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This is the second part of a two-part lead article, co-written by Frank Mattes and Dr Ralph-Christian Ohr. The first part can be found HERE. The two-part article summarizes key findings from their new book “Scaling-Up Corporate Startups: Turn innovation concepts into business impact” that was co-created with a Peer Group of leading European companies.
The – in the truest sense of words – ‘Billion-Dollar-question’ we are addressing is: How can companies generate more business impact from non-incremental innovation?
The solution to this question lies in the middle part of an end-to-end process for (non-incremental) innovation. We call this part ‘Scaling-Up’.
Typically, companies have little problems in generating ideas for adjacent, radical or even disruptive innovation and in validating the most promising concepts. On the other end of the process, companies have systems to grow material businesses and incrementally improve their performance over time. But for many companies, the transitional Scaling-Up phase in-between is a ‘Valley-Of-Death’, in which many promising concepts die on their journey to business impact.
In this article, we identify the main reasons why many companies struggle with scaling up their corporate startups. We then show that three things need to be in place so that corporate startups survive the Valley-Of-Death and generate business impact.
The thoughts below have been worked out and validated with a cross-industry Peer Group of companies. If a company follows the advice in this article, it can build excellence in Scaling-Up. This not only translates into business impact from non-incremental innovation. It also increases the company’s capability to ‘Reshape the Core’ and establishes a crucial cornerstone for a modern corporate innovation management which we call ‘Dual Innovation’.
Winning in innovation (Note: For easier readability, we use the term ‘innovation’ for non-incremental innovation) should be the domain of large corporates, not of greenfield startups. Established large companies have installed bases (e.g. direct access to customers and industry influencers, brands, supply-side and distribution-side networks, in-house experts, IP, production facilities, etc.) and resources that a greenfield startup often only can dream about. These should put the incumbents in a pole position to industrialize breakthrough technologies, to establish new business models and to create new value networks which displace established structures.
Yet, most large companies struggle in generating business impact from innovation. The problem is usually not in getting ideas for products, services or business models – In most corporates, there are far more ideas than ever could be implemented. Most incumbents also use established methodology for validating concepts that trace back to these ideas. But statistics show (see below) that the majority of large companies is not able to turn them into business impact.
We often find that many seemingly convincing innovation concepts die along the way. From the surviving ones, many suffer ‘a thousand cuts’: After a long and arduous journey they are launched as a miniature version of the original ambition, just so radical that they still fit into the existing business model, paradigm and mindset.
(c) Tom Fishburne
Scaling-up: often, it is the Valley-of-Death
If you recognize your company, you are in good company because this seems to be a widespread problem. Accenture found that the Fortune 1,000 have invested USD 3.2trn into R&D in-between 2012 and 2017. Yet, Return-On-Innovation has decreased by 27% in that period. And Bain&Company found that only 1 out of 8 corporate startups are successful– In other words, seven out of eight fail.
This article pinpoints the locus of the problem. It is in one phase of the end-to-end innovation process which we call ‘Scaling-Up phase’. In this phase, validated innovation concepts are taken to a sizable business, which then can be integrated in an operative Business Unit (BU), become a separate entity within the corporate Group, folded into a Joint Venture or monetized in other ways.
In this article, we also show why Scaling-Up is so hard and we present a framework for improving results. This framework has been developed and validated with a cross-industry ‘Peer Group’ of leading companies.
Some of these companies also co-authored our book “Scaling-Up Corporate Startups: From innovation concept to business impact” in which you find in-depth elaborations, statistics and illustrating case studies to the approach and ideas presented in the following.
We aim at providing you with three key takeaways:
- Without excellence in Scaling-Up, money spent in the early phases of innovation is just a costly hobby (often referred to as ‘Innovation Theater’).
- In many companies, the relationship between corporate startups and established BUs is ‘Us and Them’. However, this delimiting mindset hampers collaboration which is necessary to generate business impact. To generate business impact one needs to understand that these are two organizations designed for two different purposes.
- For success in Scaling-Up, the inherent differences between the scaleup and the BU need to be acknowledged and an effective, constructive collaboration be orchestrated.
Emulating greenfield startups is not the solution
To understand the problem it might be useful to look at where many companies come from. During the dot.com era, greenfield startups were funded with large sums of VC money – ‘Build it and they will come’ was widely accepted as the way to go for radical and disruptive innovation.
But then, some 5 to 10 years after the burst of the dot.com bubble, corporates noticed that a new class of greenfield startups were disrupting whole industries without heavy VC funding. These startups put customer-orientation front and center and were operating on principles that today are called Design Thinking, Agile, Lean Startup, Business Model Canvas, Lean Canvas etc.
So, many companies thought that they needed to follow the approaches of Spotify, Airbnb, Uber, etc. They opened Innovation Labs, Accelerators, Incubators, Digital Labs, etc. and trained their staff in those methods and frameworks.
Unfortunately, as can be seen by the figures above, this has not produced the expected results. Many companies found that after simply emulating greenfield startups, they have arrived at a ‘Scaling-Up problem’: They now have the structures and the people to come up with lots of innovation ideas and concepts – ‘light bulbs in all shapes and sizes’, if you will – But they cannot generate business impact.
Why the scaling-up problem needs to be solved
It is important to understand that companies must solve the Scaling-Up problem. We have found four reasons why:
- Companies with a Scaling-Up problem find it hard to generate growth and profit from new-to-the-company (or new-to-the-industry / new-to-the-world) technologies and/or business models
- Consequently, they fall short in ‘Reshaping the Core’ and, in part, also struggle in ‘Creating the New’ (see the first part of the article HERE)
- Furthermore, they remain at risk of being outpaced or even disrupted by other companies
- And finally, disappointing innovation results may negatively influence shareholders and top talent
Why scaling-up is so hard: three challenges
But why are so many companies facing the Scaling-Up problem? In the above-mentioned Peer Group of leading European companies we have found three main reasons:
- Scaling-Up is a White Space
- Corporate startups have more limitations than greenfield startups
- There are inherent ‘Areas Of Tension’ between the scaleup and the core business
A White Space
When we discuss with our clients the difficulties in generating business impact from innovation, we often hear statements like these:
- ‘We have enough ideas for conquering adjacent spaces and for radical or even disruptive innovation. But we are struggling to execute on them.’
- ‘We know how to validate ideas and develop a Minimum Viable Product. But most validated concepts die on their journey.’
- ‘When we acquire an external startup with a customer base and some revenues, we know how to grow it from there. But somehow, we can’t replicate this without corporate startups.’
These statements suggest that there is a big problem somewhere in the end-to-end innovation process. To pinpoint the problem, it is useful to split the process into four parts which – at a reasonably high flight altitude – are the same for every industry:
- Ideation: Based on meaningful insights, promising value propositions are identified and ideas generated how the value could be captured via new products, services or business models.
- Validation: Concepts for products or services that allow for capturing the assumed value are developed, challenged, validated and reworked/refined via an agile Build-Measure-Learn approach until ‘problem/solution-fit’ and ‘product/market-fit’ is established and a ‘Minimum Marketable Product’ can be launched into the marketplace.
- Scaling-Up: Validated innovation concepts are scaled up to a sizable, material business that can be integrated in an operative BU, become a separate entity within the corporate Group, folded into a Joint Venture or monetized in other ways.
- Growth: Using existing, tangible and/or intangible corporate assets and proven approaches, further growth is executed within the defined core business structures and processes.
Typically, the first two phases are managed by an explorative innovation unit (e.g. the corporate Innovation Center) and the last phase by the relevant BU. In most companies, however, there is no organizational home for the ‘Valley-Of-Death’ phase in-between. So, Scaling-Up is firstly a White Space when it comes to responsibilities.
Scaling-Up is also a White Space with respect to methodology. For phases 1 and 2, practitioners can turn to Design Thinking, Jobs-to-be-done, Lean Startup, Business Model Canvas, Lean Canvas, Google Sprint, etc. to find practical guidance. For phase 4, Business Development, Key Account Management, Growth Hacking, etc. provide guard rails. But for the critical Scaling-Up phase, there has not been a solid methodology available so far.
More limitations than greenfield startups
Corporate startups differ by design (apart from the obvious, which is the source of funding) in three major points from greenfield startups: They are supposed to …
- deliver a piece of the strategic innovation agenda to ‘Reshape the Core’
- respect the corporate ecosystem and context
- leverage corporate assets to capitalize on ‘unfair advantage’
These three differences limit the degrees of freedom for corporate startups. Since corporate startups are supposed to contribute to the strategic (vs. financial) development of the company, they have less freedom to ‘pivot’ in search of a sustainable business model compared to greenfield startups. The last two bullets also impose boundaries for moving forward. In contrary, greenfield startups – in particular, those which are on a mission to disrupt existing industries – do not have to care about these corporate boundaries.
Inherent ‘Areas of Tension’
As we have outlined in the first part of this article (see HERE), any company needs to work three Innovation Playing Fields concurrently: (1) Optimize the Core: Running day-to-day business, continuous improvement and churning out a constant stream of incremental innovations that maintain the relevance of existing products and services; (2) Reshape the Core: Adaptation of today’s core for tomorrow’s business and Scaling-Up of new opportunities; (3) Create the New: Discovery and validation of novel technologies and/or business models.
It is clear that (1) and (3) need different ‘operating models’ to ensure success: The most effective operating model for (1) is a process-driven, risk-minimizing one, whereas for (3), it is an agile ‘Build-Measure-Learn’ one.
Scaling-Up is one of the two activities in Playing Field 2. So in order to succeed, companies need to have an effective, distinct operating model in place here as well. As we have shown in the first part of the article, this must be different from the ones in (1) and (3).
However, defining and implementing an effective operating model for Playing Field 2 – and in particular, for Scaling-Up – is non-trivial. When a company tries to leverage the core business’ assets for the corporate startup without slowing it down, it needs to establish a productive collaboration between two entities that are designed on fundamentally different paradigms:
- On the one side is the core organization with the predictability / process-driven / zero-mistake DNA of Playing Field 1
- On the other side is the corporate startup with its agility / Build-Measure-Learn / experimentation operating model of Playing Field 3
It is immediately clear that establishing an effective collaboration will not be straightforward and without conflict. The different paradigms will manifest in tensions in a number of dimensions. Together with our Peer Group, we have found at least ten of them:
For instance, the core organization establishes governance via explicitly formulated top-down arrangements, detailed responsibility schemes and committees for cross-silo issues. The scaleup establishes governance by a much more agile, team-based approach in which all voices are heard and the best argument wins.
Or, to take another example, the core organization’s culture can often be characterized as risk-averse, ‘stick to the rules’ and political, whereas the scaleup’s culture is of a ‘find a way or make one’, learning-oriented, open-minded nature. Additionally, scaleups have a much higher sense of urgency and hence a higher clock speed than the core organization.
Approaches to solving the scaling-up problem
To solve their Scaling-Up problem, some companies choose to outsource the Scaling-Up phase of individual ventures. In our view this is not a real solution to the problem: It does not fully leverage corporate assets and resources and the ‘Reshape the Core’ challenge is not adequately addressed.
We see two real solutions. The first is to apply the solution framework described below to individual scaleups one at a time. We call this approach ‘Apollo’: A single rocket with a lot of resources is being built, a well-trained team put into the cockpit and it is expected that this team manages all issues on their voyage in close contact with the ground station. And one hopes that the call ‘Houston, we have a problem’ never comes.
There is also a second, more systematic and continuous solution approach which we call ‘Space Station’. In a near-earth orbit, which is reasonably distant from earth but near enough to have an extensive exchange, there is a separate entity. This entity takes up little ‘Apollos’ that are shot into near-earth orbit and turns them into space ships that are then sent off to reach other planets.
This entity has procedures that ensure leveraging the resources of the corporate while at the same time adapted to its specific situation. So for instance, lean and accelerated, yet still compliant Procurement processes that use the corporate’s global supplier base are implemented.
Three cornerstones of a solution framework
Independently from the choice between ‘Apollo’ or ‘Space Station’, we found in the above-mentioned Peer Group that three cornerstones must be in place to ensure Scaling-Up success:
- A very rigorous validation (due to the restrictions and limitations of corporate startups)
- An effective Scaling-Up process
- A collaboration model
We have found that a comprehensive and effective framework for validation prior to Scaling-Up needs to be built on three principles:
- Four dimensions need to be validated at the same time. As many practitioners are aware, Design Thinking calls for validating Desirability, Viability and Feasibility. For corporate startups, an additional dimension ‘Contextuality’ is needed which refers to the organizational and strategic embedding of the scaleup
- These dimensions (think of them as ‘Validation swim lanes’) need to be connected at a few Value Inflection Points. We have found four of them to be sufficient: Problem-/solution fit, Minimum Viable Product, Minimum Marketable Product and Minimum Scalable Venture
- The Value Inflection Points correlate with increasing certainty about (a) the value of the innovation, (b) the ability to capture the value, (c) ability to implement the innovation concept and (d) alignment of the core organization with the innovation and its implementation
In this framework, product/market-fit will be achieved in-between Minimum Viable Product and Minimum Marketable Product. For more details about the Validation dimensions, the Value Inflection Points and typical mistakes made, please refer to our book.
Only a few companies have a defined and effective Scaling-Up process in place. The deeper reason might be that that Scaling-Up is a complex endeavour and plays out in multiple dimensions.
During Scaling-Up, the corporate scaleup has to drive four work streams in parallel:
Industrialization and Value Chain building
Mass production capability needs to be built up. For Digital products this means e.g. deploying the application at an industrial scale including 24/7 up-time, Customer Care, cyber security, etc. For physical products this means e.g. building the production lines, selecting and qualifying suppliers, building up the Supply Chain from the source to the Point-Of-Sales, getting regulatory approval for the industrial product, etc.
Typically, the revenue goal of a scaleup is in the lower 8-digit range in order to become relevant for an operative BU and, by the size of the business and the shape of its processes, ready to be transitioned.
To win a revenue this size, the scaleup needs to win mainstream customers because they represent the biggest market share. However, in buying novel products and services, these mainstream customers have purchasing criteria and processes that are fundamentally different than those of ‘Pioneers’ and ‘Early Adopters’ which the corporate startup was working with in the Validation phase.
Consequently, the corporate scaleup needs to ‘cross the chasm’ which separates ‘Pioneers’ and ‘Early Adopters’ from mainstream customers and to adjust and broaden its go-to-market approach.
Company shaping: Grow the organization
Typically, at the end of validation (i.e. the beginning of Scaling-Up) there is a team with 2-5 people in place. However, if the revenue target of the Scaling-Up phase is in the 10-million range or above, many more people are needed.
Depending on the innovation and its business model, this could easily translate into 50 to 150 people. This growth is not just a challenge in size but also a challenge in finding the right type of people – T-shaped people who are productive in a high-growth, but not yet fully formalized environment.
Company shaping: Transitioning the management system
At the end of the validation phase, the corporate scaleup’s management system is based on an ‘agile, experimentation-driven’ paradigm. During Scaling-Up, the management system needs to be transitioned into a ‘predictable, process-driven’ paradigm of an established business. There are three reasons for this:
- The growth of the organization (see above) requires so
- The corporate scaleup needs to be compatible with the core organization in order to leverage the corporate’s tangible and intangible assets (e.g. experts in various functions and market access)
- If the corporate scaleup is to be transitioned to an existing BU, its management system needs to be fully compatible with the BU management system by then.
Alongside these four work streams, four managerial aspects need to be organized::
Governance and funding
The Governance Board of the corporate scaleup should provide guidance for the corporate scaleup, ensure that corporate assets can be leveraged for materializing the ‘unfair advantage’ and set the stage for integration into the designated ‘home’.
To be effective, the Board should be as small as possible but – to fulfil its role – comprise at least the scaleup’s Top Manager and a Senior Manager from the target BU (or from Corporate Strategy, if the target BU is not yet defined). If relevant, the Board is quite often augmented by a Senior Manager of the explorative innovation unit and external experts in an advisory role.
We found it helpful that the Board is led
- initially by the scaleup’s Top Manager or a Senior Manager from the explorative innovation unit (because ‘innovation’ still dominates the setting)
- in later stages of Scaling-Up by the BU Senior Manager (to facilitate transition and further growth).
With respect to funding, we have found that the most effective approach resembles a VC-type approach: As long as the scaleup is moving according to plan in the four work streams mentioned above, funding will not be an issue. The release of (earmarked) funds can elegantly and effectively be done via Scaling-Up milestones (see below).
KPIs and metrics
During Scaling-Up, the set of KPIs and metrics used for measuring progress should change from one that carries over from late-stage validation (comprising e.g. ‘Traction’ and ‘Net Promoter Score’) to one which is more finance-oriented and suitable for an established business. We found that it is not helpful to apply the full set of corporate performance metrics too early.
Often, a significant part of the scaleup’s staff comes from the core organization. Usually, people with deep expertise in ‘Industrialization and Value Chain building’, ‘Market making’ and functional touch points to the core organization are essential to capture the ‘unfair advantage’.
To facilitate the transfer from the core organization to the corporate scaleup and back, HR procedures need to be set up. These need to address e.g. the questions whether there is a return ticket or not and which incentive schemes are the most helpful.
Scaling-Up is a journey that usually takes several years. There are at least five reasons why this journey should be structured via milestones and not with annual goals:
- The overall corporate environment might change over a multi-year time horizon. What might have been a convincing value proposition 3-5 years ago, at the start of Scaling-up, might not be convincing today anymore. Milestones provide a good break-point to assess the best path-to-value.
- Too many companies struggle with ‘in-between states’. Simply counting revenues at the end of the year does often not provide the necessary clarity on whether funding should be extended. One could think of the issue on hand in terms of quantum theory: There are only discrete valuation states – and a scaleup receives only subsequent funding when it materially changes its state.
- Milestones provide an elegant and effective way to arrange the above-mentioned managerial aspects.
- Clear milestones take away uncertainty from the scaleup’s staff. They do not have to worry that they will be ‘suddenly standing in the cold’ just because the core organization had two bad quarters in a row.
- Once a standard system of milestones is set up, the company can establish pipeline management and use statistics (’80% of our scaleups at milestone 3 made it to market and generated 60% of the projected revenues in the first three years’).
Setting up a productive collaboration between the scaleup and the core organization is not easy due to the inherent Areas Of Tension (see above). Both research and the above-mentioned Peer Group recommend that a formal collaboration model needs to be established.
This model needs to comprise explicitly stated benefits, efforts / risks, metrics which measure quality of collaboration and some work rules. In practice three things should be discussed and stipulated in detail between the core business and the scaleup:
- The value equation: What is the benefit of the collaboration for customers, the scaleup, the core business and the receiving BU?
- The value contribution: What does every side bring to the table?
- Operationalizing the collaboration: How to run and monitor the collaboration?
Interestingly, we often find that the value-add for the customers is not explicitly stated or reduced to some commonplaces. This is surprising since working out the specific benefits for the customers could easily create a stronger alignment between BU and scaleup.
This second article and the foundational first part provide a proven approach how companies can increase the business impact from investments into innovation.
With a Peer Group of leading companies, we have found that in many cases disappointing business impact can be traced back to the Scaling-Up phase, i.e. the phase in which validated innovation concepts are turned into a sizable business.
Scaling-Up is in a number of ways a ‘White Space’. We have found, however, that by improving the rigour of the validation prior to Scaling-Up, defining a solid Scaling-Up process and establishing a collaboration model between core business and scaleup, companies can improve their Scaling-Up success.
By doing so, they not only increase financial results. They also build the strategic and organizational capability for ‘Reshaping the Core’ and lay an essential foundation piece for a modern ‘Dual Corporate Innovation Management’.
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