Suffering from the inability to generate higher levels of profitable growth? Find yourself repeatedly asking “Why aren’t we able to develop the ‘next new thing’?”
You’re not alone. Companies everywhere have been having difficulty driving higher levels of growth. And few have harnessed sufficient innovation wherewithal to introduce the “next new thing.”
The harsh reality is that traditional types of innovation won’t produce the “next new thing”. While conventional R&D organizations can provide incremental improvements to existing products and services, they are not structured or resourced to generate sustained, above-average growth.
That hasn’t always been the case. Years ago, companies produced breakthrough innovations from traditional R&D organizations. DuPont, for example, developed nylon that way. But over the past couple of decades, the mandate to meet quarterly profit targets has led companies to emphasize R&D operating efficiency over breakthrough innovation. The net result has been a culture and operations model best suited for creating incremental changes.
Over the past couple of decades, the mandate to meet quarterly profit targets has led companies to emphasize R&D operating efficiency over breakthrough innovation.
Open innovation initiatives often don’t fare much better. Typically embedded across the objectives of multiple organizations, these projects do not have the focus or the metrics needed for getting results.
No wonder so many companies are having difficulty producing the breakthrough innovations needed to drive sustainable growth.
There is, however, a remedy for ailing R&D operating models: internal incubators—small teams focused on commercializing high-impact innovations quickly. By injecting just a small dose, leading companies like Cisco, P&G, and Alcatel-Lucent have realized big results.
In contrast with earlier incubators, which operated as independent think tanks, today’s incubators function as integral units of the parent company. As such, they focus on developing product concepts and business models considered core to corporate strategic goals. They also have full access to corporate assets and competencies.
Today’s incubators differ from traditional R&D in three important ways.
First, incubators are now organized, staffed, and operated with a single goal in mind—significant profitable revenue growth. Having tasked its incubator with creating the next $1 billion businesses, Cisco is approaching that goal with hits like TelePresence, a high-end video conferencing product.
Second, incubators are designed to deliver breakthrough change in both business models and technology. This dual-action innovation allows for the creation of robust offerings with maximum potential for profitable growth. P&G’s incubator, FutureWorks, recently introduced Tide Dry Cleaning and Laundry, combining a novel business model and eco-friendly technologies with a tried and true brand.
Third, incubators are responsible for commercializing the winning concepts and generating the initial revenues. This forces incubation teams to put some skin in the game—i.e., they have to own the commercialization outcome and the resulting revenues. The teams carry the responsibility for making marketing investment and sales training decisions, and for managing inventory build-ups and write-offs. Most importantly, they are accountable for setting and achieving the initial profit-and-loss goals for the unit. For these reasons, the charter of Alcatel-Lucent Ventures, the communication giant’s incubator, extends from concept to launch to initial sales.
Incubators require a special organizational construct. You can’t put them inside the business units because the organizational antibodies will kill the concepts and ultimately the incubator itself.
Caution: incubators require a special organizational construct. You can’t put them inside the business units because the organizational antibodies will kill the concepts and ultimately the incubator itself. To keep a laser-like focus and deliver on the growth goal, the incubator needs to be isolated from the bureaucracy, quarterly P&L concerns, and antibodies of the business units. But incubators can’t be entirely isolated either, or they risk producing concepts that lack commercial viability. The best example of that phenomenon is Xerox PARC.
Incubators deliver growth through three interrelated steps—exploration, development, and launch.
Exploration of potentially attractive opportunities requires early prototype testing focused on the areas of ignorance that are inherent in any breakthrough concept—i.e., the “leaps of faith” where much is assumed but little is known. This includes business model uncertainties as well as product or technology risks. Take on-line music as an example. Napster had proved people wanted access to music files, but its business model did not include paying for the music. Apple, by contrast, based its early iTunes prototypes on the hypothesis that people would pay for music on-line. The company put other development issues on the back burner until that crucial assumption was validated.
Prototypes are the best method to quickly gather invaluable information on key hypotheses. Enrico Fermi described it elegantly: “There are two possible outcomes (of a test). If the result confirms the hypothesis, then you have made a measurement. If the result is contrary to the hypothesis, you’ve made a discovery.” Either way, you are smarter.
Development in an incubator is highly entrepreneurial and much more rapid than traditional product development. Typically, incubator teams are small and incorporate lean practices such as Agile project management and Scrum methodologies. Yet, even with this emphasis on flexibility and speed, development is still managed within the boundaries of traditional stage-gate processes.
Launch, the third step, generates the initial commercial revenues. All aspects of launch, including branding, the development of training materials, marketing communications collateral, launch event planning, analyst road shows, social media campaigns, sales and services, and post-sales support, are responsibilities of the incubator. Product launches from corporate incubators mimic the speed and nimbleness of a start-up while leveraging the prowess of the big company. After the incubator has proven commercial viability, the venture is either spun into the company or spun out to external management to scale and to grow the business. The timing and execution of the spin-in or spin-out is the vital responsibility of the incubator.
Successful creation of an Incubator 2.0 requires the founding executive team to pay particular attention to people, processes, and cadence.
People. Incubators require intrapreneurs–lean and hungry entrepreneurs that know how to work inside a company. Incubator teams leverage company capabilities and resources to move fast. In addition, they are adept at partnering with external resources to generate value quickly and efficiently. At Hewlett Packard, teams from HP are partnering with the National Basketball Association to develop innovative products that will enhance the NBA fan experience for audiences across many regions.
Processes. Successful incubation requires the creation of an environment that is open to what’s possible without saying “Yes” to every viable concept. Since an incubator has to be maniacally focused on high-growth opportunities, there is no room for anything but the best. Proven capabilities in early stage prototyping must be combined with a new operating model that embraces rigorous execution with blinding speed. When in the exploration and development phases, incubators also require the equivalent of a venture board to make timely decisions to cut, divest, or double-down on investments. In addition, the board governs the crucial spin-in/spin-out transition.
Cadence. Successful incubation of breakthrough innovations is best done in many small, successive development steps. While this cadence may seem counterintuitive, it has proven to be the best way to make big breakthroughs and quickly generate high growth. Vacuum cleaner giant Dyson created 5741 prototypes of its revolutionary product over a four-year period before actually launching it. That high-paced cadence allowed the company to transition a brilliant concept into a successful product with huge consumer appeal.
How does a company determine if it needs to add an incubator?
If your company already has an incubator in place, you should look at several key performance measures to ensure you are getting your money’s worth.
Over the next 5 years—possibly longer—companies will be preoccupied with regaining their growth vitality. Some companies will try higher doses of traditional R&D, but will be disappointed; the culture and capabilities are just not up to the task. Others will borrow and apply models from reputable innovation leaders, such as Google’s 20% free time for innovation. But above-average growth cannot come from borrowing a remedy that’s dependent on the culture of the company that developed it.
The key to higher growth is to create an incubator pathway that bypasses the incremental culture of traditional R&D and business units. As leading companies have shown, the intrapreneurial culture and operating model of the incubator provides the vision and capabilities needed for creating the “next new thing”—and experiencing the profitable growth that comes with it.
By Rob Shelton & John Riggs