This is a first-pass at a narrated presentation that illustrates how Enterprise Innovation Partners works with established companies to build relationships with startups and entrepreneurs to foster discontinuous innovation and maintain their competitive advantage.
Draft of blog post or copy for web site.
Kodak, Polariod, Borders, Circuit City, Research in Motion (Blackberry), and Blockbuster are among the poster children for bad management. Missing dramatic shifts in the market cost these companies billions. They literally died watching new upstarts disrupt their business.
Disruption is happening faster and in more sectors of the economy than ever before. Marc Andreessen, founder of Netscape and successful venture capitalist, says “software is eating the world”. New technologies can be tested for less money and adopted much more quickly. Every company is at risk of being eaten. That’s good for Marc Andreessen – he makes bets on startups and hopes for big payoffs when new companies take over large chunks of a market — but if you’re managing an established business you need to do everything you can to avoid getting Blockbustered.
The answer is to embrace change and encourage innovation. Most senior managers recognize this: according to a recent report by Accenture entitled “Why Low-Risk Innovation is Costly,” 85% of companies rank innovation among their top 10 priorities and 18% put it at the top of their list. But no matter how well you nurture an internal culture of innovation it won’t protect against major disruptive shifts.
A common graphic used to illustrate disruptive innovation is a sequence of “S Curves.” Companies set out with an original strategy and then enjoy rapid and profitable phase of growth because they have a differentiated product or service. Eventually competition or other market changes will eat into growth and the S Curve flattens out. The typical response is to invest in improvements to the product or service to fend off competitors. They frame all of their thinking in the context of the existing S Curve. These product line or “sustaining” innovations incrementally increase sales over the short term but don’t protect against more significant changes in the market.
A recent article by the Clay Christensen Institute notes this tendency:
Business model lock-in often prevents companies from disrupting themselves because they try to use potentially disruptive technologies in sustaining ways, fitting them into their already-existing processes using their previously-arrayed resources to sustain existing profits and costs.
It takes a stomach-churning jump from the existing approach to a new strategy to get back on a different high growth curve. This leap from one S Curve – the original strategy — to a new growth strategy based on a much different approach is what’s called discontinuous innovation.
How do big companies navigate S Curves? The answer is to view your company as part of a much larger innovation network. You need to build relationships with entrepreneurs looking at the problem from a completely different perspective. This “outside in” approach to innovation helps companies recognize disruptive changes before they cannibalize their core business.
For every established company striving to stay ahead of the competition there are hundreds of startups and smaller companies driven by creative entrepreneurs who are working on new approaches for solving similar business problems. Rather than shy away from radical shifts, an entrepreneur’s goal is to become the next S Curve. They thrive on replacing existing business.
Of course startups have their own set of problems. Frequently they wrestle with the challenge of finding the right customers at the right price with the appropriate sales model. They also struggle for attention in a noisy market. Some startups are lucky (or extremely insightful) and find the right go-to-market model quickly and progress to a Series A investment round. Many others will run into the “Series A Crunch” because they haven’t proven demand for their products with the minimal level of Seed funding they’ve received. Often they develop good technology but don’t yet have strong enough metrics required for follow-on investment. Here’s a table used by Atlas Venture partner Fred Destin in a blog post last year to illustrate growing number of seed-funded startups that don’t receive follow-on funding.
The proliferation of startups in various stages of success or distress creates a rich “innovation garden” for established companies. The key is to create a formal outreach program then choose to invest, acquire, license, hire the key personnel or buy the intellectual property depending on the circumstances. This infusion of entrepreneurial DNA will provide the best chance of embracing disruptive changes.
Insular corporations risk everything by taking a not-invented-here approach. A good example is Blockbuster promoting DVD vending machines as a way to fight back as their market share rapidly eroded to Netflix, Hulu, Amazon, Apple, cable providers and other on-demand options. Innovation focused on sustaining existing business models can seem laughably pathetic once new models are established and customer habits change. The sudden shifts that go along with discontinuous innovation can become competitive advantage, however, when smart companies establish close ties with a network of external innovators. These companies successfully tap into the expertise and energy of people focused on changing the status quo and aggressively driving around the S Curves of innovation.