Strategies and Success Factors in Innovation

Manatt Digital and Technology

The rise of disruptive startups with fresh solutions has fueled to new levels the demand for corporations to innovate. The average life span of an S&P 500 company has dropped from 60 years in the 1950s to under 20 years today. According to CB Insights, 85% of executives say innovation is very important, and 41% believe they are at high risk of disruption by emerging companies with new technologies. Corporate venture capital funds, one type of innovation initiative, made up 23% of all VC deals in 2018 and deployed 47% more capital than in 2017, emphasizing how much the commitment to fund new ideas has grown at America’s largest corporations. So, how are companies innovating today, and what key factors impact the success of their initiatives?

Innovation takes many forms and ranges from small internal programs, such as the collection and implementation of customer/employee feedback, to more comprehensive initiatives, such as dedicated innovation teams, strategic partnerships, investments and M&A. Innovation programs and initiatives typically focus on at least one of three things: (1) fortify and grow the core, (2) expand into adjacent markets or (3) enter/create new markets. Many organizations focus on opening new fronts in all these areas, especially as they balance between positioning for today and building the foundation for tomorrow.

Some initiatives are focused on strengthening a company’s hold on the existing market by improving or expanding a current product or service (incremental or transformative). We see this in Disney’s recent acquisition of Fox. The entertainment industry has already been disrupted by shifting consumer behaviors and significantly by Netflix, which now competes directly with Disney for both consumer attention and content supply. This deal strengthens Disney’s position against Netflix and enables it to fortify and grow its media and experience businesses with new intellectual property.

Often, companies’ innovation initiatives are reactive to fear created by new entrants, which sometimes start at the low end of a market and deliver simpler products that cost less. In financial services, micro-investing startups, such as Acorns (valued at $860 million), have offered low-cost, less complicated investment opportunities targeting a younger demographic; these upstarts are slowly making their way upstream to customers of existing banks. In response, JPMorgan launched You Invest, a new digital investing product that offers a sliding scale for low-cost trades. Other banks, such as Charles Schwab and Wells Fargo, have already introduced their own low-cost, automated investment platforms to protect their market share and expand it into new customer segments (customers that were previously outside their purview).

The third bucket of innovation focuses both on entering or creating entirely new markets that serve new customers or that offer existing customers entirely new products and services. In 2018, BestBuy acquired GreatCall, a connected health and personal emergency response service provider for seniors. Through this acquisition, BestBuy enters the growing market for senior health and expands its managed services capabilities, a key vertical it looks to grow on top of the hardware it sells. In addition, BestBuy can now offer GreatCall’s services to its existing customers. BestBuy can also cross-sell and market its products and services to GreatCall’s 900,000 paying subscribers.

While it’s difficult to predict the success of innovation initiatives (new product launches, strategic partnerships, M&A, etc.), the degree of alignment in a few key areas can greatly impact the likelihood of success. These areas are organizational culture, industry stage and customer needs.

The first and most critical step is aligning the organization and its culture around the change so that the change is properly supported. This is critical especially for acquisitions or new products that require a high level of cross-coordination or integration into the core business. For initiatives that are more disruptive to the existing business model, the organization must give them sufficient resources and autonomy to grow. In this case, a separate business unit, entity or joint venture with its own resources and incentives often executes more efficiently.

Second, the stage of the industry and basis of competition can help companies determine where to invest and whether to double down on current capabilities or expand into other parts of the value chain. In these early days of the AR/VR/XR headset market, the likely leaders are the companies that follow a more vertically integrated strategy, controlling reliability and functionality across the value chain. Facebook, for example, has invested in all areas of the value chain, financing (and therefore applying some control of) the supply of VR content and applications and distributing to end users through Oculus. As the technology develops and as interfaces start to become standardized, the basis of competition will shift to attributes such as convenience and personalization, if it follows history. At this stage, those that can differentiate with customized attributes for specific use cases (such as VR for digital therapeutics) or parts of the value chain (such as AR content development) will be well positioned. In the financial services industry, peer-to-peer payment platform Venmo is an example of a company specializing in one aspect of the industry and doing so to great success.

Finally, innovation should ultimately be centered on the customer (new or existing). Because digital technologies have lowered the barriers to entry in many markets, competition has continued not only to intensify but to evolve. Yesterday’s competitors do not look like today’s. To combat such uncertainties, the process of innovation must focus on identifying true customer needs, delivering compelling customer experiences and building a differentiated brand. Build technology to suit the customers’ interests; don’t expect customers to bend to technology.