Through the initial research I’ve been doing for my thesis on how large companies can successfully co-innovate, I have no choice but to examine more closely why it is that large companies fail so often at bringing disruptive/radical innovation to market.
Once a firm has established itself with one or more dominant products, it tends to focus almost entirely on sustaining innovation for these products and then even when new entrants to the market emerge with a disruptive technology that threatens to dethrone them, the larger firms almost always fail to respond in kind. It is often the case that only through new R&D or acquisition, does the firm find a pathway into new markets with something new that they can then successfully transition into and remain a strong, viable going concern. From an economic perspective I see why this is the case. two engineers with a bold new idea can’t sell an idea to the executives leading a multi-billion dollar company on the promise of returning ten million in revenue but these same two engineers can leave the firm to make the same case with a venture captialist and have it funded (easier perhaps, pre-Internet bubble).
There is no question that large companies use both R&D and strategic acquisition to help them achieve radical innovations. Yet for SAP- having an ecosystem of partners and a Co-Innovation Lab (COIL)- it is my belief that COIL can be used as a 3rd method to drive disruptive (not just sustaining) innovations through collaboration with relevant partners. There is already evidence to indicate that such collaboration results is getting solutions to market faster and can drive value more deeply and broadly across the customer value chain. For the large firm, sustaining innovation is driven by always looking up market. A firm’s largest customers will always heavily influence the primary IT supplier’s tech roadmap.
Customers will always seek more mass customization of the things from the firm they’ve already heavily invested in. Once an installed base is saturated with licensed seats the supplier then depends upon upgrades to continue growing revenue. However, In a down economy if the customers stop growing this business begins to flatten and can even contract. The softwre provider must either wait for its installed base to begin growing again (unhealthy), or look to expand its footprint in more industries and markets (expensive and time consuming). If the next upgrade adds real value (lowers cost, improves productivity, increases service levels etc) then the firm may improve revenues but if discounting was applied in any significant way then margins are likley reduced and must be offset by lowering the firms operating costs. All of these actions are taken to serve the current base of customers which means the firm is still moving up market and only emphasizing sustaining innovation.
New growth opportunities for the large firm may emerge behind it in the mid market yet few are optimized for addressing this market without the expense of making major process changes internally or risking the erosion of value at the high end lowering product pricing to attract the mid market.
One way to potentially drive higher value into this portion of the market might come from an increase of co-innovation between an established firm and an array of smaller partners where complimentary technology and similar business drivers can be directed at the formulation of projects designed to spawn radical innovations the customers in this space are seeking (mobility, SAAS, cloud, etc.) In the same way that larger firms have issues addressing new customers in the mid market, smaller partners have their own issues to grapple with such as limited feature sets, no market share and next to no trust relationship established with its customers to help it increase overall market confidence in its offerings. Large and small companies have formed partnerships for ages but whether simple or sophisticated, a reseller agreement alone is not enough to drive significant new opportunity for both entities and it’s often the case that many of these reseller-based partnerships dissolve within six months after the press release. The same result is common among the largest firms who attempt the same.
A fundamental key to successful co-innovation between a large and small company lies in the understanding that the larger firm cannot take advantage of an opportunity in the market through either its own R&D effort or through acquisition; either option would represent economic constraint or other unacceptable risk. This leaves partnership and collaboration as the only way to get there. For this to succeed, the firm and its selected partner must both not only possess the right business drivers to justify pursuit of the oppportunity but both firms must identify the joint business drivers and be in agreement as to what the joint value proposition will offer.
Then, providing that the co-innovation environment supplies a sufficient IP framework, network computing resources, project management and ability to support a go-to-market plan needed to drive commercial success of the co-innovation solution, such a collaboration endeavor might truly be used to enable higher levels of disruptive innovation to occur at a more quickened pace resulting in greater value add in the market and growth opportunity for the co-innovation partners that could not achieve the same desired result singlehandedly.