OPERATING A BUSINESS WHILE SEARCHING FOR INNOVATION

Multiple forces in the marketplace are driving diverse opportunities for connected product innovation. As users and customers become more familiar with digital innovations, they are realizing that these technology innovations will push the boundaries of how products, systems and equipment are managed today. This will, in turn, increase pressure on OEMs to embrace these capabilities.

The growth opportunities that software and digital innovations enable, what we like to call Smart Adaptive Systems, are creating unimagined new solutions based on new customer experiences, new business and revenue models and new service delivery modes. As the cyber-physical world continues to dovetail with IoT, machine learning and artificial intelligence, Smart Systems will enable previously unimagined capabilities. The question is whether business leadership really understands the new dynamics driving value and are ready to grasp its potential.

Traditional business practices, company cultures, and operating models inhibit the required creativity and speed to effectively drive new customer innovation and value creation in many OEMs today. Leadership teams in most OEMs live in two distinct worlds—running their core business as efficiently as possible while also trying to identify novel product, systems and solution delivery innovations. These two thrusts—operating the business and enabling new innovations—often creates contention.

EVOLUTION OF CORPORATE DEVELOPMENT AND GROWTH STRATEGY

source: Harbor Research

Management attention in OEM businesses has traditionally focused on the known, the visible, and the predictable. Anything too difficult to measure is too often treated as if it were unreal. Even more misleading is the assumption that “business as usual” will prevail over a given planning period. Such assumptions leave little room for dynamic management (or creation) of change, the early identification of emerging technologies, or the increased presence of unfamiliar competitors.

THE CHALLENGES CORPORATE DEVELOPMENT FACES

Software and digital technologies are displacing physical hardware and replacing labor-intensive services in nearly every market and application imaginable, and it shows no signs of slowing down. The traditional differences between so-called high technology companies and the remaining product and service businesses that utilize the innovations that tech-focused developers provide is fading away. In one form or another, every OEM is becoming a technology developer which is forcing businesses to re-think how they approach growth.

Technology is blurring the traditional distinctions between products and services, value chains and entire industries. Innovations are accelerating while, at the same time, interrelated combinations of compute, network, sensor and software innovations are reinforcing one another and multiplying their impacts. New and unexpected innovations are forcing companies to rethink not only business processes but business models, operating models, domain focus and even the scope of their core businesses. Evidence of these forces surrounds us daily:

• Exponential Technology Advancement: The rates of impact will accelerate in a logarithmic way resulting in far-reaching intended and unintended consequences. Industry boundaries will blur and value chains will be reformed with value migrating to new places, with entirely new industries created. Every sector of the economy will be affected.
• Confusion About the Impacts of Smart Adaptive Systems: There is a general understanding in business that adaptive and autonomous systems will drive enormous impacts however, the specifics are not well understood because it is difficult for most people to imagine this.
• Re-Design of Corporate Structures: Modern enterprises have been deconstructing for decades and are becoming value-delivery networks consisting of diverse business functions and entities – some owned directly, many sub-contracted, but all requiring orchestration.
• New Value Creation Modes: Agile organizations are extending skills through new relationships and ecosystems increasingly comprised of coalitions of diverse self-motivated participants, not sub-contractors tied to “command and control” schemes.
• Excess Capital and Less Capital Needed to Form Ventures: Capital is superabundant. Global financial assets are more than 10X global GDP, making talent and ideas more important than capital. At the same time, it’s becoming ever cheaper to form and prove new ventures.
• Catalytic Technologies Will Drive Abundant Value: Evolving technologies will radically transform our lives and the global economy; impacts on value creation in the public markets will be many and be significant in scale.

When does an OEM need to seriously consider alternative innovation modes and non-traditional growth ventures? Two basic situations tend to warrant this:

• When traditional business practices, company culture, and operating models inhibit the required creativity and speed to effectively drive new customer innovation and value creation.
• When traditional operating models constrain the organization’s ability to develop new technical skills or organizational capabilities.

Technology advances will force corporations to continuously evolve their growth strategies. To succeed, companies must become more flexible and adaptive and will need to continuously reshape their businesses to address changing market and competitive structures.

MULTI-MODAL GROWTH STRATEGIES: RE-THINKING INNOVATION MODES & VENTURES

Today, the subject of corporate ventures and related maneuvers does not inspire many executives, especially in the conservative cultures that often exist within machine builders and equipment manufacturers. We believe that like a pendulum swinging, corporate ventures suffered a bad reputation starting as far back as the run up to the Internet “bubble burst” in the 1990s. However, because the many challenges associated with embracing digital and Smart Systems technologies are now clearer and better understood, we believe the pendulum is swinging back.

To take advantage of these growth opportunities, leaders in diverse companies are investing in home-grown solutions, launching innovation incubators, hiring digital natives to instill innovation in their company cultures and more. Many of the companies and maneuvers we observe are, for the most part, organic and internally focused. Will this be enough?

Historically, established companies have pursued three broad avenues to growing their businesses: Core market penetration to drive share in existing markets, consolidation of peer companies to drive economies of scale and cost, and expansion into adjacent growth opportunities including new offerings or new market segments.

Companies pursuing market penetration make investments in new product or service capabilities or investments in expanding marketing and sales resources to help drive dominance in their core markets. Consolidators utilize M&A to build scale and companies pursuing adjacent opportunities make investments in new products and services or utilize focused M&A to acquire access to customers in new target segments. While this summary portrayal might oversimplify corporate growth strategies it does sum up most of the levers traditional businesses have utilized to grow.

Smart Systems and digital technologies are creating many new external sources of growth opportunities. Ecosystems, corporate ventures, autonomous start-ups, joint ventures with customers and partners as well as minority equity investments and more. External growth maneuvers and inorganic growth mechanisms are multiplying fast and becoming much more dominant than internal organic approaches.

We believe executives need to think more about utilizing multiple parallel growth vehicles and strategies. However, many established companies are conservative and tend to select only one, or possibly two, of the many emerging sources for new growth:

• Internally via spin-off of sound new business ideas that surface in existing core businesses, but where the culture and operating mode in the core do not permit them to survive beyond early R&D and development.
• Internally via incubators, accelerators and other similar innovation development modes.
• Autonomous (standalone] ventures often developed via a corporate venture function or similar for new high potential innovation and business concepts.
• Externally via acquisitions and minority equity investments.
• Externally via joint ventures and other similar vehicles for collaboration with customers or partners.
• Externally through collaborative ecosystems and creative combinations of start-ups and larger organizations

MULTIPLE GROWTH MECHANISMS REQUIRED
TO ADDRESS DIGITAL AND SMART SYSTEMS

source: Harbor Research

New inorganic growth levers offer several advantages relative to organic growth — particularly in the digital and Smart Systems era. Inorganic growth increases a company’s options and increases the odds of success where organic innovations have practical limitations regarding what technologies that can be pursued. Virtually any technology, capability or collaboration mode is available and accessible with inorganic growth strategies. Moreover, external maneuvers are less costly today and can significantly shorten development time.

OEMs that embrace external growth and innovation mechanisms can take advantage of new solutions and technologies already in development — saving time and resources and potentially avoiding costly internal failures. External growth levers enable corporations to leverage balance sheet capital, rather than expense, to drive new growth advancing innovation while minimizing the impacts to operating income and performance.

New emerging investment and venturing approaches are being organized in a variety of industries including investment vehicles that tie investors to specific ventures within a larger organization—investments that are suited to their risk profiles and that do not involve owning a share of the whole company.

We believe the rapidly expanding number of inorganic growth alternatives represents a structural shift in how companies will approach growth. No longer will traditional product and service businesses rely only on seeding growth internally or default to M&A maneuvers. The center of gravity for growth strategy will dominantly shift to diverse external approaches.

Corporate growth strategy is radically changing with far reaching implications. This amounts to much more than how executives think about growth. Companies will need new skills, capabilities, and relationships as well as new processes to support corporate development and growth strategy.

Corporate Growth Mechanisms

source: Harbor Research

THE EMERGING ROLE OF THE BUMBLEBEE

The corporate development function should play a central role in implementing and coordinating these efforts. Instead, their role in many OEM organizations has been too narrowly defined. They have been the “M&A Department” keepers of a narrow set of “inorganic” skills that are often an OEM’s only real functional path to new growth. Such approaches freeze out too many sources of growth. They foster a narrow view of growth opportunities and fall far short of what is needed to sustain new innovation.

The rapid changes in competitive market structure and value delivery chains driven by Smart Systems and IoT technologies are imposing new requirements on corporate development. Re-focusing resources on emerging opportunities needs to now become a continuous process.

As Smart Systems and IoT technologies evolve, the complexity, number, and diversity of interrelationships within and between companies is growing exponentially. This turbulent environment requires a new strategic development persona with cross-functional interests and abilities to find new growth opportunities, build new ventures, and reshape competitive markets. Organizations need to foster new ideas and encourage diverse viewpoints to build shared knowledge about new innovation opportunities.

No single corporate development mode will be sufficient to achieve the mix of capabilities required in most markets today. Different approaches, each with their own strengths and weaknesses, must be carefully combined to achieve the desired results. Corporate development must evolve to include a broader network of new business developers across the organization that act like “bumblebees” within a company and throughout its ecosystem of alliances with suppliers, customers, and value-adders, “pollinating” new growth opportunities.

OEMs need to adopt a broader view of non-traditional growth opportunities that can include ventures to address emergent innovations that threaten the core business, as well as opportunities to collaborate with customers and partners on new solutions. While many companies continue to use traditional approaches to strategy and corporate development, and some even succeed in this way, Harbor believes that OEMs will need to creatively combine new technologies and business system elements to accelerate new growth. ✦