Business innovation in the era of the fourth industrial revolution is determined by digital ubiquity, which accelerates the convergence between the physical and virtual world. Data science, together with the internet of things, generates the possibility of transforming business at a speed never seen before. The fundamental issue is how large companies can join this technological revolution.
Both Forbes and Harvard Business Review coincide in recent editions, that the challenge for companies is not technology, it is culture. Digital Transformation is not synonymous with Process Digitalization, it is about profound changes in the value proposition to customers, innovation in business models enabled by technology.
The case of Chile
In the case of Chile, the Innovation Club, an institution that since 2004 promotes corporate innovation, identified various obstacles to innovation and digital transformation in the corporate sector. Among these factors, the existence of; an organizational culture that is too focused on operational efficiency and short-term results; an organization too hierarchical; excessively centralized decision making; and an uncritical subordination, oriented to compliance with standards.
Also like this, organizations are appreciated as a set of silos with territorial culture, with a marked individualism and excessive competition; lack of incentives and resources allocated for innovation and low tolerance for failure, and lack of transformative vision of leadership. Even when there is a conviction of senior management, of the urgency to innovate, social capital barriers remain, which limit collaboration, a key factor to innovate.
Unicorns, unicorns and unicorns
Cultural obstacles to corporate innovation in Chile and the world, coexist with the emergence of exponentially growing digital startups, that is how almost 400 Unicorns have been generated in a few years, startups that in less than 5 years are valued in more than one billion dollars, a new phenomenon that is directly associated with digital ubiquity and the explosion of services based on digital platforms.
The total value of these unicorns is greater than 1.1 trillion dollars. In many cases, these digital platforms challenge the incumbents, because thanks to network externalities they generate dominant positions and barriers to entry, which threatens to exclude current and past leaders from future businesses.
The question arises whether the corporate world can learn from digital startups.
Perhaps the most significant contribution comes from a development of the last ten years, which begins to gain strength in the last five years, it is the Lean Startup methodology.
The traditional approach for digital startups since the internet appears is to build an elaborate business plan, invest in technological development and marketing, significant amounts of resources, financed by raising capital from venture capital funds.
This approach leads to sink important resources before having the value proposition validated
It also led to the creation of the first Unicorns, but with a very high failure rate, making the technology startup business highly risky. The lean startup approach, on the other hand, in the words of Steve Blank, favors experimentation over elaborate planning, iterative design over “great design from the start,” “customer feedback on intuition,” and would add leave that the data speak for example by applying A / B testing, challenging the preconceptions. This approach to generate scalable businesses through experimentation and rapid learning allows validating or rejecting innovative hypotheses, with a Minimum Viable Product (MPV) that is quickly tested with a selected group of potential clients, initiating a learning process and iterations, which should lead to quickly and inexpensively discard ideas that are not validated. Avoiding establishing significant resource commitments to projects whose fundamentals of value creation are not validated. The digital revolution dramatically reduces the cost of experimentation, which makes this methodology feasible on a massive scale.
A recent study of the NBER *, for the first time allows to test with empirical data the validity of the implications of this methodology. This is a panel of 35,000 global startups that are evaluated over a period of eight years. The number of startups that follow this approach at the beginning of the period is low, only 7.6%, but more than doubled in eight years. The hypothesis is tested that startups that follow the methodology fail and scale faster, avoiding committing significant resources in initiatives without destination and scale and focus on growing rapidly when after a few iterations the value proposition has been validated. The study concludes that a strategy based on repeated experimentation generates better performance. The relevant question for the corporate sphere is what type of organization is better prepared to implement this approach and face the challenges of digital transformation.
How can these approaches be incorporated into corporate innovation?
In this context, Corporate Venturing (CV) emerges, understood as a systematic process of linking between large companies and startups in order to accelerate innovation in the former and access resources, markets and recognition by the latter. Linking can have different levels of commitment of resources by large companies. From offering technological tools for the startup to develop applications to the investment of capital in the startup and the contracting of services.
In Chile, Corporate Venturing acquires relevance in the last three years. A study by Wayra-Prodem indicates that in Chile 28 corporations were in 2018 carrying out CV activities, positioning us in second place in Latin America, only after Brazil. Although initially many of these initiatives at the corporate level were aimed at positioning image and impact on culture, there is an incipient sophistication of the mechanism, advancing to the generation of open innovation that allows to solve business challenges as well as expand and sophisticate business current.
What should be the link between the corporation and the startup is a crucial issue to solve
Acquisition as a traditional M&A is not convenient, since the growth momentum of the startup is inhibited; A minority investment with contracting of innovative services is a more appropriate alternative, but how it is stimulated to be able to influence the practices of the corporation, if they are two different entities with different interests. How do you innovate in the contractual way, moving to more flexible relational contracts imbued with the lean startup methodology? All issues that do not yet have definitive conclusions. How this linking methodology can be structured is a systematic process.
A trend that has not yet reached Chile is the establishment of “company builders” with the support of large corporations, in which they offer platforms that allow startups to innovate in diverse applications. The company builders apply the Lean startup methodology to experiment until validating the business model with potential clients and then invest venture capital to grow rapidly.
A topic with relevance
Open innovation in the corporate sector through Corporate Venturing is a topic of the greatest relevance to address the challenges of digital transformation in the business sector. That is why from the Innovation Club and during our next CEO 2019 Meeting we will focus on these new methodologies that must be adopted by the corporate sector to increase the possibility of taking advantage of the digital revolution to obtain a better strategic positioning in a period of Technological changes and business models that can be very disruptive in the dynamics of market competition.
Also published on Medium.