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Corporate Innovation Makeover: First two rules of excubation

Author: Markus Anding, Cologne
© Excubate: 1st rule of excubation: the tasks of optimizing the core business and innovating new businesses need to be separated organizationally so that the respective units can tailor their approaches.
© Excubate: 1st rule of excubation: the tasks of optimizing the core business and innovating new businesses need to be separated organizationally so that the respective units can tailor their approaches.

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In the previous publication, we introduced excubation as the new approach to corporate innovation. It consists of seven critical rules which, if sufficiently implemented, will enable companies to build corporate innovation muscle to recurrently develop innovations with a higher probability of market success than existing approaches allow. This post deals with the first two rules, namely separating innovation from execution and attracting entrepreneurial talent.

Rule #1: Separate innovation from execution

One classic dilemma every successful organization faces is the challenge of delivering innovation beyond the core of its current business. While the current business is focused on execution and exploitation, innovation requires exploration and development of new competencies.

Corporate mechanisms and organizational structures generally do not allow for the fast and agile development of radical business model innovation. Therefore, the tasks of optimizing the core business and innovating new businesses need to be separated organizationally so that the respective units can tailor their approaches, processes and incentives specifically to these tasks.

The excubation approach dives deeply into the relationship between the core business and the innovation unit to leverage the strengths of both. Within this model, two separate units can be identified: “execution company” (focusing on exploitation) and “innovation company” (focusing on exploration), sometimes set up as an individual legal entity.

The core of the problem

Many companies using traditional approaches to building ventures find themselves facing a set of practical challenges. For instance, since assets are tailored to execute the existing business model, innovation venture “access” to it could become an inflexible liability. As a result, internal ventures fight on two fronts, balancing their needs with the needs of the core company. And at the same time, strategic and resource dependency leaves the new business at the company’s mercy. In light of these challenges, it becomes clear that using a smart approach to separation is critical, given that neither fully external nor fully internal venturing approaches have been sufficiently yielding meaningful results for corporates. With internal venturing, synergetic benefits between the core company and the venture are typically overestimated and are most often not achieved, as experience shows.

Finding the right level of separation

To find the right level of separation, the core business and the new venture should be looked at from three different angles (see the figure below). This helps us evaluate how close the two are in terms of strategic success factors (management capabilities, operating capabilities and proprietary assets that both the new venture and the core business make use of), their business models (synergies and risks) and the capacity to innovate and scale.

Rule #2: Attract entrepreneurial talent

Google, aka Alphabet, is already a very valuable company, but it could have been even more valuable had it been able to retain the entrepreneurial talent that left the company to found Instagram, Pinterest and Twitter. But Google – as innovative and entrepreneurially driven as it is – didn’t manage to provide an environment compelling enough to keep these founders in-house.

Outside a company, and even more so within a company, there is a limited number of entrepreneurially talented people with the right skill / will profile for successfully building new businesses. Statistics show that only up to 10-15% of employees fit these requirements. It is equally important to identify and to incentivize this talent the right way and to combine it to build the most effective teams.

Three motivators for entrepreneurs

In each company, there is a group of entrepreneurially minded people who have gained significant work experience and would like to found their own company. However, many do not find a way to transition from their fixed job into an entrepreneurial role or lack the right idea, the team and / or financial support. By consequence, each company needs to set up a recurring mechanism to identify those talented individuals, bring them into a community of like-minded people and link them with compelling corporate start-up ideas. To operationalize this, companies can apply a model called “corporate founders club”.

There are typically three important motivators for potential entrepreneurs: ownership and decision responsibility, effective boundary conditions (access to resources, technology, IP, processes) and financial upside in line with the success of the business. The challenge for a company is to design these elements carefully in a way that is beneficial for both the core business and the venture.

Entrepreneurs want to move fast and make quick decisions on their own responsibility. This is what they find in greenfield start-ups and what companies need to enable too, by modeling a start-up environment. Separate team, separate budget, separate processes and separate location, yet intelligently supported by the company with resources, people and expertise and guided by a disciplined process – this is at the core of the excubation approach.

Defining incentives and participation models

Creating a startup-like incentive model is both extremely difficult but actually also quite easy for a corporate – if it is approached with the right mindset.

Entrepreneurs, depending on their own lifecycle stage, need to balance financial security with financial upside and are not necessarily only driven by the latter. However, it is crucial to build at least some form of financial participation model into the incentives structure, either by giving the entrepreneur an equity share or an equity equivalent (phantom shares).

Big companies – in contrast to greenfield startups – have additional options to create a compelling value proposition that pure start-ups don’t have and that put corporates in an even better position: additional fixed salary, additional perks or the option to return to their original job position should the start-up not work out. The latter, however, might be questioned from a motivational perspective and could create a too laid-back perspective (“burn your boats” approach).

For more indepth insights to the 1st and  2nd rules of excubation read here. Stay tuned for Mr. Anding's next blogs about rules 3 to 7 of excubation.

Dr. Markus Anding is co-founder and Managing Director of Excubate Corporate Startups, a firm focused on helping large corporations innovate like start-ups. Together with his team, Markus builds corporate start-ups and respective incubation environments for companies across industries and helps them implement the excubation approach. Markus has an academic background in information systems and combines long-term practical experience as an entrepreneur and as a Principal at Bain & Company. He also acts as Managing Director for the Munich Center for Internet Research.