit between the new business and the current corporate strategy generally determines the choice.

Table 6.5. Tools for leveraging

A breakthrough product that does not alter the business-unit structure is easily incorporated into an existing business unit. Since the new product only needs to leverage resources the company already has deployed in markets, the structure of an existing business unit provides the fastest growth solution. When a breakthrough makes the product or products of a business unit obsolete, that business unit should transition to the new market. Though technically ideal, this solution can be challenging from a cultural perspective.

Spin-offs or trade sales (sales to other companies) are best suited to strategic discoveries that do not fit with a company’s current strategy, or with the alternative strategies envisioned going forward. While a spin-off or trade sale captures the financial value of a strategic discovery, integrating it as a new division is the most common solution. The new division has the flexibility to design itself based on the needs of its new business model, and at the same time it does not face the challenges of transforming an existing organization. Table 6.6 contrasts the alternatives for integration.

Table 6.6. Tools for integrating