Competing with new forms of innovation
The classic approach to innovation revolves around disruption as a game changer. Companies hunt for the next disruptive business idea. But some companies take a shortcut by copying successful business models and modifying them to their organizations.
Everybody talks about disruptive innovation – innovation that leads to new customer behavior, new supplier behavior, and new markets. Examples are cloud computing, in which files are no longer stored on laptops and can be accessed with electronic devices from anywhere; e-mobility, in which the gas station has been replaced by a plug at home; and decentralized energy generation, whereby customers produce their energy themselves. We have heard about the ways Uber is impacting the transportation industry and Airbnb is using private accommodations to challenge the hospitality industry.
Scouts around the world are continuously observing new customer needs, new technologies, and developing new scenarios. Companies organize hackathons, that is, workshops where expert teams around the world try to solve specific IT problems and receive financial rewards if their algorithms or apps win. Companies set up incubators to nourish ideas until they are strong enough to enter the market. Or they set up accelerators to serve as boot camps to boost their development. But during all these stages, the question remains: What will be the competitive advantage and the financial result?
A venture capital firm typically receives 2,000 business plans, evaluates 200, and invests in 20, of which roughly 2 to 10 percent outperform – a chance of 1:1,000 to identify the successful business model.
Still, successful innovations threaten market positions, so it is not surprising that incumbents want to have a say in these developments. But how to implement this process, given the bureaucratic restrictions, the provision to fulfill detailed plans, the balancing of scorecards, and the structures for preventing disruptions? How to do it if employees are incentivized for risk-averse optimization strategies such as low failure rates and continuous improvements of existing processes?
A smart way of implementing innovations is to add to the search for ideas as well as to the incubator and the accelerator, and then look at proven business models or technologies, adapt them, and scale them to the existing organization.
Best practice example: Rocket Internet.
Rocket Internet is an internet platform founded in 2007. The company copies successful business models and adjusts them to any market except those of the United States and China. It has more than 30,000 employees across its network of companies, which are active in more than 110 countries across six continents. In 2014, it launched 10 new companies and became the global leader in the online takeaway food market with companies such as Foodpanda and Delivery Hero. For its new companies, Rocket Internet hires management teams, provides them with equity, and supports them in speedily scaling the respective business model and conquering the target market. It took them only 80 days to set up “helpling,” a platform for hiring cleaning staff in Germany, and another 80 days for the rollout in another four countries. In the early phases, Rocket Internet offers support regarding IT, marketing, and personnel. When the new company is fit to operate, it becomes increasingly independent. But, if necessary, it will still be supplied with the relevant benchmarking data of other Rocket Internet companies. The success formula here means: identification and ownership of the management teams with their business ideas, targeting growth markets with weak competitors, providing support for scaling, and collaboration.
Best practice example: E.ON.
E.ON, one of the world’s largest investor-owned power and gas companies, invests in companies with new technologies and business models. But rather than chasing untested ideas, its scouts select product offers that have already been tested on the market. These are discussed and evaluated with internal E.ON teams. If they agree, E.ON invests in the respective company and jointly puts together a commercialization plan. For example, E.ON cooperates with the Californian startup Sungevity, whose remote solar design technology uses high-resolution imagery and electricity records to show customers which solar panels would be best and most cost-efficient for their needs.
Best practice example: Otto Group.
Otto Group is a globally active corporate group of retailers and retail-related service providers. It sells its goods through catalogs, e-commerce, and in over-the-counter retail shops. Online shopping is one of its main businesses. Similar to E.ON, Otto selects and invests in innovative projects that have already been accepted by the market and adjusts them to its own requirements. With the help of pilot customers within the group, each adjustment is tested. If it is successful, the rollout throughout the company follows. One of the best examples is the acquisition of an innovative technology with which customers can check the fit of a clothing item better than before, which significantly lowers the return rate – a critical cost factor for the mail-order segment.