As the pandemic’s first wave swept the planet, companies everywhere scrambled to adjust. Whisky distilleries, responding to surging demand, switched to hand sanitizer production, apparel manufacturers made masks and gowns, and commercial airlines ramped up cargo-only flights. Faced with city centres becoming ghost towns, UK sandwich chain Pret a Manger pivoted to launch a coffee subscription service, John Lewis announced plans to become a residential landlord, and Chinese cosmetics giant Lin Qingxuan spurred growth by redeploying over 100 in-store sales reps as online influencers.
In a fight for survival, many businesses – from lowly corner shops to global conglomerates – have proven not only resilient, but highly adept at delivering rapid change and innovation around resources, assets and business models. Yet even before Covid-19 upended economies and accelerated shifts to digital, many of today’s household-name brands were already facing an unprecedented array of threats. Corporate lifespans have been shortening for decades: the average age of an S&P 500 company in the US is under 20 years, plunging from around 60 in the 1950s. It’s a similar story on this side of the Atlantic: a report by Schroders revealed that since the FTSE’s launch in 1984, just 28 of the 100 companies on the original index remained on the list by 2017, some 33 years later.
Fast-growth digital startups have also been making serious inroads into the territory of established players in every sector. Retail banking is a prime example: Lloyds Bank and Barclays were founded in 1765 and 1896 respectively, and together they have just under 80 million customers globally. Yet Swedish unicorn Klarna, founded just 15 years ago, claims 90 million customers in 17 countries. UK fintechs Revolut and Transferwise have 12.5 million and eight million respectively. Transferwise, an online money-transfer service, is only a decade old, yet it forced traditional banks to slash their FX fees and update their offerings. Revolut, founded just five years ago and already valued at $5.5bn, operates in 35 countries and is shooting to become “the world’s first truly global bank”.
And the pace of change is only speeding up. While Mobile-era growth is plateauing, we are on the brink of a new wave powered by artificial intelligence and machine learning. Whereas technology trends have tended to come from Silicon Valley, the next generation of disruptive tech giants are just as likely to originate in China, India – or just about anywhere – and incumbents who fail to keep pace risk edging ever closer to oblivion.
Little wonder then that legacy companies are pulling out the stops in response. They’re launching innovation hubs, setting up venture funds, partnering with startups and touring the Valley in search of inspiration. Despite all this, most corporations, albeit with some notable exceptions, struggle at digital transformations and innovating from within. This is often attributed to the fact that legacy companies – accountable to boards and shareholders, who prefer growth of the steady, rather than rollercoaster, variety – tend to be risk averse, which is problematic given that innovation is inherently risky. Indeed, research suggests that three in four Venture Capital-backed startups “fail”.
But that’s only one strand of the story. According to Mark Lambert, Growth officer at Capita Technology Solutions, many corporates tend to be constrained by what he describes as the “eight deadly sins” – the first of these being “an unwillingness to listen”. Recent corporate history is littered with household-name brands, from Kodak and Blockbuster to HMV and Woolworths, who failed to spot behavioural shifts or adapt to fast-evolving technological trends. “If you’re in denial, and you’re not listening to what the market is telling you about what the world’s going to look like in just a few years time, then that will be fatal,” says Lambert.
The next deadly sin is “a lack of patience”. VCs tend to allow up to a decade for an investment to play out. Corporates often expect to see significant ROI from in-house ventures in a fraction of that time. “Companies can get very excited by an innovation initiative and will sign off the funding, but often, after six months or a year, they start to get bored because someone else has come up with a different, newer idea,” he says. “And then from there, your internal sponsorship wanes really quickly.”
Avoiding the innovation killers
A further innovation-killer is “a lack of distance” or separation between the core business and new venture. Innovation initiatives need to be given sufficient space from the mothership, argues Lambert – to be able to operate with a degree of independence while also being insulated against the tendency for senior executives to meddle. Large corporates increasingly understand this, he says, citing the recent decision by IBM to split its high-growth hybrid cloud business – which it views as “a $1 trillion opportunity” – from its legacy infrastructure operations. “Distance or separation allows a new unit to respond and operate differently, to find their feet and even to be measured in a different way,” he says.
Next, corporate innovation projects can be stifled by failure to allocate sufficient resources, be it funding, team, or time, for them to succeed. Lambert points to two examples: Google’s famous “20% time” policy which was introduced by the company’s founders to give employees a full day a week to pursue their own Google-related innovation project. Over the years, this initiative is said to have resulted in products such as Gmail, Google Maps and Google News. Science-based tech company 3M, meanwhile, holds over 118,000 patents, many of which come from ideas generated during its “15% Culture”, which “encourages employees to set aside a portion of their work time to proactively cultivate and pursue innovative ideas”. “It’s really important to just give people the time and space to go away and be creative,” he says.
Another blocker is failure to recruit the right talent. “There’s always a danger in corporate innovation that when somebody comes up with a great idea, a senior manager just assigns a few people to work on it who happen to be nearby or not particularly busy at that point. It’s almost a case of using whatever spare capacity they have, rather than putting the right creative, entrepreneurial people in place,” Lambert continues. “And that’s disastrous.” As is the next “deadly sin” which is neglecting to build enough on-going, internal political support to see the new venture through the turbulence that innovation and experimentation inevitably involves.
The trap of legacy thinking
Finally, and perhaps most crucially, innovation can be holed below the waterline by cultural deficiencies. “It’s very easy to say ‘No idea is a bad idea’,” he adds, “but if you’ve got the wrong culture, the moment a bad idea is put in front of 20 people, it will get shot down in flames in a very public way. That then prevents other people with ideas from sharing them. So you do need to create not just a group of people who are tasked with thinking creatively, but a whole culture where constructive challenge and risk-taking are actively encouraged.”
If large companies can steer clear of these pitfalls, however, then they are far better placed than startups to innovate their way to new opportunities at scale, says Lambert. Research by business strategist Kaihan Krippendorff, in association with Wharton Business School, found that contrary to received wisdom, “only eight of the 30 most transformative innovations were first conceived of by entrepreneurs; 22 were conceived by employees.”
In other words, legacy businesses are teeming with talent – it simply needs to effectively be set free. And the much-derided scale and seemingly arcane processes which make many big corporations slow to reach decisions can, in fact, offer a range of “unfair advantages” that no go-it-alone VC-backed startup can ever hope to match. How? By combining them with deep in-house expertise, global networks and customer bases, a trusted brand, laser-like focus on the customer and experience at navigating compliance and regulatory issues in multiple territories.
“Tried and tested systems, strong balance sheets and rich data sources are all huge differentiators for legacy companies,” says Lambert. “But what they then need to do is organise themselves and create a culture which leverages these advantages while allowing the new venture to behave and think like a startup. That doesn’t mean moving the team to a separate building with yoga spaces and free kombucha. They have to be tied to the mothership, while not being constrained by its bureaucracy – and most importantly – its thinking processes.”
Here, he continues, diversity – and diversity of thought – come into play. “The best thing you can do to encourage innovation into a legacy company is to have a diverse workforce, one which approaches ideas from different directions. Yes, some of their ideas might be terrible and many won’t be viable, but that’s fine, because you only need one killer idea to transform the entire organisation.” Citing the pivots companies have performed in response to the pandemic, Lambert argues that the lesson has now been learned that failure to innovate today probably means you won’t exist tomorrow. “If Covid-19 has taught legacy businesses anything, it’s that all the things they thought they might accomplish three or four years down the line, as part of a five-year strategy, they’ve already done – and it only took a few weeks to get there.”
–For more information, visit Capita Consulting