Smaller companies are often seen as the innovators and bigger companies as the ones who acquire them. In other words, “you come up with something new for us and we will buy you out and then claim it as our own.”

There are times when investment and acquisition can provide the missing piece a big company needs to disrupt their market or penetrate new ones. Through acquisitions, they can claim intellectual property rights and enhance product development opportunities. They can also acquire the necessary talent and resources they might not already have.

The Challenge with External Acquisitions For Sustainable Growth

Growth through acquisition can be risky and can present a mixed bag of results. For example, the Walt Disney Company has made several successful acquisitions under its CEO, Bob Iger, that have expanded its creative library and transformed its once broken core business of animation. Disney did this by acquiring Pixar first and then following up with Marvel and LucasFilms. As a result, the stock price has gone up six times (6x) on Iger’s watch.

However, in addition to the larger success of its core business, there have been failures in some of their new digital growth categories.  Disney acquired Playdom for $763 million in 2010, only to exit the gaming business, and then write off its more recent 2015 investment in the digital media company Vice for $400 million. That’s over $1 billion in investments in two promising growth opportunities that went nowhere.

Acquisitions have Led to a Lack of Growth Among Technology Companies

Failures of acquisitions into new growth directions is not an uncommon outcome even with the more innovative technology companies.

Google’s 2014 acquisition of Nest, and its popular thermostat, had all the makings of a smart growth strategy. Google provided Nest with almost unlimited resources, and Nest promised new and innovative products under the oversight of a proven, innovative leader, Tony Fadell, credited with the iPod. However, what looked like a promising acquisition was an abysmal failure due to internal fighting and politics, and eventually led to Fadell stepping down.

When eBay acquired Skype for $2.6 billion in 2005, the idea was that the communications technology of Skype would improve communication between buyers and sellers. What leaders failed to do was to consider how their customers did business. There was never any real need for buyers and sellers to communicate apart from email, so in 2009 eBay sold off 65% of the company.

Another example of large tech company acquisitions that failed to produce as expected is Microsoft’s decision to buy aQuantive in 2007. The purchase of the ad company could have helped Microsoft if they had considered the trend towards display ads, but instead, Microsoft was focused on search rather than innovation in the digital advertising industry as a whole. Ultimately, Microsoft took a $6.2 billion write-off, mostly related to aQuantive.

Why do acquisitions fail to innovate?

The path of acquisition for companies in new growth categories, although necessary, is especially fraught with high risk if the company’s internal foundations do not firmly understand and integrate these new category acquisitions. If they want to succeed, it’s worth the time and effort for companies to build up those internal innovation foundations. This will lead to true transformation, achieved with commitment and discipline.

Why Corporate Innovation Needs Disruption To Succeed

Before we examine the “how” of disruption that helps sets strong foundations for a company for its new directions, we should take a moment to consider the “why.”

The bottom line for most businesses is revenue and profit growth. However, for corporate innovation to be considered a success, it needs to accelerate a path to true business transformation resulting in significant new enterprise revenue. This will lead to increased valuation of a company and move beyond short-term public relation headlines.

The problem that big businesses face is that their short-term revenue goals often precipitate the need for quick results, so rather than make holistic changes within the company, they will silo a division to “innovate” and leave the rest of the company to perform “business as usual.”

In ideal situations, company leaders will fully support the idea of transformation and use it as a vehicle to truly create meaningful new enterprise revenue for their company.

What are some changes required for big companies to manage innovation?

In order to achieve a true transformation, the company needs to re-invent corporate innovation so that it involves a holistic approach involving all parts of the company.

  1. Intrapreneurship

According to Investopedia, “Intrapreneurship is a system that allows an employee to act like an entrepreneur within an organization.” In other words, they are creative, innovative thinkers that should be able to develop their ideas within their own company rather than starting one of their own.

Currently intrapreneurship is a side venture, siloed into an innovation division. To succeed, intrapreneurship  is needed throughout the company, including the core businesses.

Intrapreneurs that are the most impactful can also be the most disruptive to a company’s status quo. Accepting and nurturing insurgents within the incumbent ranks will be important for transformation success.

  1. Corporate Accelerator Programs with a path to Significant Enterprise Revenue

Investing and mentoring innovative startup companies can lead to innovation and also achieve transformation for the investment company. When the two companies have a unified set of goals, then they operate as one unit, rather than two. Therefore, the innovations of the first become the innovations of the second. Many corporate accelerators today are used as experiments or intelligence gathering units rather than the focus to create meaningful enterprise revenue.

The risks of corporate accelerator programs include a lack of innovative startup companies aligned with the strategic new directions of the larger company as well as accountability to produce real shareholder value beyond the immediate public relations headlines. It’s important that the startups strengths and weaknesses are known and if necessary, bring in relevant experience from the core business units and additional partners to fill gaps not filled by either the startup or core business.

  1. Innovation Teams That Are Permissioned To Disrupt Beyond the Innovation Division Silo

When it comes to innovation, it’s rare to find one individual with the technical and creative skills as well as disruptive thinking necessary for success. Instead, the permission and freedom for a team of innovative and disruptive thinkers from multiple disciplines,from anywhere in the company, to brainstorm ideas and offer solutions that come from a variety of mental models would wake up otherwise dormant innovation capabilities within a company. An added benefit is that these collaborations across the company will increase the likelihood of future innovations.

Most of the time technology innovations at established businesses fail because they lack an understanding of their own customers and organization. Ideas abound, but there is often a disconnect between innovation and the company as a whole. By allowing core business units also to participate in innovation, these gaps can be closed.

  1. Digital Transformation with a focus on People over Technology

Big companies often struggle to keep pace with the speed of disruption because they jump on the digital transformation and technology trend bandwagon but fail to consider the human element. Rather than looking to technology for answers, it should be a tool in the hands of a “think different” and open minded, trained workforce that also has the techniques to find and mine its future customers continually as part of its work lifestyle.

Although digital transformation should be part of a company’s future state portfolio investment, it should be noted that it poses the highest risk to success in terms of returns and execution. Instead, companies would be served well to add another category to their future state portfolio investment that explore wholly new directions that don’t threaten to cannibalize their core and diversifies this future state transformation investment beyond only the digital transformation category.

What are the benefits of reinventing corporate innovation towards true transformation?

  1. Creating a true internal capability within to transform as the main job rather than innovate as a hobby
  2. Build real competence, cultural and operational understanding in new categories for future growth as well as external acquisitions
  3. Align and shape leadership to be all in on their company’s future rather than get stuck in the safety of only experimenting in the confines of innovation labs
  4. Send a clear signal to the whole company that change is real and not superficial and the company is committed to make true transformation happen within a specific period of time
  5. Retrain all people at the company with competences and skills needed for the company’s future state
  6. Diversify the future state investment portfolio beyond digital transformation to reduce risk and increase likelihood of success.

Sources:

https://www.cbinsights.com/research/merger-acquisition-corporate-fails/