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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. Their owners don’t like risk and won’t kill the goose that lays the golden egg. As a result large enterprises end up defaulting to incremental innovation, perversely increasing the chances that they’ll get upended.
Incumbents don’t have to be caught in this trap. To the contrary, when managed well, the innovation process can both leverage and transform a company’s existing operations. Large firms have a diverse array of capabilities and resources they can share with entrepreneurial partners—or with in-house entrepreneurial managers—that have ideas for breakthrough products and services. They can create portfolios of projects and nurture each one until its chances of successfully scaling up have become clear. This allows incumbents to stay at the leading edge of innovation in their fields and expand into new ones while greatly increasing the odds that their entrepreneurial partners (or intrapreneurial managers) will succeed.
But as we’ll see in the following pages, this approach is complex and nuanced. It requires careful management. To describe how firms can effectively apply it, we’ll draw on what we’ve learned by studying the experiences of more than a dozen large multinationals, including the European firms Atlas Copco, Enel, and Epiroc. Their innovation process, we have found, involves three essential phases: exploration, commitment, and scaling up. Let’s look at each one in turn.
[Here is the first of the three phases.]
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. They have the freedom and, when supported by venture capital, the resources to pursue their ambitions single-mindedly. As long as the prospective upside is worth the risk, they willingly embrace their chances of failure.
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. Consider what happened when Blockbuster had the opportunity to buy the upstart DVD-by-mail service Netflix for $50 million in 2000. Unable to see that home movie-entertainment purchases could be more than impulse decisions focused on hits, Blockbuster flatly rejected it. Four years later Blockbuster unsuccessfully attempted to launch its own DVD-by-mail service, and in 2010 it filed for bankruptcy.
The incumbent innovators we studied avoided Blockbuster’s fate by following a total of three practices in the first stage of their journey:
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