The following article was written by Scott Snyder, a senior fellow at Wharton’s Mack Institute for Innovation Management and author of the book Goliath’s Revenge: How Established Companies Turn the Tables on Digital Disruptors, and Bill Seibel, author of Press Go — Lessons Earned by a Serial Entrepreneur, and former CEO and founder of Mobiquity. Snyder is also Chief Digital Officer at EVERSANA.
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 JC 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 scale and mature, and then “undertaking” when it is too late to pivot to a new model before becoming obsolete.
The speed of digital innovation, accelerated by the recent events of COVID-19, has only intensified the pressure to innovate in large corporations and is increasing the gap between the innovators and pretenders. And it’s not for lack of effort. Over 75% of companies have some form of innovation accelerator or lab, yet over 90% of these labs fail to achieve real financial impact (Cap Gemini, 2019). Some recent examples of high-profile corporate innovation efforts like GE Digital and Nokia Labs failed to save either of these companies from serious disruption. With the vast resources that large enterprises have access to, why is such a small percentage successful at disruptive innovation? What do successful corporations do differently? And why are start-ups able to beat them to the next market opportunity so often? We believe that there are lessons earned from successful startups that can help large enterprises innovate, pivot, and turn their ideas into successful ventures that can move the needle on their long-term value.
David vs. Goliath on the Digital Battlefield
A recent Dell survey of 4,000 senior business leaders found that 78% of C-level decision-makers believe digital startups will pose a threat to their organization now or in the near future. The same survey also reveals that 62% have already seen new competitors enter the market as a result of the emergence of digital technology. Gartner adds that 125,000 large organizations are launching digital business initiatives now and that CEOs expect their digital revenue to increase by more than 80% by 2020. 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. CEOs 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.
With the vast resources that large enterprises have access to, why is such a small percentage successful at disruptive innovation?
But everyone knows that starting a new business venture is challenging. The odds are not great. Seventy percent 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 VCs (often expecting 25%-30% IRR) and acquiring customers, data assets, and brand equity — things that large corporations already have! Yet the odds 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 .4% ever reach $10 million. That doesn’t even begin to move the needle for a large corporation. With all 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? It’s just the opposite. Rubicon reports that the success of a new venture is inversely proportional to the amount of corporate help.
What Makes Startups So Disruptive?
Digital startups don’t waste time with consultants and flipcharts 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 to existing solutions. This requires a very different mindset compared with how successful corporate executives running mature businesses might think. Some of the ways these startups — or “Davids” taking on Goliath — think differently are:
1. 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 occurs. 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 career and personal life, unlike corporate ventures where teams may feel little to no financial stake in the outcome.
2. 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 versus getting handed one, as is the case in most corporate innovation efforts, where politics may dictate team composition more than raw skills and capabilities.
3. 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, evolve their go-to-market strategy, or perhaps fundamentally rethink their business model or use cases. 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 their 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.
4. They See Opportunity in Low-end Clients
Large companies tend to overlook Tier 3 customers. They are the ones that are small, without a huge budget or a strong brand, and perhaps not as sophisticated as other clients. Tier 1 customers have the most attractive customer profiles and are the targets of most marketing and sales efforts.
But, as a startup, if your business model is still evolving, so is your best-fit customer profile. Opportunities are hard to come by and you can’t afford to squander them. Being open-minded to a Tier 3 customer that can move quickly and is willing to help you demonstrate outcomes for your product may be far more valuable to growing your business than “whale-hunting” for a Fortune 500 client that may take a year or more to make a decision. Winning your first customer always makes it easier to win your second.
How Can Goliaths Out-innovate the Davids?
Given the unique advantages of startups to create new ventures, how can we harness the strength and scale of established companies — or Goliaths — to beat them at their own game? Below are three pathways for large enterprises to turn the tables on disruption.
1. Develop a Second Speed
While the core business must continually improve through incremental innovation to drive near-term returns, or Speed One, companies must create a Speed Two capable of rapidly innovating the next generation opportunities that will disrupt the core business someday. And this second speed is highly unpredictable and needs air cover to allow the teams pursuing these disruptive ideas to experiment, pivot, and pursue seemingly unattractive markets without the daily scrutiny of the 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,” “Our competition isn’t doing this,” or “This represents a huge security risk.”
One structure that we have seen be successful that provides protection while also maintaining connection and sponsorship by 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 VCs) that can balance the strategic needs of the company with what new markets and new customers will truly value.
2. Cultivate Intrapreneurs
Intrapreneurs have entrepreneurial DNA but relish the opportunity to leverage the scale and resources of a big company to drive meaningful impact. Whether it’s building new AI-based models to identify patients at risk of disease or validating a new self-driving car feature, large enterprises have access to data, customers, and markets that startups can only dream of. Intrapreneurs can navigate both speeds of the organization to access these assets and apply them to new ventures, but they need protection and support. 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 access to “crown jewels” from the legacy business to scale new innovations using the company’s resources.
[Disruption] 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.
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. A few ways to break through in building a strong pool of intrapreneurs are: 1) Make sure you balance both internal development and external hires. You need a healthy mix of external digital and venture talent with edge-thinkers that know the business. 2) Create a new rewards structure for internal ventures that includes longer-term asymmetric payoffs versus just short-term rewards, and 3) encourage and celebrate “risky” career moves in your best talent, even if it includes being part of a failed venture. Because even failed ventures create learning that benefits the company.
3. 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 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 demonstrating 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 your partnership group with little to no experience in new venture creation, you need to set up an innovation leader and team responsible for validating and scaling the new opportunity including navigating the corporate antibodies 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 your market will require a different approach to leadership, culture, and talent than what has worked in the past. You need the willingness to disrupt yourself on a continual basis, develop your own unique ambition to drive step-change outcomes for your customers and society, and create an environment where Intrapreneurs can grow and thrive. Then, you can harness the advantages of both the attacker and the incumbent to build your own unique advantage in the future digital battlefield.
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This article first appeared in www.knowledge.wharton.upenn.edu
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