By Lou Kerner
Established companies increasingly fund startups and take numerous measures as they seek to create innovative new businesses.
Just based on the numbers, you wouldn’t think established companies would be scared by the $50 billion invested this year in the U.S. by venture capitalists. The companies themselves will collectively spend over $330 billion this year on research and development, according to R&D Magazine.
Yet VC money is funding aggressive newcomers like Uber and Airbnb, and aims to create the next Teslas, Facebooks and Googles. Insurgent startups seem to be targeting every industry and even inventing new ones. The startups are wielding the weapons of the Internet—cloud, mobile, social, and data analytics—and deftly taking advantage of connectivity and the flattened business environment it enables.
As we enter the most disruptive period in business history, established companies with deep pockets—the ones you might call the “disruptees”—are waking up and determined to fight back. Many are refocusing their own efforts to innovate and stay relevant. The result is a stunning range of initiatives.
Cash rich corporations run by smart people are going to try aggressively to adapt–by spending lots of money. The $330 billion in R&D spending should be a great start. But for corporations, there’s little correlation between what they spend on R&D and the amount of innovation that results. A recent Booz Allen survey ranked Tesla the 9th most innovative company among the Top 500 global spenders on R&D. That is despite the fact it only spent $300 million in 2013, coming in at number 377.
But there are plenty of ways to spend on innovation. The easiest is to acquire it. The impact can be immediate, which makes it appealing. In the second quarter of 2014 U.S. companies announced $625 billion in deals, up more than 58% over the same period a year earlier. According to a recent report by PricewaterhouseCoopers, “Transformational” M&A (which generally includes innovation) is now the number one reason for targeting a particular company. But acquisitions are tricky, and the Harvard Business Review recently reported that between 70 percent and 90 percent of M&A deals fail.
Another rapidly-growing trend is ordinary companies investing in the disruptors. That’s why corporate VC investment jumped 221 percent in the first half of 2014, to over $7 billion (see chart). Such deals now comprise roughly 30 percent of all VC investing.
The third way corporations are spending on innovation is by participating in the rapidly growing Incubator/Accelerator movement, in which teams come together to innovate in special physical spaces fitted out with resources and staffed with experts in entrepreneurship, design, finance, marketing, and other disciplines. Some companies create internal startup incubators. Samsung, Orange, and Turner Broadcasting’s Media Camp are examples. Incubation experts are increasingly lending the big guys a hand. Techstars has eight of its own standalone incubators (in Boulder, New York, Austin, London, and elsewhere). Now it is partnering on private incubators with six companies, including Disney, Nike, and Barclays.
Corporate co-parenting is yet another approach, when multiple companies join together to incubate products, services, and startups. Bosch, State Farm and Panasonic joined together around a common theme to create Plug and Play’s Internet of Things Incubator. Other operations focus around a specific industry, like New York Fashion Labs, whose partners include J. Crew, Ralph Lauren, and Kate Spade. In London, MasterCard, Lloyds Bank and Rabobank joined together in an incubator specializing in financial technology, run for them by Startupbootcamp, which has seven accelerators in Europe and one in Israel.
Xerox Parc (Palo Alto Research Center) opened in Silicon Valley way back in 1970. Now numerous other corporations are setting up their own Silicon Valley innovation centers. Walmart Labs was formed out of the acquisition of Kosmix in 2011, and has focused heavily on mobile strategy. Ford Motor set up its Lab in Palo Alto in 2012 to focus on “…user experience, open innovation and big data.”
Partnerships are yet another way to stimulate innovation. In November 2013 GE announced a partnership with Quirky, which specializes in crowdsourcing innovation and invention. They introduced the Quirky Inspiration Platform, which provides open access to a library of GE patents across several product categories. The partnership’s first product, a Wi-Fi enabled air conditioner, hit retail stores in April 2014. However, GE recently announced it was selling its appliance division to Electrolux. So Quirky loses access to some patents, though the Inspiration Platform will live on. Consumer packaged goods giant Unilever estimates that 70 percent of its innovation is linked to working with strategic suppliers. In one program, seven Unilever brands including Hellman’s and Vaseline each awarded $100,000 to a digital media start up that then joined the brand in a pilot marketing program.
The ultimate way to stimulate innovation is to change the corporate culture, so it begins to happen naturally and regularly. Google’s famous 70/20/10 model encourages employees to spend 70 percent of their time on core business tasks, 20 percent on projects connected to the business (incremental innovation), and 10 percent of time on unrelated ideas (disruptive innovation). This model is hard for most organizations to replicate, so they institute more bite-sized programs. Coke’s Startup Weekend is an annual 54-hour event where 100 Coke associates pitch ideas. Hasbro, Accenture and GM’s Chevrolet hold corporate hackathons, where hundreds of people from outside the organization gather for a short period of time to advance specific corporate innovation initiatives.
Big companies would love to manage innovation the same way they manage everything else, with metrics and discipline. Unfortunately, it doesn’t work that way. Entrepreneurs are willing to take risks in ways most executives simply could not abide.
The sad reality is that corporate giants have been failing at innovation for years. As the pace of technology change picked up in recent decades, the lifespan of companies in the Fortune 500 radically declined. It took 28 years for half of the 1955 Fortune 500 class to disappear. Half of the class of 1995 were gone 15 years later. You have to innovate–or you die.
This article appears in the 2014 Year-End Edition of Techonomy Magazine.
