Achieving the revenue growth that markets expect can be challenging, especially when core business growth prospects are limited, or when disruptions or convergence mean that the company has to move into new or unfamiliar areas. Growth by acquisition is expensive, and organic growth is slow and incremental. Many CEOs today therefore look towards innovation to overcome the growth gap and most large companies have already put in place a breakthrough innovation capability to complement core R&D. However, whilst plenty of good ideas may be generated, progressing these through to the creation and launch of full-scale new businesses is not easy. Arthur D. Little (ADL) has been working with clients using a powerful new external incubator approach to overcome the challenges and accelerate new business creation.
Creating new step-out businesses is not easy
Many CEOs face something like the “$1billion challenge”: how do I deliver the significant growth that the markets expect? For companies in established mature businesses with low single-digit growth prospects, or where technological disruption is threatening to erode or even destroy the current business, this challenge is critical and even existential. Acquisition is clearly one route to consider, but acquiring a $1billion revenue business is extremely expensive and not without risk. Innovation is another route to growth, but creating new businesses requires ‘breakthroughs’ and is unlikely to be delivered by core R&D. Consequently many companies have created stand-alone, semi-independent breakthrough innovation teams and are using vehicles such as start-up incubators, accelerators and corporate-venturing schemes.
However, despite some successes, many companies are finding that these initiatives still fall short of their expectations in creating significant new business growth. For example, in our own breakthrough innovation survey 1 , more than 85 percent of companies were unsatisfied with their breakthrough innovation performances. There are several reasons for this, for example:
- Failure to go beyond the prototyping stage: Many innovative prototypes falter when more thorough market/consumer testing is conducted, or when the practicalities of large-scale material sourcing and manufacturing are properly assessed.
- Internal rejection of radical new products: Many large companies have built-in “antibodies” that hinder or reject radical new innovations, especially if they are seen as threats to the current business.
- Brand and receptivity constraints: In most B2C and some B2B businesses, brand is king. Sometimes great new innovations are killed prematurely because they don’t easily fit with the existing portfolio of brands, or because they can’t find a home within the current business unit structure.
- Lack of resources and capabilities: Often there is not enough resource availability to pursue non-core innovation, or else the company lacks the right in-house capabilities to support growing a new, non-core business.
- Scale-up risks: In many companies, concepts and prototypes can stay on hold for years, without being either properly commercialized, or finally killed off. This is often due to the level of investment required for scale-up and the perceived high residual risks, combined with reluctance to give up on a pet project.
In other words, lack of success is more often due to failures at the scale-up and commercialization stages, rather than lack of good ideas or concepts at earlier stages of the innovation cycle.