Corporate Innovation- How do leaders Innovate and where is the industry headed?

We live in a disruption economy. Consumers and markets are not only expecting companies to come up with disruptive game-changers but also at a rate faster than ever before. Thus, corporate innovation — the process through which companies create ideas that improve their products, services, and processes — has become increasingly imperative to stay relevant, competitive, and sustainable. While corporate innovation has traditionally been attributed to research and development (R&D) functions at large corporations, advancements in technology and access to global innovation and knowledge have lowered barriers and enabled companies at any scale to innovate. The dynamic nature of the market can be seen with the decrease in expectancy of a firm to be on the S&P from 75 to 12 years. Thus, it is evident that corporate innovation is no longer an option, but a necessity.

As with all things, COVID-19 has acted as a catalyst for change in the space:

The COVID-19 pandemic has forced corporations to rethink their business and relationship with their employees, customers, and other stakeholders. The challenges of this black swan event have, however, not deterred leading corporates from actively pursuing an open innovation agenda. There are signs of creative business building, as companies respond to the crisis with innovative solutions born of necessity. The general trends among corporates show a rapid uptick in virtualisation and digitalisation to connect with their customers globally. Firms are developing and experimenting with radical risk-mitigating technologies such as using robots to spray disinfectant and drones to drop parcels.

To find out more, we sat down (virtually) with AB InBev’s Innovation Brewery team to learn about their corporate innovation journey Innovation Brewery is one of the global innovation hubs at AB InBev. Bud Start is the flagship start-up program hosted by AB InBev Innovation Brewery. Started in 2019, the program worked with 10+ start-ups last year and now launched the 2020 edition. Pritam Dutta, Director of New Capabilities & Digital Transformation, AB InBev underlined how organizations are investing in cost-effective business solutions and startup collaborations can give us the head start especially during COVID.

A-Scale (AS): What made you build an accelerator in-house vs bringing in existing startups or partnering with existing accelerators?

Pritam: Our experience is that for a successful adoption & scale of innovative solutions, we need a strong understanding of the organization landscape, which is typically very unique for each organization, focus on people & process along with the right technology & partner. Having an in-house accelerator gives us the opportunity to not only access range of innovative products and technologies developed by startups but also helps with 1) Flexibility to build a solution that delivers significant value for our specific business needs 2) Increases the probability of successful scale-up after the initial pilot as we are able to assess & align on all other critical success parameters during the initial engagement.

AS: What are the common terms of engagement for startups?

Pritam: We have two models of engagements with startups

1. For Startups with production-ready solution, we engage with Paid PoC, provide them with mentorship and is successful, refer them for global opportunities both within and outside AB InBev through our innovation hubs network at AB InBev e.g. Good Sustainability startups who are identified by Innovation Brewery will get an opportunity to present to experts from 100+ Accelerator which is our global accelerator program focused on sustainability

2. For early-stage startups/Startups who are extending their product/solution portfolio and looking for mentoring in our domain, we have a mentorship only program. In case they are able to come up with a great solution, they will present to stakeholders within and outside AB InBev for scouting opportunities.

AS: How do you create and balance an agile startup culture in an existing corporate environment?

Pritam: One of the key cultural traits of AB InBev is if we see value in any idea, we action it at rapid speed. We prefer to work with startups and work with speed in our engagements. As our project plans are rapidly evolving, we challenge startups to prioritize finding solutions to new challenges in support of our business cases. Some startups who have worked us have shared their feedback that they were pleasantly surprised at how fast things move at AB InBev though it is a large organization.

AS: Does AB InBev prioritize product or process innovation?

Pritam: Both go hand in hand as the process improves the product, so these are crucial to any manufacturing CPG (Consumer Packaged Goods) industry. The initial focus will be on building a strong process, considering cost improvements and various other factors, which can complement a better product.

AS: What are the KPIs used to measure success, excluding profit?

Pritam: Some of the KPIs we use are scalability, turnaround time, and solution fit to other zones. We want to pilot your great ideas to our India business as a testing ground for breakthrough innovation and help startups grow with our partnership.

AS: How is success determined at a startup level throughout the open innovation journey with a corporate?

Pritam: We want to work with those startups that offer us a unique value proposition, ability to scale, and faster time to value. If they deliver business value, then we offer them an opportunity to scale globally within and outside AB InBev. Also, they could also find the opportunity to get strategic investment from our Investment arm ZX ventures.

AS: How essential is the sustainability element in the beer/beverage industry as well as to the company?

Pritam: Sustainability is one of our key drivers and a strong focal point for us to build an organization for the next 100+ years. We connect with the startup ecosystem to drive our sustainability goals. In the beverage industry, some of the most efficient sustainability elements are eco-friendly packaging, waste management, green energy, and recycling. If startups with a focus aligned with our sustainability goals are found, we enter a POC stage to validate the solution with the business.

AS: To what extent has AB InBev’s corporate innovation program helped to offset the environmental cost associated with the brewing of beer?

Pritam: Our global innovation program was instrumental in driving efficiencies to our brewery operations with the adoption of smart technology. We have an ambitious sustainability target for 2025 e.g.100 percent of the electricity we purchase should be from renewable sources. We are working on reducing the use of plastic in our packaging, focusing on recycling the bottles, started using Zero Emission electric and hydrogen vehicles to deliver our products to our consumers in the US & Europe.

AS: What are the common challenges you have faced in carrying out corporate innovation in conjunction with external partners and startups during COVID-19?

Pritam: We faced challenges similar to those experienced by other CPG (Consumer Packaged Goods) firms during this pandemic. Cashflows challenges, and optimization of budgets for high capex & opex intensive initiative. However, we have been able to preserve with engagements with startups who have a gain-share model and innovative commercial models. Innovation Brewery started to make strides to collaborate with ecosystem partners to bring new solutions to solve the business challenges related to COVID-19. We innovated by pushing new ideas such as contactless vending machines for buying beer, using SMS channels to place orders for beer in Africa, and others to help our business grow.

AS: Why do you partner with external VCs and partners?

Pritam: We want to build a strong ecosystem with VCs, startup networks, incubators, academia, and corporate peers to nurture the startups who work with us, exchange the best practices, and accelerate our innovation journey. Some of our opportunities are very exploratory, therefore working with early-stage startups through VCs can help us tailor the solution to meet our requirements and co-invest for business growth.

AS: How will corporate innovation change in the coming decades?

Pritam: Our corporate innovation program will look outwards, with more open innovation with external stakeholders, and would become geography agnostics as we will have more virtual programs. You will see more open challenges from different business verticals tapping into the emerging startup networks and crowdsourcing of solutions from innovators from across the globe, to solve new challenges going forward. Corporate innovation will be better integrated with academia and peers to solve the challenges of the future

From AB InBev’s insights, it is clear that COVID-19 has significantly impacted corporate innovation, yet innovation remains at the core of solving the challenges brought upon by the pandemic. Moreover, collaboration with startups and academia will continue to grow as a significant driver of corporate innovation, given the strong and consistent focus on speed. The global pandemic has taught firms a lesson to constantly re-strategize and challenge widely held assumptions throughout the organization. Corporations have been forced to become smarter and follow non-traditional means of doing business such as greater acceptance towards working from home. Looking ahead, investments in robotics, automation, digitalization, and artificial intelligence to augment new products, services, and business models and more importantly, a change in business policies can be expected.

We got in touch with Lowe’s Innovation Lab, for their insights into what the future holds for corporate innovation and incorporated it into A-Scale’s postulations of what its future may look like.

Overall Trends and Looking Ahead

Innovation Scales Up

In order to stay on top of their game, businesses will need to respond to evolving customer demands in the next normal, and innovate in order to make that a reality. One immediate and directly tangible outcome of that could be the hard-wiring of innovation into the corporate DNA. This could take the form of larger innovation teams, who are vested in the practice for a longer period of time than what we see today. For instance, Abhay Tandon, Director and Head, Lowe’s Innovation Labs, India mentions the “Movement of corporate innovation teams from being ‘fit for purpose’ to ‘scaled for purpose’”. He further elaborates- “Corporate innovation teams, specifically open innovation teams have been traditionally small (not more than 10 members) to be able to facilitate PoCs. As they try to carve out their own identity and create a bigger impact within the organisations, these teams will be ramped up to not just stop at PoCs but also scale successful concepts within the organisations.”

By extension, he believes the process of corporate innovation may see its focus shift to a futuristic analysis of the customer landscape and innovating in order to best serve it. “With the fast-changing landscape of consumer interests and trends, it is important that we stay true to the focus on consumer centricity first before looking at technologies to be applied. Corporate innovation teams need to build futuristic narratives of solving problems and creating seamless and frictionless experiences, ushering a new era of experiences and engagement.” He stresses the combination of a short and long term focus, and shares, “At Lowe’s Innovation Labs, we have practiced and implemented the technique of narrative-driven innovation through long term innovation themes”.

Both these points suggest that corporate innovation is likely to play a central role in the corporations of tomorrow, to the point that team sizes will have to be scaled up, as they look to perceive, and subsequently innovate for the future.

Incentivizing Innovation

As can be seen from Ab InBev, corporate innovation is often tailored to the needs of different business units (BUs) within an organization. An innovative solution taken from a start-up flows to the BUs according to their requirements. This poses an execution risk: Can BU heads that have stretch targets in their categories take out time to ensure the implementation of new and adjacent ideas? Innovation leaders of the future will recognize this and tie it with the existing KPIs of BU heads to ensure alignment. This would eventually lead to more meaningful corporate innovation and on a regular basis

Increasing Openness and Hybridisation of Corporate Innovation

Historically, corporate innovation has been closely tied to exclusivity and confidentiality due to the significant costs of R&D and the potential upside associated with exclusive control of disruptive innovations. However, as corporates increasingly tap on the agility of startups in pursuing innovation, the clear benefits of hybrid corporate innovation systems (i.e. the augmentation of internal innovation sources with external ones to build cutting-edge capabilities) present themselves as a clear case to shift. We predict that this openness and hybridization of corporate innovation will continue to increase.

In support, Mr Tandon said that “the [corporate innovation] model will see a change as the innovation focus becomes dual in nature … to the extent that both [internal and external R&D] fall under the same organizational reporting structure.” Lowe’s Innovation Labs has already assimilated both internal and external innovation efforts under one aegis. He also added that “it is important that both software and hardware innovation are done in tandem for us to advance to the next level of engagement creation.”

The benefit of increased openness is twofold. Firstly, from the outside in, it allows corporates to innovate beyond the limits of their capacity, while lowering the costs involved in traditional R&D. For instance, P&G utilises its Connect+Develop website to invite others to submit innovations that suit their needs. Secondly, from the inside out, cooperation with external innovation partners such as startups and academic institutions will improve corporate networks and potentially lead to the discovery of alternative applications of existing technologies owned by these corporates.

Additionally, we anticipate an increasing openness toward the usage of corporate innovation by other companies in non-competitive industries and applications. Not only does this promote the positive externalities of innovation by allowing others to adapt and improve existing technologies, but is also a potential monetisation opportunity through licensing and technology transfer. For instance, GE licenses intellectual property and technology in the fields of materials & advanced manufacturing, healthcare & electronics, energy & industrial systems, and smart systems.

Rise in Process Innovation

While product advancements are a traditional driver of corporate innovation, we will also see an increase in focus on improving processes as a means of reducing costs, improving productivity, and enabling advancements in product development. Examples of process innovation range from Henry Ford’s creation of the first moving assembly line to the launch of Amazon Web Services and the cloud computing market.

The benefit of process innovation spans across industries, thus any progress can help drive technological development across the board. With the digitization of the world, we have become increasingly collaborative and interdependent. As process-related problems become increasingly complex, now even more so due to COVID-19, all companies are faced with the task to find new ways for their products to reach consumers, requiring joint efforts and investments in process innovation. We can expect to see an increase in cross-industry collaboration with structures similar to HyperLedger, an open-source collaboration community for blockchain development with companies ranging from Airbus to American Express.

Proliferation of Corporate Venture Capital

Since the evolution of Corporate Venture Capital (CVC), there’s been a drastic shift in the typical profile and activities of corporate investors. Today, 77 percent of Fortune 100 companies invest in venture capital, and 52 percent of Fortune 100 companies have their own investment arms. The large tech companies like Intel (Intel Capital), Google (GV, Capital G, Gradient Ventures), and Microsoft (M12) are amongst some of the most active investors in tech. But CVC is not only restricted to tech. It is also evident in industries such as Health & Pharma (Pfizer Ventures, Kaiser Permanente, Blue Cross Blue Shield) and big media companies (Disney, Sky Ventures) amongst others. In fact, The takeover has begun- US CVC investment was more than the VC investment in 2018- representing 52% of dollars invested.

The rise of CVC is owed to various factors such as conventional R&D yielding lower returns, globalization challenges, strategic choices, and financial considerations. Other than Technology, Telecommunications, Media, and Pharmaceuticals, we now witness companies in industries including consumer and construction, which previously saw little venture investing activity, entering the CVC space. Corporate investors are now looking beyond their core business to other niche sectors such as clean technology. As CVC focuses on innovation and tapping emerging markets, it is a function that will continue to flourish.

Delinking of Equity-Only Deals

In the past, accelerators have generally been equity-focused, with 59 percent of all global accelerators following the traditional cash-for-equity model in 2016, according to the Gust Accelerator Report. However, amidst a dearth of exits, this orthodox equity model is proving to be sub-optimal to sustain operations. Traditional accelerators are increasingly looking towards corporates as sources of revenue via sponsorship or partnerships, amidst this lack of exits. In that light, corporates’ own innovation programs and in-house accelerators too, may need to evolve their deal mechanisms to steer clear of the same roadblocks.

This evolution has already begun. While traditional VC firms have set up funds to deploy a revenue-share model, corporates too, are going down this route. For instance, Microsoft for Startups has structured its program for B2B startups through a unique co-selling model. While slightly unconventional at present, this model still enables the major objectives of corporate accelerators and, by extension, corporate innovation programs. The added bonus is that it ensures founders can focus on revenue and business growth, without concerns of dilution.

Overall, large corporations are recognising the value of nurturing potentially disruptive startups and exploring symbiotic relationships via novel deal mechanisms, instead of directly competing with them for market share. This comes as a direct consequence of corporates considering the bigger picture and aiming to deliver better experiences to their customers, as well as improving their own value proposition. Taking the Microsoft example as a starting point, we believe that deal structures in this industry such as revenue-share and gain-share, will gain traction as equity-only deals take a back seat. Further, with the rise of CVC as mentioned above, corporates can be the driving force that implements this revolution.

Rise of Corporate Venture Studios & Labs in Collaboration with VC Firms

With startups stealing market share from established corporates at an unparalleled scale in the last decade, corporates have already started setting up in-house venture studios. This concept was popularised by Amazon that set up Amazon Lab126 in 2003. Through the creation of this lab, Amazon came up with the concept of Kindle, its first moonshot project.

Currently, companies, regardless of industry, such as Coca Cola, AT&T, JP Morgan, and Sephora have set up these labs. The primary function of these is to focus on mission and product critical innovation where external partnerships are not feasible due to the sensitive nature of these innovations. In fact, Coca Cola’s KOLab is famously known for making people who work in the building sign NDAs as new products are constantly developed in this lab. We predict that more corporates will continue doing so due to the rising external competition and increasing benefits of first-mover advantage.

In support of corporates seeking to establish venture labs and corporate innovation programmes, venture capital firms such as Anthill Ventures and FutureLabs Ventures offer proprietary support for modular and tailor-made programmes. For instance, Anthill worked closely with YES Bank to design, organise, and execute YES Fintech, which went on to win “Accelerator of the Year” at the India Fintech Awards 2017.

Conclusion

In a time of flux precipitated by the COVID-19 pandemic, it is those who are able to prioritise innovation today who will reap the benefit of postcrisis growth tomorrow. As technology continues to evolve, corporations need to innovate in tandem in order to stay ahead of the competition and remain relevant in a disruptive economy- it’s no longer the big that eat the small, it’s the fast that eat the slow.

While corporates have access to scale that startups may not have, startups are able to operate at speed traditionally unviable for corporations. Clear synergies, therefore, exist for collaboration Moreover, as the future of corporate innovation tends towards open innovation with players such as startups, venture capital firms, and academic institutions; taking the phrase “corporate innovation” at face value no longer accurately represents the depth and breadth of the pursuit.

Here at A-Scale, we eagerly strive to play our part in this pursuit and help build a more innovative and sustainable future by marrying the Scale of Market leaders to the Speed of the innovators of tomorrow, and we couldn’t be more excited for what’s around the corner for the innovation ecosystem.

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We hope you enjoyed this report and would love to hear your thoughts on how COVID-19 will affect the future of corporate innovation and sustainability!

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