book.chapter Five options for innovation

Venturing within corporation Corporate venturing, a strategy where established firms invest in or collaborate with startups, has seen varying degrees of success across industries. Initially, it was seen as a critical innovation pathway, with companies like enron, xerox, and lucent technologies investing heavily but ultimately facing significant losses. Intel capital, however, stands out for its successful investments. The approach has faced criticism for not enhancing innovation across the entire organization, generating ideas that don't align with the parent company's core strategy, and difficulties in integrating successful startups back into the parent company. The distraction and resource allocation to these ventures can also detract from the parent company's performance. Despite these challenges, corporate venturing has thrived in the pharmaceutical industry, where investments are closely aligned with the parent company's interests. Modern strategies include linking venture activities directly to the core r&d needs of the parent company, engaging with venture-capital-led communities for insights and potential collaborations, and focusing on investments that offer direct benefits to the parent company's strategic goals. The mixed experiences with corporate venturing suggest it is not a universal solution for innovation challenges. Successful ventures often result from a focused approach that leverages the parent company's assets and aligns closely with its core strategies. Companies like google, ge, and microsoft have demonstrated the potential benefits of corporate venturing, including access to new markets and technologies, when executed with a strategic focus. The key is for companies to recognize the limitations and potential of corporate venturing, aligning efforts closely with their core innovation strategies to avoid the pitfalls experienced by some in the past. Licensing intellectual property Intellectual property (ip) licensing has gained prominence in the digital age, with companies like ibm generating significant revenue from patents, though these figures are often dwarfed by their research and development (r&d) expenditures. The commercial value of ip largely stems from its application rather than mere knowledge, which is why corporations often outvalue universities in this realm. Universities have found limited success in ip licensing since the true innovation value emerges during commercialization, not at the conceptual stage. Ip's intangible nature complicates its management, with licensing agreements open to interpretation and disputes potentially costing billions. Moreover, companies that depend on licensing external technology may see their own r&d capabilities diminish over time. Managing an ip portfolio incurs substantial costs, and the ever-changing political landscape around ip rights, coupled with rapid technological advancements, can affect the enforceability and value of ip. Despite these challenges, ip remains crucial in the new economy, with effective management strategies being key to leveraging innovation value. However, the asset-lite model of ip licensing, which minimizes tangible investments, has limitations. Most industry revenues and profits derive from the execution of ideas, not just their conception. Without deep involvement in product development, companies focusing solely on ip may struggle to innovate and remain competitive. Thus, for most firms, ip licensing is part of a broader innovation strategy rather than a standalone solution. Partnering to innovate Strategic alliances and partnerships have become an integral part of the innovation landscape, allowing companies to access complementary capabilities, share risks and costs, and accelerate time-to-market. However, while alliances carry significant potential, they also pose challenges that must be carefully managed. A long track record of successful partnerships exists, with companies like corning, xerox, airbus, and sematech using alliances over many years to enhance innovation and build their businesses. Collaboration has also been instrumental in establishing industry standards. However, some inherent difficulties can make capturing value from alliances problematic. With shared upside potential, it may be hard for individual participants to achieve superior profitability and competitive advantage. The risk-spreading incentives of alliances sometimes push questionable ventures forward which likely would not advance solo. Significant time investments may be required to align differing interests of partners. Focus can shift from competing in core markets to managing the collaboration. Decision-making can become cumbersome with multiple parties, actually increasing execution risk, especially in dynamic industries. When things go wrong, partners often fault others instead of taking ownership. Seeking to please all partners often leaves everyone somewhat dissatisfied. Despite best collaborative intentions, unclear end-goals means little tangible value gets achieved. Before entering an alliance, due diligence should be conducted on all partner interests and objectives to ensure proper incentive alignment and dispute resolution mechanisms. Alliances have optimal applications – for developing non-core innovations, establishing industry standards, or enabling vibrant supplier ecosystems. For innovations deemed core, alliances require tight integration between a very limited number of partners. An example would be a start-up with a scientific discovery partnering with a large established company having resources and distribution channels. The big partner pushes the product through hurdles while the smaller entity shares in future revenues generated. In summary, while potentially transformative, alliances have inherent tensions requiring shrewd planning and skillful execution to succeed. They must be purposefully structured, with crucial innovations better managed internally. If core to a company’s innovation challenges, alliances need tight oversight - not loose, lightly-governed entities. Faddish innovation trends may have some utility if applied judiciously, but many failed alliances prove the difficulty of collaborating for breakthrough innovations. Partners must carefully evaluate their reasons for allying and manage accordingly. If not, what appears ideal in concept can fail profoundly in reality. Acquiring other companies Mergers and acquisitions (m&a) saw a significant peak in 1999 and 2000, with over $6 trillion in deals, driven by companies like cisco systems, jds uniphase, nortel, and lucent. However, the value of m&a deals dropped by two-thirds in 2001, marking a shift towards cash-based transactions. Studies indicate that 50-67% of m&a deals reduce rather than increase value for acquiring companies due to several factors. Companies often pursue acquisitions to gain first-mover advantages or to acquire startups pre-ipo, believing it to be cost-effective. M&a is also seen as a way to hire top talent, though post-acquisition, many of these employees leave due to high compensation. Valuing acquisition targets is challenging, with different stakeholders having varied criteria. Acquirers betting on early-stage companies face the risk of the technology not being as valuable as anticipated, leading to major write-downs. Key lessons include the importance of distinguishing between early-stage and market-ready acquisitions, emphasizing due diligence over deal structuring, and integrating acquisitions fully before pursuing further deals. M&a should complement internal r&d, not replace it, and companies should avoid over-reliance on acquisitions for innovation. The challenges of evaluating and integrating targets, combined with the actual deal premiums, make m&a a risky strategy. However, with the right approach, m&a can be a valuable tool for innovation. Spinning out promising technologies Spinouts became popular in the mid-1990s, driven by the emergence of the internet and the ease of forming dot-com companies. The idea was that established firms couldn't fully adapt to the internet era, necessitating the creation of standalone e-commerce firms. However, when prominent spinouts underperformed, they were often reacquired by the parent company, sold off, or shut down. Thermo electron's experience illustrates the pitfalls of excessive reliance on spinouts. By spinning off promising technologies into independent companies while retaining majority stakes, thermo created administrative duplication and investor confusion, leading to a significant drop in stock value. This situation underscores the importance of using spinouts judiciously and ensuring they have real independence to create value. Spinouts often face challenges such as the "umbilical cord" dilemma, where the parent company's inability to fully sever ties hampers the spinout's viability. Successful spinouts are those centered on valuable innovations that are non-core to the parent, have clear boundaries to avoid conflicts, and can attract outside investment. The late 1990s saw a surge in spinouts across various sectors, seen as a way to fast-track innovation. However, many failed to survive independently, highlighting the need for careful consideration and execution in the spinout process. Spinouts can enhance innovation value if done correctly and for the right reasons, but they require critical thinking and a willingness to let the new firm operate independently.