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Chapter 2: Running a business in an idea economy

Get ready for shorter business life spans
To succeed in an ideas economy leaders need to operate like start-ups, and automate back-office processes in order to effectively free-up capability to focus on innovation and transformation.

The constant acceleration of technology development has fundamentally impacted the global economy. The business life-span from introduction and growth, to maturity and decline has been more than a hundred years for traditional industries. Today, the life-span of businesses can be measured in years instead of decades.

Of the companies on the Fortune 500 list in 1955, 88 percent are gone today.[i] These companies were killed by substitute products that had superior functionality and substantially lower priced offerings. New products are not only finding faster adoption but are also becoming commoditised more rapidly. The shorter industry life-span is impacting not only traditional industries but is clearly visible in new technology industries as well. Well known examples of challenged technology leaders include SUN, Yahoo, and Netscape. Netflix has already had to change its business model twice to stay relevant in the market and continue growing.

“We are now living in an Idea Economy where success is defined by the ability to turn ideas into value faster than your competition.”
Meg Whitman, CEO of HP Corporation

The evolution of telephony exemplifies the increasingly shorter industry life-spans. Landline telephones took about eighty years (1880 – 1960) to be adopted by 80 percent of USA households.[ii] After 125 years on the market, landline telephones were replaced by cellular networks and internet Voice Over Internet Protocol (VOIP) calling. Mobile phones reached broader adoption in the USA. in a short ten-year period (1993 - 2003),[iii] but after 25 years on the market these devices were almost completely replaced by smartphones.[iv] Almost overnight, once-popular mobile phones from Nokia and Blackberry have become irrelevant. Today’s Apple iPhones, after ten years on the market, no longer have any major hardware advantage against Android-based smartphones or even low-cost brands. In other words, the smartphone industry reached its maturity in ten years. Wearables and embedded devices are now the current frontier. Figure 4 demonstrates the compression of these business lifecycles.

Start operating as a startup

A new traditional industry was typically introduced by a group of startups applying latest technologies and creating new products. These startups would rapidly innovate and grow over a period of five – seven years to become an independent company, or be acquired by another corporation interested in the new business. Today, when the whole industry life-span is less than a decade, the corporation itself must operate as a startup or a portfolio of startups at different phases of maturity.

For any business, it is now increasingly important to have a diversified portfolio of offerings, each at different stages of maturity. It is not only about having multiple products and participating in diversified industries. It is about continuous experimentation with an objective to succeed in new industries. This requires internal corporate startups, trying out different business models, identifying high-potential businesses and growing them as part of the overall portfolio.

Amazon is a good example of such portfolio diversification. The company expanded its e-commerce business from one product to a broad range of retail products, diversified from ‘business to customer’ (B2C) into ‘business to business’ (B2B), and created completely new businesses, including Amazon Web Services (AWS) and Amazon Transportation and Logistics. The company smartly leveraged itself as a customer to reach critical mass and secure first-mover advantage.

Form an innovation board

Given startups use experimentation to validate new business models, revenue and profit-based financial planning tools cannot be used to measure progress. Such portfolios of startups need to operate like a venture capital fund that can invest in startups using a staged funding model. An innovation board (also called growth board) needs to be established to measure progress of this experimentation and decide when to pivot or cancel certain initiatives. Eric Ries defines a growth board as an “internal version of a startup board: a group of people who meet on a regular basis to hear from teams about their progress and to make funding decisions”.[v]

The practice of establishing and operating an innovation board is a new task for boards of directors and executives at most organisations. There is great need for companies to adopt these business practices formally and consistently. Many partners at venture capital firms came from executive leadership in traditional corporations. Hence, it should be possible to engage capable internal executives on innovation boards and help them develop additional investor skills.

Automate traditional business

The cost of robots is dropping significantly every year, while features and capabilities of robots are continuously improving. Traditional product manufacturing, front office (marketing, sales, and customer support) and back-office (finance, human resources and legal) functions can be almost 100 percent automated. This automation leads to significant savings in traditional businesses that can be invested into growing new businesses.

When a traditional business becomes 100 percent automated, a much smaller number of people are needed to fill traditional occupations. The freed-up personnel could be redirected to corporate startups focused on exploring new businesses. People can unleash their creativity towards new product design and technology-driven innovation. At the experimental stage, manufacturing processes are not fully automated, and some manual labour is needed as well.

Figure 5 outlines the key differences between the traditional operating structure and what is needed in the future company.

Engage with startups

The term ‘start-ups’ is synonymous with challenging the traditional business operating model. Start-ups are small, depend heavily on technology, have few hungry staff who have to do a lot more with very little, and are hungry to succeed fast or fail fast. These factors alone force them to continuously innovate, disrupt, and create a dynamic eco-system of collaboration.  

The venture capital (VC) industry took off in the U.S. in the early 1980s when annual investments into startups were only few billions of dollars. Technology companies such as Genentech, Apple, Electronic Arts, and Compaq began with the help of VC funding. Fast forward some forty years to today. In 2017, $165 billion was invested globally across 11,000 startups.[vi] This is now a global industry with $75 billion invested in the U.S., $72 billion in Asia and $18 billion in Europe. Silicon Valley is the world’s largest “innovation ecosystem,” which currently captures 28 percent of all early-stage investments into startups globally and produces over 38 percent of startup exit value.[vii]

To put things in perspective, the total annual spend of the world’s 1000 largest corporate research and development (R&D) spenders is USD702 billion. Only 125 companies spend individually over USD1billion on R&D. This means that the amount of innovation investment in the startup world is much bigger than any individual company can afford. Hence, leveraging external innovation becomes as important as driving internal innovation initiatives.

Companies like Skype, Uber, Dropbox, and Nutanix are disruptors bringing fundamental changes to their respective industries. Valuation of these companies has grown quickly and surpassed USD1 billion. These new private companies had been called ‘unicorns’ because they were so rare, but now we see more than fifty new companies joining the unicorn club every year. Over the last nine years there were 372 of them globally. Of those, 217 are still operating as private businesses, 90 completed an initial public offering (IPO), and 65 have been acquired or merged.

With the increasing speed of change and reduced life-span of industries, independent startup ecosystems are becoming a vital source of innovation for enterprises. These startups can be viewed simply as an external R&D lab that corporations can tap into. Given the huge diversity of new technologies and different business opportunities, it is impossible to cover the whole range internally. Companies need to be open-minded and leverage external products and solutions from startups; establishing startup engagement processes to enable such collaboration as can be seen in Figure 6.

With fast developments in the startup world, companies are increasingly setting up their own corporate investment teams to stay on the top of these developments and identify potential acquisition targets even earlier. Traditionally companies looked for a few merger and acquisition (M&A) opportunities per year, but the number of startup teams on the market in each industry is now measured in thousands. Cisco, during its rapid growth phase as a company, became a master in identifying, acquiring and integrating startups into their networking products business.

While M&A is a valid expansion strategy in certain cases, startup partnerships can be a much faster, cheaper and more flexible approach. These partnerships enable enterprises to take advantage of new solutions and incorporate them as part of their overall offering or use them internally to automate production and drive costs down. Such startup partnerships need to be managed differently; companies are adopting flexible procurement processes to expedite piloting and adoption of these innovative solutions.

Make innovation part of your company DNA

Traditionally, very few companies have managed to stay innovative in the long term after their founders leave the driver’s seat. In this model, organisations primarily engage in incremental innovation around existing products. But this way of operating cannot continue. To stay alive in this highly competitive global economy, every company needs to become an innovation powerhouse.

Many executives now understand the need for innovation. However, establishing the process of innovation continues to be a challenge for corporations around the world. This is not for a lack of understanding the need, rather, it is simply because of pure focus on business as usual and short-term value for shareholders.

True innovators have an entrepreneurial culture, relentless focus on customer experience, and growing market share. In such organisations, profit and short-term thinking are second nature and come as derivatives of their innovation successes. Having demonstrated their ability to innovate, these companies have nurtured their investor base to think long-term about growth, profits, and social good such as Amazon, Tesla, Google, Intuit and Facebook. Using a recent example, Facebook enhanced its ability to filter out “fake” news while endangering some short-term advertising revenue. Improved user trust translated into increased stock valuation since those announcements were made.

The most challenging aspect of becoming an innovation powerhouse is the sheer effort and time which must be committed by senior executives. This challenge goes beyond strategy and operations. It requires a shift in behaviours and mindsets from the top to bottom of an organisation.

To excel at innovation, organisations need more than inspiration. They need guidance and practical tools for establishing the necessary innovation processes and culture. In the next section, we outline a transformation blueprint that combines best practices from leading technology companies and successful corporate innovators.


End notes

[i] Perry, M.J., 2014. Fortune 500 firms in 1955 vs. 2014. Viewed at 26 October 2017. Available at: http://www.aei.org/publication/fortune-500-firms-in-1955-vs-2014-89-are-gone-and-were-all-better-off-because-of-that-dynamic-creative-destruction/

[ii] McGrath, R.G., 2013. The Pace of Technology Adoption Is Speeding Up. Viewed 8 January 2018. Available at: https://hbr.org/2013/11/the-pace-of-technology-adoption-is-speeding-up

[iii] Elon University School of Communications, 2018. Imagining the Internet: History and Forecast. Viewed 1November 2017. Available at: http://www.elon.edu/e-web/predictions/150/1870.xhtml

[iv] Rainie, L., Perrin, A., 2017. 10 facts about smartphones as the iPhone turns 10. Viewed 1 November 2017. Available at: http://www.pewresearch.org/fact-tank/2017/06/28/10-facts-about-smartphones/

[v] Ries, E., 2017.  The Startup Way: How Modern Companies Use Entrepreneurial Management to Transform Culture and Drive Long-Term Growth. Crown Publishing Group. pp 285

[vi] PricewaterhouseCoopers (US), 2017-2018. PwC: MoneyTree. Viewed 2 November 2017. Available at: https://www.pwc.com/us/en/industries/technology/moneytree.html

[vii] Startup Genome, 2017. Global Startup Ecosystem Report 2017. Viewed 7 November 2017. Available at: https://startupgenome.com/