Innovation a case for specialists?

Companies are currently looking for ways to adapt their innovative capacity to the challenges of the future. That’s why corporations are increasingly setting up innovation labs.
July 19, 2021
7 Minutes
Alex Mahr
Co-Founder & Managing Partner

"There's a way to do it better - find it!" said inventor Thomas Edison once. In his time, the 20th century, that may have been true. Back then, one brilliant mind was often enough to change the world with an innovation. Today, it takes far more than a single genius to do so. However, digital innovation is the elixir of life for companies. That's why corporations are increasingly setting up corporate venturing „innovation labs” to guarantee this.

New circumstances, new economic world

It is entirely due to changing, increasingly difficult circumstances that „innovation labs" are growing in number. In the past, large companies enjoyed a status of untouchability: monopoly position, pricing, and lack of competition. That changed completely in just a few decades. The reasons for this were complex: In 1989, the Soviet Union collapsed. A third of the previously isolated world population, including the Chinese, was then quickly integrated into the world market. This is reflected in the figures. Sea, air, and freight transportation costs fell by an estimated 65 to 96 percent over the past 70 years. The cost of interpersonal communications dropped 99 percent from 1990 to the present. Every product, as well as skilled workers, became more globally mobile, while world markets became more intertwined. According to World Bank data, global goods exports increased from $5.1 trillion to more than $26 trillion from 1985 to 2019. Territorial borders have become more permeable. The globalization process will continue despite Corona. These new circumstances, created in the last 30 years, caused a global entrepreneurial competition for the best products and minds. The pressure on corporations is increasing from all sides. Because despite the ever-increasing complexity of products, the speed of innovation is increasing. On the one hand, the global economy has experienced a division of labor and has become increasingly specialized.

From the mechanical to the digital loom of the fourth industrial revolution

At the same time, as globalization is increasing, the fourth industrial revolution is also taking its course. The previous technical level of electronics allowed to automate a few manual processes within a company. The increasing computing power of chips, the more sophisticated and refined software of recent years, completely changed the way of producing. This new technical framework allows machines to communicate with each other, configure themselves and control each other in a data-driven way through sensors. This fact also increases the speed of change in production, in innovation, but also in management. An Mc-Kinsey study has identified 11 strategic and operational practices that are closely linked to the implementation of digital modernization. They asked 1500 executives to what extent they were using these eleven practices. The result was that so-called „digital leaders" move four times faster than their peers. The speed of change caused by digitalization and globalization is pushing corporations that work and forecast for the long term ahead of them, as no forecasts or long-term plans are possible anymore.

Corporate innovation labs trying to be corporate venture builder

For the reasons mentioned above, companies are investing more in research and development in order to stay ahead of the global competition. The consulting firm PwC found that the Global 1000, i.e. the 1,000 companies worldwide that invest the most money in research and development (R&D) in relation to their sales, increased their financial resources by 70 percent to $680 billion between 2005 and 2015. But they are not only spending huge sums of money on this, they are also setting up their own „innovation labs”. These are physical or virtual rooms in which the focus is on the creative exchange of information, findings from experiments, ideas, and knowledge. In these spaces, the necessary infrastructure, services, and methods are provided for the respective members. Often, these facilities are characterized by a cross-innovation approach. This means working in an interdisciplinary and cross-sectoral manner in this set-up. Companies specifically try to create new ideas with the help of external experts of all kinds.

Innovation is no longer a one-man show

This has to do with the ever-increasing complexity of innovation and is also logical. Thomas Fink, a researcher at the London Institute for Mathematical Sciences, and Martin Reeves compare simple innovations like new cooking recipes with complex innovations like software.  They have calculated that 56,498 different meals can be made from 381 ingredients. In technology, on the other hand, since the innovation is more complex than simply mixing ingredients together, the effort is much greater. For 1158 software products, you need 993 developer tools. The more complex the new creation becomes, the more ingredients are needed for it. A genius who develops new things on his own is increasingly relegated to the background since there is almost always a well-coordinated team behind it.

The approaches of these innovation labs

The German-speaking labs are therefore increasingly focusing on interdisciplinarity, with people from different fields working together on new designs across disciplines. A practice that has always been traditional in the Anglo-Saxon world. Whereas in German-speaking countries, the professional structure is still very rigid. This practice is being tried to change because it is recognized that technical developments are much more complex than they can be reduced to 1-2 specialties. The organizational structure in these labs should attract different user groups and remain open to exciting minds. The framework conditions must be optimal so that new things can emerge. They also try to give free play to free thinking. Everything should and may be critically questioned. That's why corporations spin off these units to give them the necessary freedom to do so. One example of this is the pharmaceutical company „Bayer", which maintains one of its R&D departments in Berlin, even though its headquarters are in Leverkusen. This amalgam of knowledge, diverse minds, resources, and experiments in the laboratory, away from the day-to-day business, is intended to systematically promote change. As Edison said, there is a way to do it better. You just have to find it. The innovation labs at least dare to try. German corporations are actually in the grip of invention fever. At least, that's what they pretend. In 2005, large companies didn't even have 10 idea labs. In 2016, they created over 60 innovation labs. That CEOs are concerned about driving innovation is good. But the data on the success of these institutions is disillusioning. Very few research institutions succeed in making a breakthrough in the marketplace. The biggest mistakes for this are usually their own fault.

The economics of innovation labs are disappointing

Thanks to advancing digitization and increasing pressure on the market, corporations are building institutions to ensure their economic survival in the future. The goal of these institutions is to create new inventions that can be scaled and monetized - innovation ultimately means: invention + commercialization. While they are not over-resourced, they are not under-resourced either. German innovation labs have an average of 25 employees. The annual budget is approximately €4.3 million. That is a level of resources that should be sufficient to produce innovation. An invention basically gives its creator a monopoly position in its segment because it opens up a business model that no one else has yet dominated. This not only gives one a competitive advantage over everyone else but also allows one to set the price for that product or service and generate a greater profit. But it is precisely in achieving this goal that most labs fail. According to a study by the „Capital” magazine and the consulting firm „Infront", which examined 44 of these labs, the figures are disappointing: Almost half of the existing labs rate their own economic success as „not high”. A maximum of 2 innovation projects are launched on the market annually by 4 out of 10 units. Less than 20 percent of the units generate a positive cash flow. Only 9 of the 44 participating units received the „DigiLabs Award” for successfully scaled innovations in 2020.  Innovation away from the core business is particularly difficult for the Labs, especially the Industry Group. The reasons for this are complex.

Wherever you look, there are problems

One side of the coin is that companies are working on success-oriented innovation in a much more controlled way than ever before. They are equipping their facilities with solid budgets and staff. But very few labs succeed in scaling their innovations - if they produce any at all.  Companies still don't take the topic of new creations very seriously, despite paying it a lot of lip-service. Why should they? Germany's major corporations are still generating considerably high profits. So far, there doesn't seem to be much pressure to suffer. This nonchalance even goes so far that industrial labs even complain about the lack of funding from the parent company, which seems particularly absurd considering the profit rate in the industrial sector. The most pressing problem facing all facilities is staff shortages. Nearly 25% of Lab leaders say that skill deficiencies are the biggest reason for their lack of success. Suitable professionals are hard to find. There is often no career path for Lab employees to follow if they are successful. As a result, there is a very high turnover in the institutions. If new people are constantly coming in and older people are leaving, the concentration cannot be mustered to invent something new. The establishment of „Eurowings Digital" has solved the problem. It involves its employees in its success and outlines various career opportunities for them in advance. The result: The company has seen a massive increase in the quality and quantity of applicants. This is not surprising. Every talented person wants to know where their journey might take them. On top of that, units are complaining about a lack of collaborations. Many believe they should strengthen collaborations outside the group and expand the network of collaborations. But this is counterproductive because it means the mothership loses ownership. Instead, the CEO should focus on fostering in-house collaborations and provide all the in-house resources the lab needs to grow.

Innovation labs lack what corporate venture builders have

Apart from all these factors, the ideas from the labs do not learn to fly on the market. Among other things, this is due to the wrong approach. The focus of today's innovation is not first on experimentation and creativity, but on the sober, disciplined and data-driven pursuit of a plan like professional corporate venture builder are following. This is followed by a fast and pragmatic implementation of the newly gained knowledge. There is no magic formula for innovation. The path from model to cash cow is highly individual. What unites the best scalers is their data-driven work and constructive collaboration with the parent company, which gives one a competitive edge over the rest. Lack of focus is also among the biggest obstacles. Labs work on too many issues at once. Instead, there is a need to focus completely on a few ideas by concentrating resources and attention on specific projects. The „Lab1886” research unit of „Mercedes-Benz”, founded in 2007, was sold to other investors in 2020 for almost €100 million. On the one hand, the unit fell victim to an internal cost-cutting drive. Which is probably, even if it is not mentioned publicly, due to their output. After 13 years, the facility's balance sheet is somewhat unsatisfactory. „Car2Go" and „Moovel" are the only two projects that have been able to give the group a competitive advantage over others with a noticeable scale. The CEO change of the parent company was certainly not beneficial for the development. Here, too, the reasons are complex. In hindsight, a comprehensive strategy, focus, and data-driven implementation also seem to have been lacking. And ultimately, the absolute will to want to create something new. That is probably the most important ingredient for creating innovations.

Alex Mahr
Co-Founder & Managing Partner

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