Professional Documents
Culture Documents
Radical Innovation
Robert Stringer
Three of the people attending the meeting in a Chicago suburb were going broke.
They had spent most of their money and all of their time for the past two years
trying to commercialize a radical innovation called "Liquid Life," an all-natural
beverage made 100% from pureed fruit. They had developed an attraaive plastic
package, six good tasting flavors, and eye catching point-of-sale promotional
materials. Grocery stores had told them they loved the idea and would gladly
carry the product. However, consumers knew nothing about "Liquid Life" and it
would take millions of dollars to cormnercialize the innovation the way the three
entrepreneurs wanted to do it. Now, they had run out of money and time.
Four other people were at the meeting. Two were investment bankers, one
a venture capitalist, and one a vice-president from Big Food, Inc., a Fortune 100
food and beverage company. Three of these four tried, once again, to convince
the "Liquid Life" entrepreneurs to sell their ideas and technology to the food
company. Once again, this advice was met with an emotional refusal.
The argument was always the same: the food company loved the breakthrough
technology and was desperate for a radical new idea that might pump life into
one of its existing product categories, but they could not pay much for an
unproved innovation. The "Liquid Lifers" loved the idea of having a big
company's resources behind them, but they knew the food company would strangle their commercialization dreams and control the way they developed future
products. None of them wanted to join a largethough very successful^public
company. The investment bankers had brought the food company to the meeting
and advised the "Liquid Lifers" to sell. The venture capitalist wasn't so sure.
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Other hand, may realize that their industries are suddenly changing and that the
winners in the new millennium will be those who adapt the quickest and innovate most effectively, but they do not know how to do this. They seem to be
"genetically" incapable of commercializing radical innovation, and they cannot
bring themselves to learn by doing.
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for years for silicon germanium in the face of supposedly more feasible R&D
projects in IBM's R&D portfolio. The internal battle for support for radical ideas
must have been fierce at IBM. Meyerson himself admits he was following the
advice of a former IBM president who, wise in the ways of corporate bureaucracy, said: "If a senior executive hasn't screamed at you lately for grossly
exceeding your authority, you're probably not doing your job."*
There is a strong logic for saying that the evaluation and funding of
breakthrough R&D should be separated from a large company's normal R&D
decision-making processes. In order to avoid the trap of incremental thinking, all
aspects of breakthrough innovation must be carved out; this includes identifying
promising radical innovations, funding them, testing them, screening them, and
commercializing those that make sense. However, if you separate accountability
for introducing radical innovations, how do you maintain control? How does
the large company know when a development project is to be considered breakthrough? These become sensitive political issues. How can a large company give
up control over even part of its investment in R&D? After all, that control is the
whole point of the internal R&D portfolio management process.
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leaders of small companies with a radical new technology will often bet most of
their limited resources on commercializing the innovation. Just like the opening
example of "Liquid Lifers," they may knowingly risk the enterprise trying to
prove out and expand the viability of a new idea. Small company R&D functions
are sometimes subject to the same conflicts as large company functions, but their
small size puts them closer to the market and makes them more agile, less
bureaucratic, and more responsive to the unpredictable nature of the commercialization process.
The most important aspect of the small company genetic makeup, however, is the concentration of inventive entrepreneurs found in them. Because of
who they are and where they work, these entrepreneurs can be ruthless about
listening to the market and adapting their ideas in order to make them
successful.
Researchers have known for many years what motivates entrepreneurs.
In the 1960s, we called it "achievement motivation."* A recent article in Fortune
magazine labeled it the "need for accomplishment."' However it is described, the
phenomenon is the same. Innovators and entrepreneurs are driven by four
needs:
to compete against an internal standard of excellence,
to make a unique contribution to the world,
to engage in activities perceived to be moderately risky (that is, where the
chances of success are close to 50/50, rather than impossibly difficult or
too easy), and
to constantly receive concrete, measurable feedback on their performance
and progress.
High achievers are planners. Aware of things that will hinder their
progress, they constantly search for ways to overcome these obstacles. They seek
(and are motivated by) tangible feedback rather than vague or hard to understand measures. They learn from this feedback. They art on it. High achievers
are not simply idea peoplethey are builders. They take ideas and put them to
work, and this is what makes them successful as entrepreneurs.
Unfortunately, entrepreneurs often have well-earned reputations for
being poor team players. They view other people as a means to an end, and they
can be stubborn, ruthless, and drivennot by fame or fortune, but by their need
to accomplish something real, meaningful and tangible. As Fortune states,
"Entrepreneurs with the right stuff don't think much about taking risks or getting rich. Instead, they are obsessed with building a better mousetrap."'"
It is not hard to imagine why large company environments frequently
discourage and de-motivate entrepreneurs who are the drivers of radical innovation: too many rules, too much compromise, too many meetings, and too little
willingness to "just do it."
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JJDC executives, have partially overcome these fears. Qther venture capitalists
are also wary of corporate venture capitalists, in part because sponsoring corporations are impatient with the long time franies venture capitalists use to measure success. JJDC has earned their trust by sharing quality deals and by
pledging to stick with investments in later financing rounds. Perhaps the most
troubling lesson learned by JJDC relates to their ability to attract and retain
high-quality venture capitalist talent to work for them. JJDC simply cannot offer
the incentives and the equity participation in the venture capital fund that the
best venture capitalists
Strategy #9; Participate in an "emerging industry fund" (EIF).
Large companies like Lucent Technologies, Merck, and DuPont have been
investing in start-up ventures for years. The research firm. Venture One Corp.,
estimates that 27% of all venture capital rounds in 1998 included one or more
corporate investors.^" However, the vast majority of these investments are passivemade by the large company's pension fundand include no systematic
mechanisms to insure that the corporate investor gains any strategic insight from
its investment. Today, a few far-sighted industry-leading corporationswho are
desperate to innovate because they do not know how their industries will
evolveare contributing capital to a specially created venture capital fund and
setting up knowledge transfer processes to learn how radical innovations are
being commercialized.
A Fortune 500 food company and major U.S. pharmaceutical company, for
example, have recently joined forces to invest in the emerging health and wellness industry. Adobe and Texas Instruments have established fuftds that are
managed by H&Q Venture Associates. These companies invest in, but do not
control, the operations of the fund. In its pure form, the majority of EIF capital
comes from institutional investors who are seeking above average financial
returns and believe that the fund's unique structure provides them with a lower
risk way to accomplish this objective. The EIF often invests in companies in need
of growth capital, not early stage start-ups. This eliminates much of the controversy and risk involved with radical innovations and allows the EIF's corporate
investors to more quickly "see" the commercial potential of the new ideas. As an
executive from the pharmaceutical company observes: "the primary risk is market development, not technology or science."^'
The EIF is managed by independent venture capitalists (VCs). This feature, along with the inclusion of-institutional capital, distinguishes the EIF from
other corporate venturing initiatives and dramatically changes both its nature
and purpose. Unlike the typical corporate venture or corporate sponsored venture fund, EIF corporate partners are not playing with just their own money, and
the VCs are not part of the corporate family. Without the leverage of third-party
capital and the skills, greed, and discipline of the independent venture capitalist,
the fund will be constrained by the same factors that limit captive corporate
venture funds.
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Control over
Innovation and
Commercialization
Strategy
Process
Likely Motivational
Impact on the
Radical Innovators
Availability of
Economic and
Emotional Support
Complete
Lovi'
Unpredictable
Low
Mixed
3, Infomnal Project
Laboratories
Moderate
Low
4. Idea Markets
Moderate to High
ModerateIt Depends on
the Degree of Autonomy
5. Dual Strategies
High
Moderate to High
6. Acquisitions and
Alliances
Moderate to High
ModerateIt Depends on
the Degree of Alliance
Integration
7. Corporate Venturing
Moderate to High^The
More "Hands Off" the
Better
LimitedDepends on
the Budget
8. Corporate Venture
Funds
ModerateOften a
Contentious Issue
9. Emerging Industry
Fund (EIF)
LowIt Is Indirect
Very High
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Strategy
Innovator's
Perception of
the Quality of
this Support
Opportunity to
Learn about the
Full Potential of
the Innovation
Degree of
Difficulty of
this Learning
Low
Very Easy
Low
Probably LowDepends
on the Courage of the
Hired Innovators
Easy
3. Infomnal Project
Laboratories
Low
Low t o Moderate
4. Idea Markets
Moderate, IfThere Is a
"Hands OfT" Policy
5. Dual Strategies
MixedVery Hard t o
Stray Too Far From the
Core Technology
6. Acquisitions and
Alliances
MixedWill Depend
on How Connplementary
the Innovation is
HighUnless the
Innovator-Partner in
Pushed in One Direction
Mixed^The Question
is W h o Learns What?
7. CorporateVenturing
MixedComes with
"Strings" Attached
Moderate^Very Hard
t o Keep from Meddling
Easy
8. Corporate Venture
Funds
9. Emerging Industry
Fund (EIF)
HighWill Depend on
the Quality of theVCs
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ing, sales, or distribution practices, tbe faster they will be able to grow their companies. The more the large corporate investors know about tbe potential of tbe
radical innovations, the higher tbe value tbat will be placed on each of the successful portfolio companies. Even tbe less successful ones will be worth more
because of tbe active, focused, and informed VC support they received being
part of the EIF portfolio.
Researcb by Walter Powell at the University of Arizona and Rob Cross
and Lloyd Baird at Boston University sheds ligbt on bow this knowledge transfer
process works and bow it stimulates innovation in large companies. Powell studied the field of biotechnology and concluded that companies that have active
collaborative networks, including involvement with new ventures and emerging
companies trying to commercialize radical innovation, are exposed to more new
ideas and are potentially more innovative. Tbe key to being more innovative
turns out to be tbe company's ability to absorb knowledge, not the availability of
radically new ideas.^* Cross and Baird found that knowledge transfer depended
more on personal interactions than on technology or data bases.^^
Building on these insights, corporate participants in an EIF can use seven
knowledge transfer mechanisms to enhance their appreciation of the potential
value of the radical innovations they indirectly invest in:
Place an Executive in the Office of the VC. This keeps the corporate participants
fully informed of the fund's deal flow and tbe commercialization activities
of its portfolio companies. The on-site executive also belps the portfolio
companies access the resources of the large corporate investors.
Designate an EIF Network Manager. Tbe Network Manager, located at corporate headquarters, is at the receiving end of the knowledge flow from the
EIF. He or she is responsible for enhancing and sustaining tbe dialogue
between the corporation and the R&D professionals, the marketers, the
operators, and the executives of all the companies associated with the
fund.
Create Absorption Teams within the Corporation That Wants to Learn. Tbe goal
is to ensure tbat new ideas are spread around the corporate partner's
organization by turning individual expertise and insight into organizational learning. Identify small teams of people who will be responsible for
learning about the experiences of each portfolio company, with different
people assigned to each venture in order to assure rapid and diffuse
absorption of tbe new knowledge.
Set Up an Idea Library. Eacb corporate participant sbould establish a central
repository for tbe documentable knowledge tbat emerges from the EIF
activities and investments. Tbe library would include working papers, due
diligence reports, memos, presentations made by various experts, legal
documents, and the minutes of the fund's Advisory Board.
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Create an EIF Web Site. To encourage scientific dialogue, all tbe portfolio
companies, tbe corporate partners and the VCs sbould have secure access
to tbe EIF's own web site.
Establish Formal Forums to Compare Notes. In forums bosted periodically by
each corporate participant, representatives of tbe fund's portfolio companies and its Advisory Board focus on specific tecbnologies, ideas, or issues.
Participants can present issues, ideas, successes, failures, and insigbts and
can explore ways to capitalize on their pooled experience.
Respond to Requests for Informal Exchanges. Perbaps tbe most important
knowledge transfer mechanism is the informal conversations and
exchanges between tbe corporate limited partners and tbe individual
portfolio companies. Tbese include cross-functional and multi-functional
problem-solving meetings aimed at helping a specific entrepreneur commercialize his or ber innovation.
Strategy #9 is too arm's-lengtb, too expensive, and too risky to be relied
upon as tbe sole source of commercially viable radical innovations. However,
when combined with one or more of the otber strategies, it may provide multiple windows tbrougb which a company can view tbe future evolution of an
emerging industry. Moreover, it gives the large corporation informed strategic
options it would otberwise not have.
Think Ahead
what is tbe likelihood tbat tbe leaders of major U.S. industries will grow
by virtue of homegrown breakthrough innovations? Will companies like GM,
Philip Morris, and Exxon lead tbe way in defining and then meeting the needs
of tomorrow's consumers? Is it not more likely that small, emerging companies
will discover and exploit tbe best new ideas? If companies like J&J, Intel, and
Cisco Systems continue to generate a constant stream of innovations, migbt it be
because tbey bave adopted truly unconventional approacbes to tbe innovation
management process?
During times of disruptive change, just wben tbe need for new initiatives
and radical tbinking is tbe greatest, most industry leaders engage in more market researcb on tbe value propositions of existing customer segments. Tbey bire
more consultants who explore ways to expand and sustain tbe company's current sources of competitive advantage; and they fund more detailed and comprehensive analyses of the banks of data in tbe company's arcbives. These
responses to tbe need for greater innovation are all part of tbe genetic code of
tbe typical big company. In tbe new millennium, tbe leaders of traditional industries are going to bave to apply new innovation management strategies if tbey
are to maintain tbeir leadersbip positions.
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Notes
1. Curt Wang, "Seven Ways Brand Management Kills Innovation," Food Processing
(September 1999), pp. 35-40.
2. CorpTech database, owned by Corporate Technology Information Services, Inc.,
see Hanson, Stein, and Moore (1984).
3. Samuel Kortum and Josh Lerner, "Does Venture Capital Spur Innovation?"
National Bureau of Economic Research Working Paper, Cambridge, MA, 1998.
4. "Stall Points," Research Report of the Corporate Strategy Board, 1998.
5. Clayton Christensen, The Innovator's Dilemma (Boston, MA: Harvard Business
School Press, 1997).
6. "Getting to 'Eureka'!" Business Week, November 10, 1997, p. 76.
7. David McClelland, Human Motivation (Cambridge: Cambridge University Press,
1986).
8. George Litwin and Robert Stringer, Motivation and Organizational Climate (Boston,
MA: Harvard University Press, 1968).
9. Brian O'Reilly, "What it Takes to Start a Startup," Fortune, June 7, 1999.
10. Ibid., p. 135
11. Comment in a personal interview with the author.
12. Michael Tushman and Charles O'Reilly, Winning Through Innovation (Boston, MA:
Harvard Business School Press, 1997), p. 171.
13. Ibid., p. 171.
14. Ibid., p. 173.
15. For ideas and a discussion of how to squeeze the most out of business alliances
and partnerships, see Jordan Lewis, Partnerships for Profit (New York, NY: The
Free Press, 1990); Kathryn Harrigan, Managing for Joint Venture Success (New York,
NY: Lexington Books, 1986).
16. Peter Cohan, The Technology Leaders (San Francisco, CA: Jossey-Bass, 1997),
pp. 79-81.
17. Zenas Block and Ian MacMillan, Corporate Venturing (Boston, MA: Harvard Business School Press, 1993), pp. 196-228.
18. Ibid., p. 196.
19. Comment in a personal interview with the author.
20. Thomas Helimann and Manju Puri, "The Interaction between Product Market and
Financing Strategy: The Role of Venture Capital," Stanford University Graduate
School of Business Research Paper No. 1561, May 1999.
21. Business Week, October 11, 1999, p. 28.
22. Block and MacMillan, op. cit., p. 343.
23. Private correspondence with the author.
24. Luisa KroU, "Entrepreneurs Big Brothers," Forbes, May 3, 1999.
25. Comment in personal interview with the author.
26. Walter Powell, "Learning from Collaboration: Knowledge and Networks in the
Biotechnology and Pharmaceutical Industries," California Management Review, 40/3
(Spring 1998): 228-240.
27. Rob Cross and Lloyd Baird, "Technology is Not Enough: Improving Performance
by Building Organizational Memory," Sloan Management Review, 41/3 (Spring
2000): 69-78.
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