This is the second in a series on the changing models of corporate innovation co-authored with Steve Blank. Steve and I are working on what we hope will become a book about the new model for corporate entrepreneurship. Read part one on the Evolution of Corporate R&D.
Innovation and R&D Outposts
For decades, large companies (see Figure 1 below) have set up R&D labs outside their corporate headquarters, often in foreign countries, in spite of having a large home market with lots local R&D talent. IBM’s research center in Zurich, GM’s research center in Israel, Toyota in the U.S are examples.
These remote R&D labs offered companies four benefits.
- They enabled companies to comply with local government laws – for example, to allow foreign subsidiaries to transfer manufacturing technology from the U.S. parent company while providing technical services for foreign customers
- They improved their penetration of local and regional markets by adapting their products to the country or region
- They helped to globalize their innovation cycle and tap foreign expertise and resources
- They let companies develop products to launch in world markets simultaneously
Other companies operating in small markets with little R&D resources in their home country (ABB, Novartis and Hoffmann-La Roche in Switzerland, Philips in the Netherlands and Ericsson in Sweden) pursued R&D outside their home country by necessity.
Figure 1: Internationalization of corporate R&D
source: Market versus technology drive in R&D internationalization: M von Zedtwitz, Oliver Gassmann
Innovation Outposts Are Moving To Innovation Clusters
Today, large companies are taking on a decidedly 21st-century twist. They are putting Innovation Outposts into Innovation Clusters -in particular, Silicon Valley – to tap into the clusters’ innovation ecosystems.
(An Innovation Cluster is a concentration of interconnected companies that both compete and collaborate. Silicon Valley, Herzliya in Israel, Zhongguancun for software and Shenzen for hardware in China are examples of technology clusters, but so was Detroit for cars, Hollywood for movies, Milan for fashion.)
In the last five years, hundreds of large companies have established Innovation Outposts (and here) in Silicon Valley. The charter of these Innovation Outposts is to monitor Silicon Valley for new innovative technologies and/or companies (as emerging threats or potential tools for disruption) and then to take advantage of these innovations by creating new products or investing in startups.
While that’s the theory, the reality is that to date, most of these Innovation Outposts are at best another form of innovation theater – they make a large company feel like they’re innovating, but very few of these outposts change a company’s product direction and fewer impact their bottom line.
Companies who want their investments in Silicon Valley to be more than just press releases need to think through an end-to-end corporate outpost strategy.
This series of posts offers companies the tools to develop an Innovation Outpost strategy:
- Determining whether a Corporate Innovation Outpost is necessary
- Planning how to establish an Innovation Outpost
- Deciding how to expand the Outpost
Sense and Respond
The first objective of an Innovation Outpost is to sense, i.e., look for or monitor the development of potential innovations that:
- Can become threats that could lead to the disruption of the corporate parent. For example, American Express’s Silicon Valley Innovation Outpost is monitoring innovations in financial technologies that are created by companies such as Square. Evangelos and I are in the process of developing a tool for diagnosing corporate disruption through innovations pursued by startups.
- Would allow the corporation itself to be disruptive by entering adjacent markets to the ones it currently serves or creating and introducing novel and disruptive offerings for new markets. For example, USAA is looking for software innovations that will enable it to introduce Usage-Based Insurance products to disrupt the car insurance market.
The second objective of the corporate Innovation Outpost is to respond to identified threats and potential opportunities. Companies tend to set up their outposts to respond in one of five ways:
- Invent: They establish project-specific advanced development efforts like Delphi Automotive’s autonomous car navigation project or broader Horizon 3 basic research efforts that take advantage of, or investigate, technologies and business models the innovation ecosystem is known for in order to create new products and services. For example, Verizon’s Silicon Valley R&D center focuses on big data and software technologies, as well as online advertising-based business models. Sometimes these Horizon 3 research efforts may be associated with a moonshot the corporation would like to pursue as is the case with Google (Google Car), Apple (iPhone) and IBM (Watson).
- Invest: They allocate a corporate venture fund that invests in startups working on technology and/or business model innovations of interest. For example, UPS recently invested in Ally Commerce in order to understand the logistics opportunities arising from manufacturers selling directly to consumers rather than through distributors.
- Incubate: They support the efforts of very early stage teams and companies that want to develop solutions in areas of interest–for example, Samsung’s incubator focuses on startups working on the Internet of Things—or they experiment with new corporate cultures and work environments –for example, Standard Chartered Bank’s startup studio.
- Acquire: Companies buy startups in order to access both the innovations the startups are developing and their employees and in the process inhibit competitors from getting them. For example, Google acquired several of the robotics startups that had what was considered the best intellectual property.
- Partner: Collaborate with startups in order to develop a disruptive new solution using their innovations along with the corporations or to distribute innovative solutions the start-up has developed. For example, a few years ago Mercedes partnered with Tesla in batteries for electric vehicles.
After working with over 100 companies, Evangelos and I clearly see that some of these five responses are more effective than others. Moreover, the speed of the response is as important as the ability to respond. Corporations that establish Innovation Outposts often lose on speed, not on their ability to sense. What makes an outpost an effective contributor versus one that’s simply an expense item starts back at corporate headquarters with a company’s overall innovation strategy. So before we talk about the tactics of establishing an outpost, let’s think about what types of discussions and decisions should first happen at the “C-level” before anyone leaves the building.
- Companies are establishing Innovation Outposts in Silicon Valley.
- They do this to sense and/or respond to technology shifts.
- “Sense” means monitor the development of potential innovations that can become threats or would allow the corporation to be disruptive.
- “Respond” means, Invent, Invest, Incubate, Acquire or Partner.
- Most of these Innovation Outposts will become Innovation Theater and fail to add to the company.
The next post will describe The Six Critical Decisions to Make Before Establishing an Innovation Outpost.