Tuesday, October 12, 2021

Why corporate innovation is harder than a startup

 Since innovation is a difficult and often misunderstood word, or perhaps just because it is used to mean different things in different contexts, it can be difficult to understand why innovation at an entrepreneurial company or a startup is different from innovation in a corporation.  I think the matter is obvious, but I wanted to explore the challenges and issues of innovating as an entrepreneur and contrast them with the challenges and opportunities of innovating in a larger corporation.

First, let's just get the record straight.  Both the entrepreneur and the corporate innovator have equal claim to the word "innovate".  Both, if they are doing their job well, are creating new products and services that have value for customers or stakeholders.  It's just that the conditions and context each faces is radically different.  Since I've had the opportunity to work for funded startups and for larger corporations, I've seen the differences, and, while I'd like to say it's getting better all the time (Modern English reference there), it's actually getting worse, for both parties.

Innovating as a startup

No one starts a business without a great idea.  The source of that idea may be frustration with the way things work today, or an insight about new products or feature, or observation of an emerging market that has new and unmet needs.  But every entrepreneur has an idea.  If they are doing their job well, they have exactly one idea, and they place everything they have behind that one idea and explore it until it wins, or until they need to pivot to a new idea or a new delivery model.  Note the emphasis on one idea.

Entrepreneurs are blessed with the fact that they need to focus everything - all mental time, all resources, all hopes and dreams - on one idea.  This focus is a blessing, since it allows the entrepreneur to ignore other opportunities or alternatives.  Since most entrepreneurs are building their businesses from scratch, and hope to have a significant impact on the status quo, they don't have past infrastructure or products to keep whole, and aren't worried about upsetting the existing market or infrastructure.  This is also a blessing for the entrepreneur when innovating - there are no existing investments or infrastructure or revenue streams that constraint you.

What has become more of a challenge lately for entrepreneurs is outrageous expectations.  In corporations, if you can create a new product, you are celebrated.  In startups, if you can't create a billion dollar unicorn in three years, people wonder why.  The unicorn phenomenon makes it exceptionally difficult to get good ideas funded, when everyone wants to see a "nine zero" or "ten zero" outcome.  

The recent shakeup in the workforce due to COVID, and due to a great rethink about how people want to work and live will create benefits for the entrepreneur.  I think good talent is going to be easier to obtain, since many people will leave their corporate jobs and start companies or join startups or smaller companies.

Innovating in a corporation

The corporate innovator can be just as much an innovation and an entrepreneur (or intrapreneur) as an external entrepreneur.  The internal innovator simply has to juggle different issues and priorities. 

First, within any company there are likely to be five to ten people who think they have a great idea that the company should fund and launch.  This means there are competing interests for an often limited set of innovation funds (assuming any funds are available for innovation).  Further, it's likely that each of these innovators have radically different ideas, making it hard to compare them and understand their value to the company.  Thus, an innovative company with multiple intrapreneurs or innovators should have a regularly evolving portfolio of ideas, which leads to selection and prioritization.

Not all the ideas in a company can get funded and resourced, so good internal innovators need to understand what is vital to the company and how their idea will be evaluated and prioritized.  A really great idea that can't get funded or resourced has no value.

Internal innovators also face the fact that many of their ideas will create great risk to existing operations, in one of several ways.  First, the idea may threaten an existing product or service which is already generating revenue.  This asks the company to bet on future earnings not yet proven over current predictable earnings, always a difficult choice.  Second, the idea may threaten not a product, but an entire opportunity or industry.  It may create a new business model or way of working that, while valuable to customers, the company cannot shift to meet, and threatens the company.  Third, good ideas may simply be beyond the reach or capability of a company, and while recognized as valuable, simply cannot be realized by the company except as a spin out.  There are more examples but you can see that corporate innovators have to confront the fact that the company is currently making money and has investments, and any new idea, no matter how good an idea it is, could threaten those existing revenue and profit streams.

There's another significant difference, but it is more subtle.  Entrepreneurs are naturally risk tolerant or even risk seeking, but corporations have been trained and refined over time to mitigate and minimize risk and uncertainty.  External entrepreneurs know and accept risk as part of their founding - many, many startups fail.  Failure in a funded project in a corporation is typically judged rather harshly, and over the last 3 to 4 decades with outsourcing, rightsizing, cost reductions, six sigma and more, we've trained a management cadre to dislike change, risk and uncertainty.  So any new idea is often called into question, and closely examined for risk.  Corporate cultures play a significant role in limiting innovation in large companies, but should not create nearly the same barriers for startups.

Funding is both a blessing and a curse for corporate innovators.  I've rarely worked in a large company that could not afford to conduct an innovation project - most innovation projects cost at most a few million dollars, from initial trend spotting and idea generation to launch of a new product.  This is a price tag that most companies can easily afford.  The funding is available, but hard to acquire.

Funding is hard to acquire for a couple of reasons.  First is the budgeting cycle.  Most firms plan and budget on an annual cycle, so if the product group or business unit did not budget for an innovation project, they either need to wait for a new round of budgeting or need to steal or borrow funds from another project.  Which means someone's ox is going to get gored in the process.  Funding is also difficult to acquire because it's easier to spend money on cost saving activities (which impact the bottom line quickly) rather than new product or service development ideas, which may generate future revenues, but not in the next few quarters.  Third, since most organizations don't have a lot of experience developing and running innovation projects, they don't have good frameworks or models about the costs of the projects.

Development and launch can be difficult for an internal innovator, because those can be different "departments".  Even if the innovator can develop and validate an idea, there are many competing priorities to get limited development and launch time, and often an innovator in a large company does not own or manage the development and marketing resources needed to complete the project.

Differences

The entrepreneur places all their emphasis on one idea, and has little concern about disrupting a market or industry.  In fact, many ideas hope to do just that.  The entrepreneur does not worry about existing products or revenue streams or competing internal products, because they don't exist.  What the entrepreneur does worry about is funding, and especially the expectations of the funders, in a time when unicorns and billion dollar valuations are possible.

The internal innovator worries about funding, market opportunities, competing projects, the risk associated with conducting innovation in a large corporation, decision making and timeliness.  Added to this the internal innovator worries about funding but in a very different way than an entrepreneur.

Both worry about the value of their ideas, their insight into market needs or emerging markets, and the impact or power of the culture of their organizations.  Both use the same set of tools and frameworks.

Hat tip to the corporate innovator

So, here's a tip of the hat to the corporate innovator, and an explanation for what draws me to want to work with them.  They have a tremendous opportunity, and a significant number of obstacles to overcome.  Not only must they find valuable ideas, they must run a gauntlet of competing interests, difficult funding mechanisms, development and launch programs they don't own or manage, and a culture that is at best neutral to what they are doing.  All the while realizing a new idea as a valuable new product or service for customers.  They are doing everything that an entrepreneur is attempting, but with many more intangible obstacles in the way.

The one really compelling factor for the external entrepreneur is job risk - an entrepreneur is betting everything on themselves, their small team and their idea.  If the idea fails, if the market shifts, if another company beats them to the punch, then the entrepreneur may have to start all over again from scratch, with no safety net.  While the obstacles for the external entrepreneur may be fewer, the results can be either much more beneficial (an IPO) or much worse (shutting down the startup).

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posted by Jeffrey Phillips at 6:20 AM 0 comments

Wednesday, October 06, 2021

The cost of innovation

 For many years, in writing this blog, and in leading innovation projects for my clients, I tried to advocate for the benefits of innovation.  After all, as the saying goes, sell the sizzle, not the steak.  Benefits that could be achieved from innovation seemed the right way to convince business executives and government officials that they should commit to innovation projects, and eventually to innovation capacity.

The companies that do make the bet, and that do focus on innovation, often show the benefits in terms of higher profits, greater market share and higher stock prices.  But those benefits are often realized in the future.  This means it can take a visionary leader to establish an innovation project or program, who may not be in place when the benefits are realized.

Rather than discuss the benefits from innovating, I've also written about the costs of not innovating.  We don't have to look far in the corporate scrap heap to find firms that were leaders (Nokia, Kodak) but became obsolete due to a failure to notice changes in the market.  Worse, some of these, Kodak in particular, were potential leaders in innovative technologies or business models but "stuck to their knitting" and lost market share and profits.  But the cost of not innovating is a lot like the cost of not maintaining your streets.  Eventually, there will be problems like potholes, but that will be the responsibility of the next generation of leaders.  No one gets elected promising more dollars for maintenance.

But what about the costs of innovating?

What few people talk about are the costs of actually doing innovation, that is, if a company can decide to innovate, either in a one-off project or more particularly to build and sustain an innovation capability, what are the costs of doing innovation?  And, are these costs significant?

I believe there are at least three types of costs associated with doing innovation, and they rise or fall based on the type (project or building capability) and expected outcome (incremental or disruptive).  These costs are cultural or psychological (the psychic cost of doing innovation), trade-off costs (doing one project rather than another), and the actual hard dollar spending that can be associated with an innovation project.  Let's examine each in turn.

Cultural or Psychological costs of innovation

Innovation is often such a new idea (once we get beyond the concept of incremental innovation, or adding a new feature to an existing product or service) that planning and conducting an innovation project can be psychologically difficult or better, culturally challenging, to many organizations.  And the more the innovation work is aimed at building a capacity rather than a one-off project, or the more the innovation work could disrupt or transform an existing market or current product, the more resistance will build.

Why is innovation so expensive culturally or psychologically?  Because anything beyond incremental innovation threatens the status quo of the industry, or another product or revenue stream in the business.  These ideas may indicate significant changes are required in the existing business model.  They may point out blind spots in how the company is structured or goes to market.

In the end, everyone wants the new revenue a new product will generate, but few people want the cultural change that could be required.  Note that this cost is relatively "high" but not based on dollars - this cost is calculated by the amount of time and energy senior executives need to commit to changing perspectives and culture.

Alternatives or Trade-off costs

In any business, executives make choices across a range of project opportunities.  When, or if, an executive chooses to fund an innovation project, or better to build an innovation capacity, they are choosing NOT to do something else.  One definition of strategy holds that strategy is illustrated by what executives say "no" to.  When making a choice, one project or activity gets funded and another one or more than one does not.  This is a trade-off cost.

What always strikes me is how low most of the trade-off costs for innovation projects are.  That is, when executives are presented with several projects and one is a promising innovation project and others are routine existing product extensions or other activities, the times executives select something other than the innovation project, the costs and benefits seem so low.

The reason for that is that even those exceptionally small potential benefits from known projects are easier to obtain than larger benefits from a risky innovation project.  We've educated generations of managers and executives to make safe, small bets. In a climate where change was incremental and most organizations moved slowly, that logic was solid.  I'm not so sure that logic holds any more.

There is always a cost for any project, both in hard dollars and in resource allocation, so making a choice for innovation projects or capabilities is not easy, but we should always examine the alternatives and ask, just how high or low is the hurdle for the alternative?

We need to find ways in our organizations to make not pursuing an innovation project the risky bet or the lower cost alternative.

Actual Spending

What isn't always appreciated by most companies is that actually conducting an innovation project is relatively inexpensive from a spending perspective.  I've run dozens of "front end" projects ranging from a few months to over a year and a half, and I can say that we've never had a project cost more than about $1M.  For larger firms, I've seen so many competing projects produce far less outcome with much larger budgets.

The actual hard dollar cost of innovation - the actual outlay on consultants (if they are required), training, tools, market research, and so on - is not high.  Getting good ideas, and even evaluating them, prototyping them and getting market feedback is simply not that expensive.  To be fair, costs generally rise as the goals (disruptive innovation) become more challenging, but even in longer term disruptive or transformative innovation work, these projects are still relatively low cost in comparison to other projects that businesses consider.

What can be expensive is new product development - that is, taking a new idea and running it through a product development process and then launching it in the market.  The "front end" of innovation - what many firms aren't that good at - is not that expensive.  The "back end" or product or service development and launch - which most corporations should excel at - can be more expensive, but this should be where the company's expertise lies.

So it is strange to me that while innovation has a high upside (with some failure risk clearly involved) and a relatively low cost (at least in monetary terms) that companies don't do more innovation, more consistently.  The issue cannot be financial.  Other projects are far more expensive to conduct.

Structural and Cultural Problems

The problem has to be both structural and cultural.

Structural in that our budgets and team structures are designed in annual time slots and for business siloes, when innovation doesn't acknowledge either.  Most organizations aren't organized or structured for this type or work, and we don't budget this way.

The problem is cultural because managers and executives are educated to make small, safe bets rather than support larger or more interesting innovation projects.  The problem is also cultural because most interesting innovation work challenges or threatens existing structures, hierarchies, business models or existing products.  Interesting innovation will always create change, and few organizations are nimble enough or open to change in order to embrace innovation.

The cost of innovation, low and high

The data is in.  Innovation has a fairly low monetary or financial cost, but often has a very high cultural cost.  Until we 1) lower the cultural or structural costs and 2) demonstrate that innovation is the low cost, low risk alternative, innovation will most often be the project on the back burner.

For anyone who is interested in doing innovation in a corporation, recognize that the actual monetary cost of doing an innovation project is low, but the psychic cost can be much higher.  Therefore, work on the psychic costs early and broadly across the organization, before worrying too much about the monetary costs.  I've rarely seen an innovation project curtailed for lack of funds, but often seen them curtailed or ended by lack of commitment or concerns about risk.

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posted by Jeffrey Phillips at 6:05 AM 0 comments