The Legacy Company’s Guide to Innovation

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The Legacy Company’s Guide to Innovation

By Ivanka Visnjic and Ronnie Leten | Harvard Business Review Magazine | September–October 2024

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As the markets celebrate the success of gen-AI and green-tech start-ups, many experts are urging established companies to emulate those ventures by committing to radical innovation—by disrupting themselves before someone else does. But for a lot of incumbent companies, that’s just not a feasible strategy.  To the contrary, when managed well, the innovation process can both leverage and transform a company’s existing operations. It requires careful management. A new approach is complex and nuanced but hold promise. The organizations have managed to overcome this complexity by following 3 stage process.

  1. Exploration: Find Your Start-Ups.  Innovators often work for decades to tackle grand challenges and turn visions of the future into reality. Many of those efforts will end in failure; only one or two will go on to change the world. Start-ups are hardwired for this journey.  Unfortunately, this model doesn’t work for the management and stakeholders of established companies, which are designed to provide existing goods and services reliably and to adapt to customer preferences. Corporate governance and capital controls are in place specifically to ensure this.  Those constraints drive many incumbents to adopt a limited innovation strategy: focusing on incremental improvements to existing businesses or collaborating with just one or two like-minded partners on pursuing a narrow ambition. That can be dangerous.  The incumbent innovators the authors studied avoided this by following three practices in the first stage of their journey: setting up multiple partnerships, establish hubs, and groom intrapreneurial talent.
  2. Commitment: Leverage Your Advantages.  Once a venture yields a breakthrough, hopes and expectations begin to soar.  Instead of framing their commitment as an either-or investment decision, smart incumbents see it as a carefully managed escalation of their involvement. When working with start-ups, they will shift from a relatively loose, hands-off relationship to a more collaborative one. At this stage they’ll help the smaller venture find creative ways to remove roadblocks and prepare to scale up.  To determine whether an innovation project has cleared all the hurdles necessary for larger investment, the incumbent needs to address four questions: Is the business model viable?  Do we have an ecosystem that will support growth?  How ready are our customers to make purchases?  And how can we win support from other stakeholders?
  3. Getting to Scale: Move Fast.  Once a new venture’s business model becomes viable and the interest of a critical mass of users or customers is clear, the adoption of an innovation tends to take off exponentially, accompanied by a frantic race to market. So it’s vital for incumbents to be organized to rapidly mobilize their resources and scale innovations up quickly.  At this stage investment is the only factor preventing a new venture from realizing its full potential. While other obstacles may still crop up, the risk of not committing is now greater than the risk of committing. Unfortunately, at just this point incumbents often develop cold feet and start bogging the new venture’s leadership team down with last-minute questions and hurdles that hamper execution.  Four actions can help leadership teams of incumbent ventures avoid obstacles to scaling up: make the CFO a direct stakeholder, pitch a conservative case to the board, beware the differentiation and synergy traps, and put an entrepreneur in charge.

2 key takeaways from the article

  1. As the markets celebrate the success of gen-AI and green-tech start-ups, many experts are urging established companies to emulate those ventures by committing to radical innovation—by disrupting themselves before someone else does. But for a lot of incumbent companies, that’s just not a feasible strategy.  To the contrary, when managed well, the innovation process can both leverage and transform a company’s existing operations.  It requires careful management. A new approach is complex and nuanced but hold promise.
  2. The organizations have managed to overcome this complexity by following 3 stage process.  Exploration: Find Your Start-Ups (one needs to set up multiple partnerships, establish hubs, and groom intrapreneurial talent), Commitment: Leverage Your Advantages (ask the following questions: Is the business model viable?  Do we have an ecosystem that will support growth?  How ready are our customers to make purchases?  And how can we win support from other stakeholders?)  And Getting to Scale: Move Fast (Four actions can help leadership teams of incumbent ventures avoid obstacles to scaling up: make the CFO a direct stakeholder, pitch a conservative case to the board, beware the differentiation and synergy traps, and put an entrepreneur in charge.). 

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Topics:  Strategy, Business Model, Innovation, Startups, Agility, Incumbents, Competing

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