Until not so long ago, strategic thinkers used to advise firms to focus on their core competence: develop a set of difficult-to-copy core capabilities that set you apart from competitors and allow you to be the best and dominant in your industry. For example, Kodak’s capabilities in chemicals and, specifically, photographic film, allowed it to dominate the photography industry for decades, and Nokia’s capabilities in excellent mobile phone hardware led to its meteoric rise and (temporary) dominance.
In the modern business environment, however, the increasing pace of radical technological and market change can easily render a firm’s capabilities obsolete. Kodak’s capabilities in film became all but irrelevant with the advent of digital photography leading to its bankruptcy; similarly, Nokia’s expertise in excellent mobile phone hardware became inadequate, as consumers switched to smartphones where the operating system and a rich library of applications play a more important role.
To mitigate the risk of becoming obsolete, many firms try to be ambidextrous, engaging simultaneously in exploitation of their current capabilities and markets, and in exploration for new ones; 3M and Google are some well-known examples. However, while ambidexterity and in-house R&D is generally successful in producing often valuable incremental innovation, it fares less well in producing radical innovation. Deep-engrained company cultures, and a focus on large and proven markets rather than small and experimental ones make it harder for established firms to produce radically new technologies, and even more difficult for them to realize and exploit such technologies’ full long-term potential and implications.
Recognizing the limitations of in-house exploration for producing radical innovation, leading firms nowadays look for innovation outside their boundaries, and invest in scouting, supporting, and eventually acquiring promising novel technologies, rather than trying to always develop them on their own. Such scouting and support can take many forms. Intel works closely with UC Berkeley and other leading universities to offer and monitor grants for innovative research that often has little to do with Intel’s core business. Other big firms like Samsung, Telefonica, Disney, etc. have founded startup accelerators that fund and support startups working on path-breaking technologies and business ideas. These projects allow leading firms to stay in touch with and monitor youthful and radical innovators. Moreover, they allow them to do so effectively and cheaply, because they spread the risk over multiple projects (e.g. Telefonica is supporting more than 300 startups), because small startups are better able to think out of the box and experiment with radical new ideas, and because small startups operate in a much more cost-efficient manner than in-house corporate research projects.
As the pace of technological change further accelerates, the winning companies of tomorrow are unlikely to be those that boast the best in-house R&D programs, but rather those that are best able to develop and foster a sizeable, fluid, and flexible innovative ecosystem around them. As the example of Silicon Valley, the most successful among such ecosystems, shows, these ecosystems require one or a few established companies that actively nurture them, a constellation of small startups that are willing to take significant risks and innovate out-of-the-box, and also one or a few universities that conduct basic research, train scientists and entrepreneurs, and increasingly engage in entrepreneurship themselves.
For regions and countries that wish to emulate Silicon Valley’s success, government policies that create an environment conducive for entrepreneurship and offer material support for startups are a necessary, albeit not sufficient, first step. Leading and established companies also need to see the value of such entrepreneurial ecosystems that function as pools of innovation and contribute to their own long-term success. To foster such ecosystems, leading companies need to build close ties to leading research universities, and support startups often through startup accelerators that can sometimes be placed within universities. Even more importantly, notions of corporate hierarchy and life-long employment need to be relaxed. An employee that leaves a corporation to start her own firm should not be seen as a deserter, but as a potential valuable partner. In a similar vein, an entrepreneur whose company fails should not bear the stigma of personal failure, but be cherished as someone whose experiences might be valuable for the next innovator, inside or outside a big company.
In today’s economy, which is characterized by relentless technological change, no company can afford to be an island or it will quickly lose its competitive edge. The speed, the complexity, and the unpredictability of technological development require flexibility, and intricate ecosystems that spread the risk and in which companies are often both competitors and collaborators at the same time. Established companies have most to gain from such ecosystems; at the same time, fostering their development and success also falls on the shoulders of such business leaders.