With existing business models in many different industries, e.g., automotive, telco, retail, 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 accelerating their investments, acquisitions, and partnerships with startups in order to access and take advantage of their innovations. However, they must now new skills to enable them 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 entrepreneurs and intrapreneurs;
- By combining technology with business model innovations;
- Using investments in, acquisitions of, and partnerships with startups;
- By learning to effectively manage a portfolio of internal and external startup efforts, and assessing the performance of these efforts using Key Performance Indicators (KPIs) that are appropriate for the type of innovation they choose to pursue.
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. Boeing’s Business Jet 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 product and business model are identified. For example, the experiments conducted by various financial services institutions, such as Barclays, around blockchain technology.
Contrary to what many believe, corporations work with startups to address their needs across all three horizons. In particular, most corporations focus the bulk of their innovation efforts on extending the life of their H1 businesses. My interactions with Silicon Valley-based Corporate Innovation Outposts has led me to the conclusion that corporations routinely use these outposts to invest in, partner with, or acquire startups to gain access to specific technologies that could help them address their H1 innovation needs. Corporations such as Unilever and American Express provide good examples.
A smaller number of corporations are also successful at identifying and investing in H2 initiatives to develop solutions for markets that are adjacent to successful H1 businesses. Over time, successful H2 businesses become 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, e.g., winglets that extend the airplane’s range and improve its fuel economy, and targeting a new market, e.g., private jet transportation. It succeeded in creating a new, strong business unit for Boeing.
I have been particularly interested on how Horizon 3 initiatives can lead to new innovative business opportunities and result in new corporate lines of business. I have been advising several corporations on how to successfully address this process. Corporations are becoming more comfortable at launching H3 experiments. However, while they are improving in their ability to launch H3 experiments, corporations stumble in consistently growing these efforts to the point where they can become their next-generation H1 lines of business. In order to improve in this area, corporations must:
- Become ambidextrous organizations. They must continuously execute well on their H1 business models, extending them when appropriate to address new H2 opportunities, while constantly generating new H3 opportunities. This means that they need to innovate across all three horizons.
- Recognize that Horizon 2 is the critical horizon to the success of their innovation initiatives, necessitating that they focus appropriately on their H2 efforts.
Corporations that possess these characteristics are called 3-Horizon Corporations.
Two H2 Types
There exist two distinct types of H2 projects:
Type 1: The purpose of these projects is to use as a basis an existing business to extend to an adjacent market with the goal to create a new core business for the corporation (see Figure 1). Therefore, in Type 1 the project moves from H1 to H2 and then back to H1. 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 efforts/experiments with the intent of creating new H1 core businesses that may have little, if anything, to do with the corporation’s existing core business units. These experiments (see Figure 2) may be based on activities of:
- The corporation’s Innovation Outpost’s activities (investments, acquisitions, incubation, engineering development);
- The corporation’s R&D organization or of a business unit.
Therefore, in Type 2 the successful project moves from H3 to H2 to H1. Of course, this is an idealized scenario, As is shown in Figure 2, a lot of “pruning” takes place in the process. And, under circumstances, it may be necessary for a project that has transitioned from H3 to H2 to be moved back to H3, if it is determined that it is not scaling as expected. The new mobility businesses that automakers are starting to establish (Maven, Moia, Moovel, DriveNow, etc.) are Type 2 examples.
The Type 2 projects:
- Create a new platform that is based on new technology;
- Enter a new market;
- Employ a business model that is new to the corporation.
Moonshots represent a special case of Type 2 initiatives. They are expected to transition directly 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 a 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.
Five dimensions for distinguishing the two H2 types
I have identified five dimensions for distinguishing the two H2 types: 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 moderate market risk (since the market exists even though the corporation has not previously operated in it), 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 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). Type 2 projects carry higher market risk (since the selected market is nascent, or not yet fully established), business model risk (since the model is new and only in the process of starting to scale; the model may also have the potential to disrupt or cannibalize the corporation’s existing core models), 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 must be able to simultaneously pursue several Type 2 projects but, like in the case of H3 initiatives, they must be prepared to stop the ones that do not show the potential to scale to next-generation H1 core businesses. In addition, they have establish criteria that must be met for a project to transition from H3 to H2. For example, one of the rules of thumb I recommend for enterprise software businesses is to wait until they reach $10M in annual revenue before transitioning them to H2. For these reasons 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 transition to 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.