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The big idea

Written by Josh Russell on Wednesday, 02 April 2014. Posted in Insight, Analysis

Revolutionary inventions no longer filter down from corporate research to SMEs; in fact innovation has increasingly become a conversation taking place between companies – regardless of their size

The big idea

There can hardly have been more column inches dedicated to anything over the last decade than innovation. Disruptive ideas have become so vital in setting the pace of modern business that many sectors commit huge amounts of time trying to predict where the next Instagram or WhatsApp will come from. It’s pretty well accepted that this is as likely to come from a piece of crowdfunded consumer tech as a corporation but it hasn’t always been this way.

The sources of revolutionary ideas have never been static and whilst corporate R&D became one of the dominant trends of the 20th century, this is far from being the whole story. “If you go back to the 1880s, most of the inventions came from outside the established companies,” comments Professor Ashish Arora, professor of the economics of innovation and technical change at Fuqua School of Business, Duke University’s international business faculty. Gradually, with the rise of the corporation, influence in the business world began to solidify within larger organisations but it is important to remember this is a relatively recent phenomenon. He says: “Corporate R&D actually came into its own somewhere around the 1920s.”

As a paradigm, corporate-led innovation became a significant source of new ideas during the middle of the last century, with the power of commercially funded R&D and labs kicking off a range of trends such as mobile phones. However, since the 1990s, this has been in decline. Rick Eagar, partner and head of the UK technology and innovation management practice at Arthur D. Little, the international management consulting firm, says: “Whilst ten or 15 years ago innovation was largely the province of R&D, that has now completely changed in most companies.”

This has helped to overturn many assumptions about innovations, particularly the idea that one could innovate simply by throwing enough money at the problem. Whereas progress was once the domain of those with the most significant financial resources, something else has now taken up the mantle. “We’re almost at a new era,” says Eagar. “It’s characterised by the need for companies to be much more ready to transform themselves.”

Agility has actually become an invaluable resource. Glyn Britton, managing partner at Albion London, the creative agency, recently chaired an Albion Society event discussing these issues with a selection of business figures and entrepreneurs. “The way innovation happens has completely changed,” he says.

Britton gives an example to illustrate his claim. One of the UK’s biggest players in the innovation and R&D space just a few decades ago was BT, its global innovation and development centre Adastral Park giving it a huge lead over smaller firms in ensuring it had access to the newest ideas. “Its only competition in that space came from other very well-funded, nationalised telecoms organisations,” he explains. “Then Skype comes along, started by a team of six or seven software engineers, and destroys a large part of their international calling business.”

Clearly the rapid rise in the power of the internet and the power of independent developers has played a big part in this disruption. But another, deeper factor is that these things have created an era of empowered consumers who are highly aware of the options available to them. “Customers have a huge amount of power to decide to go somewhere else, to decide that they want different products and services than the ones you provide,” Eagar explains. This has meant that the captive audience large companies once took for granted has vanished. He continues: “Business models get disrupted much more quickly.”

With corporates’ control over innovation waning, this can mean only one thing: their loss is very much start-ups’ gain. “The way innovations are created has changed and new players have started to grasp that,” comments Valerie Mocker, senior researcher on start-ups and entrepreneurship at Nesta, the innovation charity. “Start-ups are definitely one of them.”

One of the most significant shifts in recent years is that small enterprises have become more and more essential in bringing new ideas to the marketplace. “As part of the innovation ecosystem, start-ups have probably been one of the important drivers in terms of delivering innovation and new services to society,” Mocker explains.

Increasingly smaller companies are the ones introducing the newer ideas revolutionising the way we do things. “It’s easier for SMEs to disrupt large companies than it used to be,” says Eagar. Whilst this is influenced by the easy availability of technology to a much wider base of businesses than ever before, there are also other factors at work. He elaborates: “It’s also because SMEs are better able to weave together value chains than they used to be, business eco-systems are a bit better developed and there’s more collaboration.”

As previously mentioned, agility has also become hugely important in being able to react to a rapidly shifting marketplace, something the majority of start-ups are incredibly well equipped to do. Mocker explains this by way of an analogy.

“Start-ups are like speedboats; they’re very fast, they’re small, they’re manoeuvrable,” she says. “When they have new ideas they can quickly put them into practice.” In comparison, large corporations often suffer from inertia: whilst they may have a significant driving force behind them, when it comes to being able to react quickly to change they are at a major disadvantage. She continues: “When you look at the largest companies, they are more like big oil tankers.”

But whilst it’s tempting to put start-ups on a pedestal as being leaner and fitter, they have another advantage which has nothing to do with their relative merits. “It may not be that small companies are better; it’s just that there are many more of them,” says Arora. “Just the scale of experimentation may dwarf even the ability of large companies.” This means that, when trying to understand their role in the innovation ecosystem, evolutionary metaphors may actually be more appropriate, with many failing and expiring for every organism that finds a vital new niche. He continues: “What we see out of successful small companies is that there must be legions of small companies that try some experiments that end horribly.”

This is something Mocker concurs with: “Start-ups are a very risky business; a lot of them fail.” Fortunately, start-ups have a secret weapon that means they’re often able to throw themselves into these scenarios and seek to do things differently: entrepreneurs. She explains that often entrepreneurship is self-selecting and certain types of people will be drawn to trying to do things in new ways, even if it involves a risk. “A certain type of person is more likely to be innovative and willing to do things in new ways than maybe other people.”

In comparison, large companies are notoriously risk averse. Whilst start-ups often have the energy and drive to throw themselves at a problem, even if it has the potential for failure, corporates just have too much at stake. “The key to innovation is essentially conducting market experiments,” Arora explains. “But large companies have decided that they’re simply not well placed to manage those experiments.”

Beyond standard risk aversion, corporates simply have too many commitments to truly dedicate themselves to the sort of rapid, iterative development conducted by the mass of SMEs in the market. “There is increasing pressure for corporates to work very efficiently and maintain quarterly reporting cycles,” says Britton. “That pressure for efficiency has killed that kind of slightly purposeless experimentation.”

Moreover, he explains, there is an increasing currency being given to the idea that this isn’t even desirable in a large company. “Some people argue that it’s not the job of a corporate to innovate; it’s the job of a corporate to scale and defend IP, rather than create it.”

This is where more traditional routes to gaining access to IP come in, to which there are several key approaches. “There are companies that are good at buying technology, integrating them and then introducing products out of them,” Arora comments. “You would think of Microsoft as a good example of that.” Others tend to wait until a company has achieved more significant market penetration, before approaching it for acquisition and running it through their corporate engine to help it scale. He continues: “You can think of companies like Johnson & Johnson that have that as their metier.”

But, despite the huge amounts of attention dedicated to high-profile acquisitions of innovative start-ups like WhatsApp, there is an increasing understanding that bringing an innovative business into the fold isn’t always the best approach. In fact, in the words of Eagar, this can simply cause a ‘tissue rejection’ when the two cultures clash and are found to be incompatible.

Arora also feels this is something we have seen a little too often. “There have been spectacular failures where large sums were paid to acquire something,” he says. “That company, once it was acquired, was treated like a stepchild by the existing businesses who didn’t see the potential or were threatened by it and the company eventually took a large write-off.”

Corporates aspiring to harness the real value of external ideas are increasingly recognising that keeping innovation alive can often mean allowing a valuable brand the space to function. “There is a recognition that it’s not easy to integrate some of those really innovative projects within a company’s own framework,” Eagar says. “They understand that at times you need to release that group from the shackles of productivity.”

This is leading to a more nuanced approach to working with innovative start-ups that isn’t solely about possession but is focused more around access to resources and ideas. Mocker comments: “This is why you’ve increasingly seen over the last few years corporates coming into this space and trying to build mutual and beneficial relationships with start-ups.”

Whilst disruption is often presented as a threat that can only be fought off by acquisition or aggressive competition, it actually provides a vital opportunity to learn from each other. “Start-ups are watching out for other start-ups; not just as potential competition but also in terms of ways they can maybe work together and be innovative together,” explains Mocker. “And the big corporates are also watching out in terms of gaining access to innovations.”

In fact, it’s important to recognise that no innovation now hitting the market is developed in a vacuum. With a culture of application programming interfaces (APIs) allowing people to build apps that interact with another’s platform and an increasingly networked approach to the sharing of ideas, it has become almost impossible for any company – start-up or corporate – to innovate without listening to its contemporaries. 

Arora says this is reflected in innovation trends across US manufacturing. He explains: “With one out of every two product innovations, the innovators claimed that the innovations – the basic invention or prototype – came from outside the company.”

This is certainly one factor behind the recent explosion of co-working spaces, accelerators and incubators in the world of enterprise. With innovations and new ideas developing so rapidly, it’s become essential for businesses to rub shoulders with the companies and concepts that might be the next to revolutionise their sector. The lure of potentially having a stake in the next exciting development to hit your market is something few can ignore.

Moreover, there is a subtler benefit to being involved in the fostering of future inventions.

Mocker draws on the example of EY’s recent explorations of this space. “They have the Entrepreneur of the Year awards programme and they’re now holding these kinds of networking events,” she says. She maintains one of the key drivers behind this sort of involvement is because companies are recognising the additional kudos this can give them. “Beyond the acquisition and being motivated to get a product out of it yourself, there’s also this hype around this innovative, hip culture,” she explains. “Big firms want to be a part of that.”

Ultimately, regardless of the mechanisms you use, engaging in conversation with other businesses, big and small, is going to be essential to ensure your business stays relevant. Speaking at the Albion Society event, Gav Thompson, the creator of giffgaff, the mobile virtual network operator, and global director of insights & innovation at Telefonica, the global mobile communications giant, summarised things very succinctly: “Not all innovation can come from inside: [...] an important part of the secret source is looking at innovation outside.”

 

Getting mobile

Mubaloo

Having worked with big corporate clients like HP, Aviva, BP and Virgin Media, Mubaloo, the enterprise and consumer mobile app development company, is no stranger to innovating on behalf of larger industry players.

There are several factors that drive corporates to employ Mubaloo to develop for them. “One of the reasons that they choose to do things externally is the breadth of experience and perspective that an external company like Mubaloo might bring,” says Gemma Coles, the enterprise’s director of mobile strategy. But the firm’s expertise in and oversight of the app market isn’t the only significant motivation; its size also plays a part. She continues: “There’s the speed and the ability to mobilise teams quickly to do things.”

However, Mubaloo’s support doesn’t simply stop at putting an app together: its mobile strategy team also assists boards and C-suite execs with longer-term learning and the creation of structures to facilitate mobile innovation long term. Coles explains: “That’s when the real transformation happens, when you’ve got senior backing for what the company’s wider approach can be, as opposed to it just being tactical here and there.” 

About the Author

Josh Russell

Josh Russell

As editor, Russell is the man in charge of properly apostrophising our publication and ensuring Oxford commas are mercilessly excised. Our digital doyen, he’s also a Photoshop Pro, a dab hand with InDesign and the man to go to if you need a four-hour soliloquy about the UK's best silicon startups.

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