With existing business models in many different industries reaching maturity and providing little or no growth, and startups disrupting them with their new solutions, corporations find themselves more than ever in need for creating new businesses. But few corporations are able to consistently create from scratch new, big businesses that use innovative technologies and employ novel business models. For reasons explained here, it is slowly becoming apparent to corporations that the innovation model that is based solely on the efforts of corporate R&D organizations is no longer sufficient for addressing the long-term growth goals they need to achieve. To address these issues, achieve their growth goals, and avoid being disrupted corporations are starting to tap on the innovations of startup ecosystems. However, they must now learn how to select and grow these startup-centric efforts into their next-generation core businesses.
Because of the challenges they face, corporations must learn to innovate:
- At a faster rate and more cost-effectively;
- By leveraging entrepreneurship and intrapreneurship;
- By combining technology with business model innovations;
- By understanding the different levels of risk involved with each innovation type, and assessing the effectiveness of each innovation through a portfolio-management approach and Key Performance Indicators (KPIs) that are appropriate for the type of innovation.
In developing my Startup-Driven Corporation Innovation Strategy, I have found it useful to build upon the work on the Three Horizons of Growth framework. According to this framework, corporations must operate across three horizons. Horizon 1 (H1) includes the corporation’s core businesses, the ones whose business models provide the greatest profits and define the corporation’s brand. For example, P&G’s Tide detergent business, or BMW’s Series 3 compact car business. Horizon 2 (H2) includes emerging opportunities that have already gained significant traction. Amazon’s Echo business is an example of an H2 business. Horizon 3 (H3) includes the corporation’s efforts, essentially experiments, to harness disruptive ideas that could provide profitable growth in the future, once the appropriate business model is identified. For example, the experiments conducted by various financial services institutions, such as Barclays, around blockchain technology.
In reality most corporations focus the bulk of their innovation efforts on extending the life of their H1 businesses. In fact, corporations such as Unilever and American Express routinely partner with or acquire startups to gain access to specific technologies that could help them address their H1 innovation needs. Some corporations are also successful at identifying and investing in H2 initiatives that are based on adjacencies of H1 businesses and using them to eventually create new H1 businesses. For example, Boeing created the Boeing Business Jet as an adjacency to its venerable 737 passenger jet by investing in new technologies and targeting a new market. It succeeded in creating a new, strong business unit. I’m a big fan of the technology and business model experimentation that occurs in Horizon 3 and the innovation opportunities to the corporation.
Corporations are becoming more comfortable at launching H3 experiments. As we have described in other articles, corporations from many industries are establishing Innovation Outposts in clusters such as Silicon Valley and Israel. Through these Outposts corporations incubate, invest in, partner with, and acquire startups. To these startup-centric H3 experiments one has to add certain relevant corporate R&D efforts.
However, even as they are improving in their ability to launch H3 experiments, corporations fail in consistently growing these efforts to the point where they become their next-generation H1 core businesses. In order to improve in this area, corporations must:
- Become ambidextrous organizations continuously executing well on their H1 business models and continuously innovating across all three horizons.
- Recognize that Horizon 2 is the most critical horizon to the scaling and ultimate success of their corporate innovation initiatives, necessitating that they focus appropriately on their H2 efforts.
Corporations that possess these characteristics are called 3-Horizon Corporations.
The management of H2 projects is further complicated by the fact that there exist two distinct types of such projects:
In addition to Boeing’s Business Jet business, NVIDIA’s growing automotive business that is based on the company’s GPU chips is a Type 1 example. The Type 1 projects:
- Create products that adapt existing technology or create new technology that is deployed on an existing platform;
- Enter a new market, one that may already exist but the corporation has not previously penetrated; or a nascent market;
- May not necessarily employ a new business model.
Type 2: The purpose of these projects is to start scaling validated H3 experiments to create new H1 core businesses that may have little, if anything, to do with the corporation’s existing core business units. These experiments may be results of the corporation’s Innovation Outpost’s efforts, or may have started internally as R&D projects (see Figure 2).
- Create a new platform that is based on new technology;
- Enter a new market;
- Employ a business model that is new to the corporation.
These businesses have the potential to disrupt or cannibalize existing core businesses. Typically, when a project transitions from Horizon 3 to Horizon 2 it has around $10M in annual revenue. Once a Horizon 2 business reaches around $100M in revenue, the parent corporation establishes it as a new H1 core business unit.
Moonshots represent a special case of initiatives that must transition from H3 fledgling efforts to H1 core businesses (see Figure 3).
The goal of these capital-intensive efforts is to build at least a $1B+ new business without first testing several H3 alternatives but instead focusing exclusively on the development and growth of the selected idea. Efforts such as Google’s self-driving car that started at the Google X research lab to recently become the Waymo business unit, IBM’s Watson, BMW’s ibrand, SAP’s HANA, and Apple’s iPhone/iPad are well-known moonshots.
The two types of H2 business are different along five dimensions: risk, timelines to success, employee culture, leadership characteristics, and required investment.
- Risk: Type 2 projects are riskier than Type 1. With Type 1 projects the corporation assumes some market risk (since the market exists even though the corporation has not previously operated in it), some technology risk (since the corporation has to adapt its technology to the market and even create new technology in order to best serve the selected adjacent market), and some team risk (the characteristics of the team are closer to those of the H1 businesses that was used as the basis for the H2 project but they still need to have entrepreneurial characteristics). With Type 2 projects the corporation assumes market risk (since the selected market is nascent, or not established), business model risk (since the model is new and only in the process of starting to scale), team risk (since the team must consist of entrepreneurs that understand the new technology and market rather than the type of executives that staff the corporation’s core business units), and technology risk (since through the H2 project the corporation will be testing the broad scalability of the technology developed by the H3 experiment). 3-Horizon Corporations are able to simultaneously pursue several Type 2 projects but, like in the case of H3 initiatives, they are prepared to stop the ones that do not show the potential to scale to next-generation H1 core businesses. For this reason I recommend that Type 2 projects must continue to work closely with the corporation’s Innovation Outpost. The Innovation Outpost may even play an active role in setting up the organization of each H2 project.
- Timelines: Type 2 projects require longer timelines to becoming candidates for Horizon 1 businesses than Type 1 projects. This is because Type 1 projects typically employ an existing business model, one which the corporation and the H2 business’ management team are familiar with, to enter an existing though adjacent market. On the contrary, in Type 2 projects the business model is still not solidly established (especially right after the transition from H3 to H2), and the market being addressed is nascent; both factors that lead to the longer timelines.
- Culture: The culture created in Type 2 organizations must always be a departure from the parent corporation’s culture. While both types of projects require teams with entrepreneurial drive, Type 2 projects require teams that are prepared to deal with significant uncertainty and probability of failure. They must also be able to establish a new organizational culture that will eventually become the culture of the new H1 core business unit. While doing so, the members that are initially part of the Type 2 organization will need to ensure that the culture they establish is adopted by all new employees, even those that transfer from H1 core business units, and is strong enough to withstand the tendency by the rest of the corporation to reject it and revert to the established culture. Because Type 1 projects are adjacencies of existing H1 businesses, the employees of these organizations though entrepreneurial typically inherit the culture of the core business unit they came from.
- Leadership: While both project types require entrepreneurial leaders, the leaders of Type 2 projects must not only be entrepreneurial but also be able to operate under uncertainty and be flexible to change. Various team members of these projects may need to be replaced and/or augmented during the journey from H3 through H2 to H1. Venture investors frequently make changes to their startups’ leadership teams. This is because a team that, for example, can lead the startup from $10M to $30M in annual revenue may not be able to take it to $70M or $100M in annual revenue. Oftentimes the first member to be replaced is CEO of Type 2 projects. Other times executives reporting to the CEO may need to be upgraded, and new executives may need to be hired by the organization to fill positions that were not necessary for a $20M business but are important to a $70M business, e.g., chief legal counsel. A good example of such transitions is the hiring of John Krafcik to lead Google’s Waymo autonomous car business unit. The leaders of Type 1 projects typically come from the H1 core business unit and eventually become the leaders of the new H1 core business unit.
- Investment: Because of their characteristics and until they become large and stable enough businesses to transition to new H1 core business units, Type 2 projects require a higher investment than their Type 1 counterparts. Moreover, because Type 2 projects take longer before they become new H1 core businesses than Type 1 projects, the corporation must be prepared to fund such efforts over longer periods of time and continue to support them even when they hit performance troughs, which, like every startup, they will undoubtedly do. The necessary investment may come in tranches based on the achievement of previously established milestones. In other words, the tranche should not be released automatically but be based on the critical evaluation of the project’s performance. The evaluation of the H2 project before each new tranche of funding is released is also an opportunity to determine whether the project should continue or be eliminated. Of course, the milestones that must be achieved before obtaining the next tranche of this investment must also be more flexible for Type 2 projects than for Type 1, because of the issues associated with introducing a new product, to a new market, using a new business model.
3-Horizon Corporations simultaneously launch multiple H3 experiments. These lead to several Type 2 projects. At the same time these corporations typically pursue at least 1-2 Type 1 projects and maybe even a moonshot. This means that at any one time 3-Horizon Corporations must manage multiple H2 projects of the two identified types with different risk profiles and timelines to success, requiring different leadership styles, organizational cultures, and investment commitment. This complexity makes Horizon 2 the most critical for the ultimate attainment of innovation goals and the creation of next-generation H1 core business units. For this reason corporations must have a particularly clear understanding of how their success in Horizon 2 will contribute to the corporate innovation initiatives, and what actions will maximize the probability of this success. The corporation’s CEO must not only make the investments required by each of these efforts but must also stay fully connected and engaged during the duration of each of these initiatives as they transition across horizons to give the corporation its next-generation growth engines.