Corporate Innovation Labs Are Contagious

Dr. Sharon Springell
Senior manager, innovation research, Virtusa
Article

But why aren’t they driving impressive business growth?

It has become an article of faith that innovation labs will help big business maintain or claw-back market dominance. Whilst they’ve been a fixture in traditional enterprises for decades, today they’re in a boom period.[1] Their number and role have rapidly grown,[2] in tandem with the growth of the digital economy where innovation is a crucial differentiator.

Two key factors have propelled companies to invest in more formalized approaches to innovation. Disruptive tech companies, with their consumer fixation and new breed of business model, are threatening to overturn long-established industries and unseat their incumbents, if they haven’t already. In addition, a low interest rate environment (i.e., cheap money) has given rich soil for big corporates to set up hothouses of entrepreneurship.

Although traditional corporates are taking a more structured approach to innovation through dedicated labs, the outcomes have been patchy at best. Their beguiling promise to turbocharge business growth remains just that – a promise rather than a reality. This post investigates why this is so.

BigTech’s meteoric rise is pressuring traditional corporates to rethink their approach to innovation

BigTech competitors – like Alphabet, Apple, Amazon, Facebook, Tencent, and Netflix – have swept in and laid waste to whole industries in record time. Think of Airbnb disrupting the hotel/hospitality industry and Uber redefining the taxi/automotive industry. It took Airbnb only seven years to become more valuable than iconic Hilton Worldwide (est. 1919); and Uber a mere six years to grow larger than Ford and General Motors, companies founded in 1903 and 1908 respectively.[3]

With their ultra-modern tech stack, low cost structures, customer-centricity, experiential design, and innovation-growth mindsets, BigTech firms and their smaller tech siblings are a force to be reckoned with. And legacy corporates find that deeply troubling.

The numbers tell the story.

Consider the markets: technology stocks are booming.[4] Compare retail leader Amazon with Walmart, and it’s clear the market reckons the business model and value proposition of Amazon is streets ahead of its brick-and-mortar rival. The famously innovative e-commerce giant has a

demonstrably higher market cap – $985.06 billion versus $319.73 billion[5] – despite the fact that Walmart draws in more than double the revenue and is almost triple the size of Amazon.

Equally compelling is the churn rate of the leading companies on the S&P 500. Partly due to the success of tech competitors,[6] the average lifespan of the largest corporates on the S&P 500 has been shrinking dramatically in recent years. In 1964, they lasted about 33 years on the S&P 500; in 2016 it had narrowed to 24 years. By 2027, it is forecast to dwindle to a mere 12 years.[7]

Evidently, Schumpeter’s “creative destruction” – the dismantling of long-established practices to make room for innovation[8] – is in its heyday. And this accelerated process of creative destruction is linked to the now-rampant popularity of innovation labs within legacy enterprises.[9]

Stable economic conditions support investment in corporate innovation

Thanks to easy access to credit and sound economic fundamentals, Chief Innovation Officers have leaped ahead to steer their organizations’ innovation efforts with minimal interruption.[10]

In this climate, global spend on R&D has been on the rise. In 2019 it broke into record territory reaching a whopping US$1.7 trillion.[11] Notably, tech companies lead the way.[12]

This mirrors the upward trend in new openings of innovation centers,[13] which shows no sign of cooling off. A recent survey of leading global firms shows that more companies will be aggressively increasing their R&D budget over the next three years, with inhouse innovation programmes representing a key area of investment.[14]

Traditional corporates get serious about innovation

When you strip away the showroom labs (“corporate innovation theaters”[15]) that attract bright graduates, and the desire to mimic the origin stories of hip tech firms, what’s left is the hard-edged reality of market forces today.

Big corporates know they can’t leave it to chance that their employees at large will innovate – when they have the time, and when the inspiration strikes. They know they must energetically pursue innovation that’s strategically aligned, furnished with significant budgets and the best people on board. They have endeavored to do so. And yet, in spite of this concerted effort, it is not preventing their exit from the S&P500. Why is this?

Traditional corporates’ innovation labs focus on optimization rather than radical innovation

Many firms hold a simplistic view of how innovation can be tamed, harnessed and industrialized. The conventional approach is functional and process-driven: it’s about making things work. In a lab-controlled setting, employees need only crank out a methodology – ideate, “fail fast”, gather feedback, draw connections – and lo and behold a disruptive innovation is born. Such processes are enormously helpful in stirring up good ideas and polishing them quickly into workable solutions. But they are not enough.

Consider the spate of lab closures, against the backdrop of new innovation lab openings. Some high-profile casualties include Microsoft’s Silicon Valley Research Lab, Disney’s research lab, and Coca-Cola’s Founders Initiative.[16] Just as there is a growing appetite for innovation labs, there is a growing scepticism about their actual effectiveness.

This bottled form of innovation – which is the mainstay of innovation labs within big corporates – tends to produce small-scale innovation. It’s good at reducing waste, errors, increasing efficiencies, and in dealing with regulatory compliance issues. That is, it is good at helping big business maintain the status quo.

But to look at the kind of innovation practiced by BigTech firms, a different picture appears. Instead of seeking optimization, tech giants seek to launch radically new innovations into the world – as an example, Google X’s ambitious “moonshot” projects.[17] These “skunkwork” innovations aren’t defensively justifying their existence to their corporate masters, meeting standard profitability and RoI metrics. They aren’t focused on using innovative tech to expedite compliance. Nor have they much to do with efficiency gains with the existing product set. Instead, their innovation practice is tethered to the customer, and finding creative solutions to the most painful problems they face.

 

References:

[1] https://www.capgemini.com/resources/the-discipline-of-innovation/

[2] https://www.cbinsights.com/research/corporate-innovation-labs/

[3] https://fortune.com/2016/06/21/startups-innovation-theater-corporations/

[4] https://www.cnbc.com/2019/07/23/technology-stocks-rise-to-their-highest-levels-ever-despite-the-trade-war.html

[5] July 25, 2019: https://www.macrotrends.net/stocks/charts/WMT/walmart/market-cap, https://www.macrotrends.net/stocks/charts/AMZN/amazon/market-cap

[6] https://www.innosight.com/insight/creative-destruction/

[7] https://www.innosight.com/insight/creative-destruction/

[8] https://www.investopedia.com/terms/c/creativedestruction.asp

[9] https://www.tandfonline.com/doi/full/10.1080/08956308.2019.1563435?needAccess=true

[10] https://www.tandfonline.com/doi/full/10.1080/08956308.2019.1563435?needAccess=true

[11] http://uis.unesco.org/apps/visualisations/research-and-development-spending/

[12] https://www.vox.com/2018/4/9/17204004/amazon-research-development-rd

[13] https://www.capgemini.com/consulting/wp-content/uploads/sites/30/2017/07/asia-innovation-centers-research.pdf

[14] https://www.tandfonline.com/doi/full/10.1080/08956308.2019.1563435?needAccess=true

[15] https://www.cbinsights.com/research/corporate-innovation-theatre/

[16] https://venturebeat.com/2017/03/22/its-time-to-ditch-your-innovation-lab/

[17] https://www.businessinsider.com/20-moonshot-projects-by-google-turned-alphabet-2016-2?r=US&IR=T

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