I get to speak in a lot of innovation summits organized by companies wanting to infuse innovation into their culture, processes, and business models. The singular question I get from a C-level executive is – “How do we institutionalize innovation in our company?”
Corporate innovation is a hot topic nowadays in boardrooms and management committees, not only in medium and large corporations, but even in small family businesses. This is due to the threat and disruptions being felt by many businesses, coming from startups and competitors in the digital space, such as those in ecommerce and fintech. There is also a growing consciousness among businessmen and executives on the opportunities presented by digitization and digital transformation on how to innovate their business models, engage with customers, and optimize their operations.
Hence, corporate innovation should be part of a company’s strategy, culture, and execution. It can be defined as the processes of implementing new innovation opportunities into existing business models.
A favorite corporate innovation framework of mine is that of Scott Lenet, cofounder and president at Touchdown Venture, who wrote about this topic which appeared in Forbes magazine.
In this framework, corporate innovation can be understood within a context that evaluates two kinds of corporate commitment, or willingness to take risk, namely:
Operational control — this asks whether the corporation is responsible for running the innovation effort. Options include full control which means the corporation is responsible for everything and has final say on all decisions; partial control which is about sharing responsibility and decision making authority; and passive approaches which mean delegating all responsibility and authority to external parties, but this does not mean “doing nothing”
Purchase of equity — this asks whether the corporation is acquiring ownership in an entity it did not previously own. Options include majority ownership which means controlling 50 percent or more of new innovation assets; minority ownership which means controlling less than 50 percent of the innovation assets; and no new ownership or zero equity.
With the foregoing two variables, corporate innovation can come in four forms of strategic actions, namely:
Build. This is a combination of full control and no new equity as the innovations are born internally. This is where corporations build a research and development (R&D) team fully managed by company executives.
An example is the recent announcement of Union Bank of the Philippines Inc. (UnionBank) which created its financial technology unit UBX that will hold its technology initiatives, platforms and investments in fintech companies.
Partner. This involves the corporation’s passive to partial commitment to operations and no new equity investment as innovations are internally incubated. This is executed in the form of business development wherein novel commercial transactions with external companies are forged such as partnering or striking alliances with technology vendors in which responsibilities and authority are shared along with economic benefits.
An example is how The Consunji Group’s integrated energy company Semirara Mining & Power Corp. (SMPC) has partnered with Ayala-led Globe and GCash to enable the people of Semirara to gain digital access to online banking, e-commerce, remote medical consultation, and digital lifestyle entertainment.
Another approach involves passivity to operations while maintaining zero equity investments. This includes licensing, a variation of business development, where a commercial transaction in which products or technology is licensed to a third party that takes complete responsibility for all further commercialization, and the licensing party passively receives royalty payments.
Invest. This involves passive to partial commitment of the corporation to the innovation asset operations, and a minority stake in equity. The execution of this strategy comes in the forms of corporate venture capital and its variations incubation, such as spin-offs of corporate R&D in which full ownership is diluted, corporate accelerators where partial ownership in externally founded startups that participate in temporary programs to develop corporate relationships, and other similar joint ventures.
Some of the country’s biggest conglomerates have recently raised their investments in venture capital in the digital businesses now more than ever. JG Summit which has also formed JG Digital Equity Ventures (JG DEV) recently earmarked $50 million, or roughly P2.61 billion, to invest in startups that have synergies with its businesses. Ayala Corp. (AC) is reportedly raising $150 million from its business units to put up a venture capital fund so it can invest in startups across various industries at home and abroad.
Buy. This means a majority equity stake in the innovation assets while maintaining partial to full commitment to its operations. Corporations execute this in the form of mergers and acquisitions (M&A) where innovation is created outside the corporation and internalized.
A recent example is when Go-Jek announced it has acquired local fintech company Coins.ph for $72 million, giving it access to the latter’s crypto exchange services, mobile payments, and financial services
These innovation strategies are in the arsenal of corporations. In the end, it depends on the risk appetite of the owners and board members. The riskiest strategies are in the areas where the corporation desires full operational control (such as building an R&D), and invests in majority equity (such as in M&A). The least risk is in the area where there’s passive control and no new equity commitment (such as in licensing).
But then again, the classic rules of high-risk, high reward comes into play. As the proverb aptly says – “Fortune favours the bold”.
The author is President & CEO of Hungry Workhorse Consulting, a digital and culture transformation firm, and Co-Founder of Caucus Inc. He teaches strategic management in the MBA Program of De La Salle University. The author may be emailed at firstname.lastname@example.org.