EXCUBATION explained PART 2
Excubation is currently increasingly being recognized as a means for (more radical) corporate innovation that promises a higher success rate and disruptive potential compared to more traditional approaches like corporate incubation/ acceleration, intrapreneurship or open innovation. (Please read Part 1 of our "EXCUBATION explained" series for details.) Success, for that matter, being defined as innovative, disruptive products, services and business models that prove to deliver significant additional value for the corporation – compared to mere marketing impact that many of the traditional programs resulted in.
Taking hundreds of corporate entrepreneurship initiatives into account, excubation as a new best practice enables a so-called “ambidextrous approach” to venturing – by excubating corporate ventures out of the realms of the core organization.
”If managed effectively, a new corporate venture has the resources of a large organization and the entrepreneurial benefits of a small one.” (cf. Tidd et al, 2005)
What are the success factors of excubation and why does this approach promise better results? From our experience and work with clients across industries and regions, we have distilled a set of seven rules for successful excubation that we want to cover one by one. While the first and generally most important rule addresses the setup as a whole, rules 2-4 focus on the innovation unit and 5-7 on the existing core business.
Rule #1: Separate innovation from execution
Rule #2: Attract entrepreneurial talent
Rule #3: Facilitate innovation flow
Rule #4: Manage innovation portfolio
Rule #5: Inspire employees in the core business
Rule #6: Educate employees
Rule #7: Support idea flow
Besides these specific and operational rules, there is another crucial success factor to establish excubation as a recurring concept for corporate innovation: The ongoing flow of ideas, talent, cultural experiences and innovations between the core business and the innovation business that will emerge from putting all these rules in place. This clearly differentiates excubation from other corporate entrepreneurship initiatives that either work as a subordinated section within the corporate or more or less isolated from the core. Both are neither empowered nor equipped to foster the urgently needed cultural, strategic and operative changes to cope with the emerging transformational shifts affecting their industries. We want to dive into these rules one by one in our upcoming newsletters.
Rule #1: Separate Innovation from Execution
A classical (also known as ‘innovators’) dilemma every successful organization faces, is the challenge of delivering innovation within and from the core of the current business. While the current business is focused on exploitation, the continuous improvement of existing competencies, innovation requires exploration and development of new competencies.
The benchmark for real innovation power is typically not set by corporates, but by successful startups. Existing companies are typically not capable of severely challenging or even cannibalizing their core business. This has been the reason – for example – for many software companies to jump on the Software-as-a-Service bandwagon too late, after it had already begun cannibalizing the existing license and maintenance based software business.
Mechanisms and organizational structures generally don’t allow for a fast and agile development of radical business model innovation. This is why we believe that optimizing existing competencies and building up new competencies need to be organizationally separated such that the respective units can tailor their approaches, processes, incentives specifically to these tasks. Whilst the idea of separating innovation from execution is not new, corporates are only now and gradually realizing that it is not sufficient to just create a separate department within or outside of the existing organization to deal with innovation.
Excubation, however, stresses the need for separation but dives more deeply into the relationship between the core business and the innovation unit to leverage the strengths of both sides, enabling corporates to even outperform startups when it comes to developing and scaling new businesses. Within our model we call the two separate units “innovation company” (focusing on exploration) and “execution company” (focusing on exploitation), whereby the innovation company typically would be a subsidiary of the execution company.
Practical issues with current corporate venture building
Working with corporates running traditional approaches to building ventures, we have come across a set of practical challenges that clarify once more why a “smart separation” is a critical success factor. Using a smart approach to separation is critical, given that neither fully external nor fully internal venturing approaches have been yielding meaningful results. With internal venturing, synergetic benefits between the core company and the venture are typically overestimated and have mostly not been achieved, as experience shows (see also Steve Blank, 2014):
A) Access to resources and capabilities could become inflexible liabilities - blocking the search and scale process as assets are tailored to execute the existing business model, not to help search for a new one and scale it
B) Internal ventures must fight on two fronts – externally achieving product market fit and scaling the new business AND internally obtaining the permissions, protection, resources, etc. needed to launch the venture initiative, and work to retain that support over time as conflicts arise
C) Strategic & Resource Dependency leaves new business at corporates mercy - increasing risk to get stopped before showing profits, e.g. imagine one bad quarter for the company or the arrival of a new CEO who wants to clean house
Applying the separation rule
Separation of innovation and execution should ideally follow a few basic principles and address the scope of organization, budget, location, strategy and portfolio, for which a few key questions need to be answered.
To find the right level of separation, we typically look at the core business and the new venture from three different angles and evaluate how close both eventually are in terms of 1) strategic success factors, 2) their business models and 3) the capacity to innovate and scale.
1) In terms of the strategic success factors, there are multiple dimensions in the areas of management capabilities, operating capabilities and proprietary assets that both the new venture and the core business make use of. We often see the required management capabilities differ quite a lot between the new venture and the core, e.g. when it comes to regulatory management and HR/culture management, where partly fundamentally different approaches are needed. As an example, when it comes to creating security documentation for a product sold in all of Europe, the core company might need to create documentation in 27 European languages, while the startup might need to be more pragmatic and do only English in order to speed up market penetration, even if this could result in penalties from regulatory authorities. Operating capabilities often overlap on the go-to-market and customer relationship side, when the new venture addresses the same customer base with a different offering.
2) The business model overlap is best assessed using the business model canvas dimensions and thoroughly understand where both models differ. We primarily look for synergies and risks to understand how closely the business models are aligned. As an example, if there is a significant legal risk of the startup company violating some regulation (e.g. data management requirements) in order to speed up the process, the parent company’s business model needs to be protected via separation as a “legal firewall”.
3) Looking at the capacity to innovate and scale, we assess the organizations readiness to implement the seven rules of excubation and – again – the differences and aggressiveness with which these need to be implemented within the existing and the startup organizations. As an example, the ability to attract entrepreneurial talent typically differs significantly between the existing core business and a more or less separated innovation company that can provide totally different empowerment and incentive mechanisms.
This analysis typically results – directionally – in a separation design along these cornerstones:
How to get started
Excubate applies a pragmatic approach to finding the right level of separation of the innovation/venture company from the core business, no matter whether the scope is establishing an own innovation company or just building a single venture. To avoid jumping to conclusions on whether and how to separate, a thorough review of the status quo and separation objectives is required.
We approach this in multiple stages and typically start with a workshop cadence to identify a) the innovation objectives and general direction of the corporate entrepreneurship efforts b) the search scope for disruptive business models, often including an ideation approach and c) the similarity and differences of the success factors and business models as well as the capacity to innovate of the innovation and the core company. Each of these steps will be addressed in a 1-2 day workshop with selected members of the management team and results in initial guidance on separation as well as a set of very specific questions for deeper analysis.
Getting started is quick and easy, the excubate team will help you compose a workshop team and orchestrate a workshop for you quickly, effectively and cost efficiently.
We are pleased to discuss the above topics in more detail with you and spend time on the phone or in person to help you run successful corporate entrepreneurship initiatives! Please get in touch with:excubate® corporate startups
Dr. Markus Anding and Tammo Ganders, MBA
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