Start-up companies are busy turning the tables. How can established giants fight back gracefully?
How do established enterprises innovate? For them, the innovation process can either leverage existing businesses or transform them. Large companies possess various capabilities and resources that can be shared with startup partners or internal startup managers who have ideas for breakthrough products and services. They can create a portfolio of projects and nurture each one until it has the potential to scale up. In this way, existing enterprises can maintain their leading position in innovation within their fields and expand into new areas, while significantly increasing the chances of success for startup partners.
While the market celebrates the success of generative AI and green technology startups, many experts urge traditional enterprises to follow suit and commit to radical innovation, self - disrupting before others do. However, for many companies of a certain scale, this is not a viable strategy. Business owners dislike risks and won't kill the goose that lays the golden eggs. As a result, large enterprises ultimately choose incremental innovation, which actually increases their chances of being disrupted.
Established enterprises don't have to fall into this trap. Instead, if managed properly, the innovation process can either leverage existing businesses or transform them. Large companies possess various capabilities and resources that can be shared with startup partners or internal startup managers who have ideas for breakthrough products and services. They can create a portfolio of projects and nurture each one until it has the potential to scale up. In this way, existing enterprises can maintain their leading position in innovation within their fields and expand into new areas, while significantly increasing the chances of success for startup partners (or internal startup managers).
However, as we will see below, this approach is complex and delicate, requiring careful management. To explain the application method, we will draw on the lessons learned from studying the experiences of more than a dozen large multinational enterprises, including European companies such as Atlas Copco, Enel, and Epiroc. We found that their innovation process consists of three basic stages: exploration, commitment, and scaling up. Let's take a look at each stage in turn.
Exploration: Find the Right Startups
Innovators often spend decades tackling huge challenges and turning their visions into reality. Many of these efforts end in failure, and only a few outstanding ones can continue and change the world. Startups are well - prepared for this journey. They are free, and with the support of venture capital, they have the resources needed to pursue their ideals. As long as the prospects are promising, they are willing to accept the possibility of failure.
However, this model does not apply to the management and stakeholders of mature companies, as the purpose of these companies is to provide reliable existing goods and services and adapt to customer preferences. Company management and capital control are specifically set up to ensure this.
These limitations have prompted many established enterprises to adopt limited innovation strategies: focusing on incremental improvements to existing businesses or collaborating with one or two like - minded partners to pursue a narrow goal. This can be dangerous. In 2000, Blockbuster had the opportunity to acquire the emerging DVD - by - mail company Netflix for $50 million, but Blockbuster did not see that "the purchase of home movie entertainment is not just an impulsive decision focused on popular movies," so it firmly rejected the proposal. Four years later, Blockbuster tried to launch a DVD - by - mail service but failed and filed for bankruptcy in 2010.
The established innovators we studied avoided this fate by following three practices in the first stage of their development journey.
Establish Multiple Partnerships. Companies should prepare for various future scenarios and conduct multiple experiments with startups. Many breakthroughs of existing enterprises come from collaborations with startups. Two well - known examples are Pfizer's mRNA vaccine and Microsoft - supported OpenAI's generative AI.
To make these partnerships work, existing enterprises need to create value for young companies, such as helping them test their inventions or giving them access to customers, and retain a share of all successes. For example, large companies may require startups to agree to become their suppliers or guarantee priority investment. Smart existing enterprises usually pay service fees to startups but avoid large - scale early - stage equity investments. This approach is also suitable for startups because getting a large customer can help them obtain VC funding. The key is that the scale of any single commitment should not prevent existing enterprises from collaborating with other partners.
Set Up Centers. Smart existing enterprises establish innovation centers to help venture capital teams connect with the middle - management and front - line employees of the company. For example, the Enel center can discover about 4,000 potential cooperation opportunities each year, and we have seen that approximately 200 proof - of - concept projects have emerged from them. Different from R & D units, accelerators, and incubators, these centers tend to isolate innovation activities from regular business, while the centers aim to spread new ideas throughout the organization. Take Nozomi Networks, a startup that provides network security services for critical infrastructure, as an example. The first version of its network security product was based on a new idea of identifying threats by monitoring normal network activities and detecting deviations, but its founders had difficulty finding a partner willing to test it. When they were introduced to a center at Enel in 2014, they were almost ready to give up. The center arranged for them to test the solution on the remote control infrastructure of Enel's hydropower stations in Italy. Through this test, Nozomi improved the system and then promoted it to multiple Enel factories around the world.
Cultivate Internal Startup Talents. Centers alone cannot drive innovation across the entire organization. It is also necessary to motivate business management and front - line employees to support innovation. Therefore, Atlas Copco, a global industrial equipment manufacturer based in Sweden, offers significant promotion rewards to managers when they try new business model opportunities. This practice helps the company cultivate a new generation of leaders with intrapreneurial instincts.
One of the outstanding representatives cultivated by Atlas Copco is Helena Hedblom. She initially worked as a materials manager in the R & D department of the rock drilling tools division, then was continuously promoted to become the vice - president of R & D and later the president of Atlas Copco's Mining and Rock Excavation Technique business area, an independent company under the group. Like other presidents, she has full responsibility for the business, which gives her the opportunity to face many entrepreneurial challenges in operating a global business, including promoting operational excellence and innovation and achieving financial goals. Eventually, she became the president and CEO of Epiroc, a mining equipment company spun off from Atlas Copco in 2018. In this position, she continued to combine leadership and innovation, overseeing multiple breakthroughs in automated mining technology, which also greatly improved safety, productivity, and cost - effectiveness.
Commitment: Leverage Your Own Advantages
Once a business achieves a breakthrough, hopes and expectations for it start to soar. This is usually when mature enterprises start to rethink their roles and increase their commitment. The conventional approach is to increase investment by making significant investments in or acquiring startups. Although they hope to ensure that they won't be overtaken by competitors or other entrants, mature enterprises also need to note that if they invest a large amount of money too quickly to expand new projects, they may waste resources and lose the support of shareholders needed for innovation. Therefore, we sometimes refer to this stage of the innovation process as the "corridor of uncertainty."
Rather than framing commitment as an either - or investment decision, smart mature enterprises view it as a carefully managed upgrade process in which they participate. When collaborating with startups, they will shift from a relatively loose, hands - off relationship to a more closely collaborative one. At this stage, they will help smaller enterprises find creative ways to remove obstacles and prepare for scaling up.
To determine whether an innovation project has overcome all the obstacles required for greater investment, existing enterprises need to answer four questions:
Is the business model viable? Enterprises need to test each innovation and think about: What can it bring, how can we supply and produce it, and how can we profit from it? W.L. Gore & Associates, the owner of the Gore - Tex brand, did just that. Bionic Yarn, a startup, uses an innovative method to produce textile - grade recycled polymers from ocean - recovered plastics and collaborates with communities along the coast of Costa Rica to collect most of the plastics. The two companies must ensure the reliable source and quality of the plastics, find a manufacturer that can adjust its equipment to produce new textiles on a large scale, and develop a marketing strategy to position it as a high - end product to cover the higher prices required for additional manufacturing costs. Today, 50% of the materials in Gore - Tex's new composite materials come from Bionic Yarn's factory in Costa Rica, and the outdoor clothing brand Patagonia has started using this fabric in its parkas.
Is there an ecosystem to support growth? The promotion of innovation products on an industrial scale may require a complementary business system, including component developers, downstream distributors, and service partners. In the late 1990s, when Atlas Copco began exploring the possibility of creating remote monitoring services for its equipment, the supporting controllers and basic connection technologies were far from mature. Therefore, the company collaborated with the then Belgian startup Velleman to jointly develop a remote controller. Soon after, it conducted another experiment with an Italian controller manufacturer. These collaborations prompted Atlas Copco to launch AirConnect, which sends SMS messages and email alerts to users when the machine is turned off. However, this service received a lukewarm response: in the end, only 2,500 devices were equipped with AirConnect. But Atlas Copco persevered and collaborated with another Belgian partner to develop a service that uses GPS to track the location of portable devices and monitor their battery levels and diesel levels. All these experiments prepared Atlas Copco: in 2013, it signed a global roaming contract with a telecommunications partner, which promoted the large - scale deployment of its new remote monitoring technology, Smartlink. By 2020, Atlas Copco had provided remote monitoring for more than 100,000 devices, making this service available to most of its customers.
Are customers ready to buy? Historical speculation may work for mature technologies but not necessarily for emerging technologies. Therefore, it is important to map the potential customer pool and determine which projects and partnerships to prioritize. Compared with most startups, existing enterprises have this advantage, especially in a B2B context. Epiroc is a good example: it collaborated with Northvolt to develop batteries for electric vehicles and other equipment used in mining operations, which helps reduce costs and emissions. With its in - depth industry experience, Epiroc realized that potential customers have decades - long planning cycles and are conservative about capital investment. But it also knows which customers are likely to be early adopters. Epiroc and Northvolt have been able to identify the customers most willing to electrify their fleets, including retrofitting existing equipment and purchasing new machines. By embedding Northvolt's batteries in its equipment, Epiroc has positioned itself as the preferred solution for the electrification of mining operations.
How to win the support of other stakeholders? Innovators often face trust issues and cannot win the support of skeptical stakeholders and regulators. Existing companies, with their established brands and reputations, are fully capable of addressing this challenge. Take Humira, a new fully human monoclonal antibody discovered through the collaboration between BASF Bioresearch and Cambridge Antibody Technology. In the early 2000s, Abbott Laboratories, which acquired BASF, launched Humira on the market. At that time, it was one of several monoclonal antibody therapies for rheumatoid arthritis. However, it was controversial because it was difficult to distinguish its potential side effects from the development of the disease itself. The Abbott team collaborated with patient advocacy organizations to raise public awareness of this therapy and clear its stigma. Of course, there is also a certain competitive risk because Abbott's efforts may also make competitors' products more acceptable to consumers and medical professionals. But this move made Humira the preferred drug for the treatment of rheumatoid arthritis.
As these examples show, the advantages of existing enterprises stand out in an uncertain environment. However, the leadership team that decides whether to make a significant investment needs to assess whether the innovation team can answer these four questions with high - quality insights and experimental evidence, rather than just market rumors. This is the only way to understand whether the innovation is truly suitable for scaling up.
Scaling Up: Act Quickly
Once the business model of a new enterprise becomes viable and enough users or customers clearly express their interest, the adoption of innovation often grows exponentially, accompanied by fierce market competition. Therefore, for existing enterprises, it is crucial to organize quickly, mobilize resources, and rapidly scale up the innovation.
At this stage, investment is the only factor that can prevent a new enterprise from fully realizing its potential. Although there may be other obstacles, the risk of not investing at this point is greater than the risk of investing. Unfortunately, at this juncture, existing enterprises often back down and start to burden the leadership team of the new enterprise with last - minute problems and obstacles, which is not conducive to the implementation of the strategy. This situation is particularly common in R & D - intensive industries with high downstream costs, such as the semiconductor industry. These companies invest a large amount of R & D funds and establish partnerships, but then quickly shift from seeking opportunities to avoiding risks. If there is still room for growth in the market for existing companies, this change of direction is difficult to achieve because, in comparison, the risk of investing in innovation is greater.
The most obvious result of the delay caused by this late - stage indecision is that they miss the opportunity to become market leaders. A less obvious but more fundamental negative impact is the loss of talent: young executives eager to take action may not wait for senior management to make a decision but instead jump to faster - moving competitors.
The leadership team of existing enterprises can overcome the obstacles encountered during scaling up through the following four actions:
Make the CFO a direct stakeholder. As the guardians of shareholders' interests, CFOs tend to be cautious about innovation investments. They may also not be used to making decisions based on innovation indicators and leading indicators (such as the number of daily active users). However, if CFOs are involved in the conversation from the beginning, they will be more accepting of these measurement standards and the qualitative data used to evaluate innovation projects. Therefore, they are more likely to "leverage the balance sheet" to ensure future competitiveness.
Present a conservative plan to the board. Just as startups must build a business case for investors, the CEO of an existing enterprise needs to build a convincing argument for the shareholders' representatives (the board) to scale up the new enterprise. This requires formulating a strategy that leverages existing businesses and their competitive advantages and guards against process disruptions.
Beware of the differentiation and synergy traps. Existing enterprises and their startup partners often have difficulty abandoning product or service features that cannot be easily scaled up and prioritize speed over cost synergies. Once exponential growth begins, they need to avoid these traps.
Foster an entrepreneurial spirit. An entrepreneurial spirit is crucial for driving innovation and overcoming organizational inertia. If you have collaborated with a startup, its founder is a good choice, especially if this person has a record of successfully starting new businesses. If the enterprise is internal, the manager who proposed the idea is a potential candidate, but this person must have the ability to motivate others to join and have an entrepreneurial spirit.
As mentioned in the article, large companies can play a key role in turning breakthrough ideas into reality. Although existing enterprises may lack the creative spark of classic startups, they can collaborate with these enterprises. As startups develop, they can carefully increase their support and adjust projects to make full use of their resources and better meet customer needs. Once the new business takes off, existing enterprises have the capital, resources, and capabilities to develop it rapidly. Although the startup slogan "move fast and break things" may not be suitable for existing enterprises, "collaborate and scale up quickly" is very appropriate and can unlock untapped sources of value.
Ivanka Visnjic, Ronnie Leten | Text
Ivanka Visnjic is a professor at ESADE Business School in Barcelona, Spain, and the director of the Department of Operations, Innovation, and Data Science. Ronnie Leten is the chairman of Epiroc, a Swedish mining and infrastructure equipment manufacturer, the former chairman of Ericsson, and the former CEO of Atlas Copco.
This article is from the WeChat official account "Harvard Business Review" (ID: hbrchinese). Author: HBR - China, Editor: Sun Yan. Republished by 36Kr with authorization.