By borrowing strategies from entrepreneurial disruptors, businesses
can stay nimble and create long-term value
Editor’s note:This article was written by Scott Snyder and Bill Seibel. Snyder is a fellow at the Mack Institute for Innovation Management, part of the Wharton School of the University of Pennsylvania; chief digital officer of Eversana; and author of the book, “Goliath’s Revenge: How Established Companies Turn the Tables on Digital Disruptors.” Seibel is author of “Press Go: Lessons Earned by a Serial Entrepreneur,” and former founder and chief executive officer of Mobiquity.
If history has taught us anything, it’s that big corporations struggle with disruptive innovation. Whether it’s missing a new wave — like IBM underestimating the value of the operating system, Kodak underplaying the impact of digital photography or J.C. Penney doubling down on brick-and-mortar stores as the “Amazon effect” was taking over retail — big companies seem to lack the ability to innovate ahead of the next disruption.
Instead, most big corporations become addicted to their business models and move from risk-taking in their early life to caretaking as they grow and mature, and then undertaking when it is too late to pivot to a new model before becoming obsolete.
The speed of innovation, accelerated by the recent events of the pandemic, has only intensified the pressure to transform in large corporations and is increasing the gap between the innovators and pretenders. And it’s not for lack of effort. More than 75% of companies have some form of innovation accelerator, yet more than 90% of these labs fail to achieve real financial impact. Some recent examples of high-profile corporate innovation efforts like GE Digital and Nokia Labs failed to save either company from serious disruption. With the vast resources of large enterprises, why are so few successful at disruptive innovation? What do successful corporations do differently? And why are startups able to beat them to the next market opportunity so often? We believe there are lessons learned from successful startups that can help large enterprises innovate, pivot and turn their ideas into ventures that can add long-term value.
Disruptor or defender
A recent Dell survey of 4,000 senior business leaders found that 78% of C-level decision-makers believe digital startups pose a threat to their organization now or will do so in the near future. The same survey revealed that 62% have already seen new competitors enter the market as a result of the emergence of digital technology. Business disruption is real and it’s accelerating. It seldom comes hard and fast like Uber. Instead, it targets segments of a company’s products and services, and manifests itself as death by a thousand cuts. Chief executive officers can decide to be either a disruptor or a defender. Both strategies are viable. Both require unbundling an enterprise’s products and services and exploring how innovation can impact each. And both are hard work.
But everyone knows that starting a new business venture is challenging. The odds aren’t great. Some 70% don’t survive, 20% break even and only 10% grow to achieve significant returns. And most startup leadership teams spend the bulk of their time raising very expensive capital from venture capitalists and acquiring customers, data assets and brand equity — things that large corporations already have.
Yet the odds of success for a new venture launched within an existing enterprise are even worse. Rubicon Intelligence reports that only 4% of them will ever reach $1 million in yearly sales, and only 0.4% reach $10 million. With the resources available within a large company (funding, expertise, market presence, global reach), why aren’t the odds better? Shouldn’t that make it easier?
How Davids disrupt
Startups generally don’t waste time with consultants and flip charts to find their top ideas or need to convince five layers of management to approve a new investment. They are typically born from the hypothesis of the founders to disrupt an existing market by creating a step-change in value compared with existing solutions. This requires a different mindset from how successful corporate executives running mature businesses might think. Some of the ways these startups think differently:
They embrace uncertainty. Startups require the ability to deal with uncertainty through most of their early life. They have an intense sense of urgency and can pivot quickly. They are skilled at executing Plan B because Plan A seldom pans out. They have no market share or existing revenue stream to defend. They don’t have to worry about upsetting existing customers, partners or distribution channels. Successful startups have an experienced team with an unwavering commitment to make their idea a success. Failure has a direct impact on their careers and personal lives, unlike corporate ventures where teams may feel little to no financial stake in the outcome.
They pick their team. Not building the right team is one of the top reasons why startups fail. Successful startup teams are composed of experienced entrepreneurs that possess both broad digital and innovation skills and expertise in key areas needed to bring the new product to market. They also share a passion for creating something special with game-changing potential. The best teams share a common set of values but include diverse points of view. Startup CEOs get to pick their team rather than being handed one, as is the case in most corporate innovation efforts, where politics may dictate team composition more than raw skills and capabilities.
They value agility. Business plans seldom survive their first contact with the customer. Successful startups pivot five times on average. Sometimes the founders need to tweak the technology, change their go-to-market strategy or even fundamentally rethink their business model. Every one of these scenarios is likely to occur at some point in a startup’s life. The best early indicator of a successful new venture team is its ability to execute Plan B. How good is the team at taking one step backward and turning it into two steps forward? Large organizations find it difficult to pivot. The more successful they have been, the harder it is and the more courage it takes.
They see opportunity in low-tier customers. Large companies tend to overlook third tier customers — the ones that are small, without a huge budget or a strong brand, and perhaps not as sophisticated as other customers. First tier customers have the most attractive profiles and are the targets of most of a large company’s marketing and sales efforts.
As a startup, opportunities are hard to come by and can’t be squandered. Being open-minded to a third tier customer that can move quickly and demonstrate outcomes for your product may be far more valuable to growing a business than whale hunting for a first tier customer that may take a year or more to make a decision. Winning the first customer always makes it easier to win the second.
How Goliaths innovate
Given the unique advantages of startups to create new ventures, how can large companies — or Goliaths — harness strength and scale to beat them at their own game? Here are three pathways for large enterprises to turn the tables:
Develop a second speed. While the core business must continually improve through incremental innovation to drive near-term returns, or first speed, companies must create a second speed capable of rapidly creating the next generation opportunities. And companies need to allow the teams operating at second speed to experiment, pivot and pursue seemingly unattractive markets without the daily scrutiny of existing business units. Without this protection, radical innovations will be exposed to the chorus of reasons not to do something, like, “This will cannibalize sales,” “We tried this before and it didn’t work” or “Our competition isn’t doing this.”
One structure that provides protection while also maintaining connection to the core business is a foundry model with several innovation teams capable of internal and external venture creation, and an investment committee composed of both insiders (business leaders and strategists) and outsiders (experts and venture capitalists) that can balance the strategic needs of the company with what new markets and new customers will truly value.
Cultivate intrapreneurs. Intrapreneurs have entrepreneurial DNA but relish the opportunity to leverage the scale and resources of a big company to drive meaningful impact. Large enterprises have access to data, customers and markets that startups envy. Intrapreneurs can navigate both speeds of a large organization. They also need the ability to build T-shaped teams that marry new digital talent and thinking with legacy talent that has the institutional knowledge and ability to grow new innovations using the company’s resources.
Despite how critical these unique venture leaders and teams are, most companies do not create an environment that attracts intrapreneurs or gives them a path to thrive inside their companies. Here are a few ways to break through in building a strong pool of intrapreneurs:
Make sure to balance both internal development and external hires. Create a healthy mix of external digital and venture talent with “edge-thinkers” that know the business.
Create a new rewards structure for internal ventures that includes longer-term asymmetric payoffs instead of just short-term rewards.
Encourage and celebrate “risky” career moves in the best talent, even if it includes being part of a failed venture because even failures teach the company something.
Help startups to scale. Instead of trying to do everything inside, corporations have an opportunity to multiply their innovation capabilities by partnering with innovators outside their walls, especially in pursuing opportunities where the internal capabilities and speed are insufficient. Under Alan George “A.G.” Lafley, P&G was one of the first major companies to demonstrate the power of external innovations with its Connect and Develop program, which increased new innovations coming from external sources from 15% to 45%.
But most corporations are not set up to successfully partner with tech innovators or startups. Instead, they apply their traditional ways of doing business and suffocate the innovative potential in these startups with legal, financial, compliance and security reviews before even seeing the potential value these innovations can deliver. External innovations need the same attention and protected pathways as internal ventures. Instead of tossing the opportunity over to a partnership group with little to no experience in new venture creation, set up an innovation leader and team responsible for validating and scaling the new opportunity, including navigating corporate structures to ensure the new innovation partner does not get crushed or run out of capital before it even gets started. Intrapreneurs are best positioned to shepherd these opportunities through, just as they would for an internally incubated venture.
David’s mindset in Goliath’s body
The biggest risk to future success and becoming a disruptor is a company’s existing business model, culture and bureaucracy. Every company was a startup once in its history, but most of the startup DNA mutates into mature corporate thinking over time, which is why most entrepreneurial talent chooses to leave. Cisco’s ability to retain more than 150 former entrepreneurial CEOs of previously acquired companies under John Chambers is an exception, not the rule.
Running at digital speed and shaping the disruption in a market will require a different approach to leadership, culture and talent than what has worked in the past. Big corporations need the willingness to disrupt themselves on a continual basis, develop their own ambition to drive step changes for their customers, and create an environment where intrapreneurs can grow and thrive. Then they can harness the advantages of both the attacker and the incumbent to build their own unique advantage in the marketplace battlefield. •
Republished with permission from Knowledge@Wharton, the online research and business analysis journal of the Wharton School of the University of Pennsylvania based in Philadelphia.