17 September 2019
Alexander Graham Bell (1847 -1922) invented the  telephone. He officiated at the opening (left) of the long-distance line from New York to Chicago in 1892. Photos: Wikipedia
Alexander Graham Bell (1847 -1922) invented the telephone. He officiated at the opening (left) of the long-distance line from New York to Chicago in 1892. Photos: Wikipedia

Corporate innovation – beyond predicting the future

“Prediction is very difficult, especially if it’s about the future.” – Niels Bohr

The Decision

Imagine that you are a key decision maker at the dominant communication network in the world, having successfully grown through astute acquisitions and network effects.

The company’s market value has increased more than 100 times in a short period of time, and you are now clearly the market leader.

Along comes a new start-up with a proposal, actually a founder and his angel investors who are short of money and are looking for a face-saving exit.

They are asking for US$100,000 in exchange for their business.

Of course, their business has no revenue, and their new technology looks like a toy.

Your internal team is far superior and has concluded that there is nothing interesting. The chances of this new toy market taking off are extremely small.

Finally, even if you needed to compete with them, you could move quickly.

Therefore, you dismiss them.

This is no imaginary case.

The dominant communication network is the telegraph, owned and operated by the Telegraphy Company.

The investors are Gardiner Hubbard and Thomas Sanders.

The founder is Alexander Graham Bell, and the toy is the telephone.

Of course, it turned out that the incumbent underestimated the founder and his investors, the toy market was not a toy after all and even when the Telegraph Co. entered the telephone market, it could not win, finally transforming itself entirely to become a money-transfer business.

Problems and Solutions

Why is this story from history particularly relevant today?

All around the world, incumbents are vulnerable, like the Telegraph Co.

A downward spiral can begin any time, as the number of start-ups continues to grow.

What are the key problems and, more importantly, solutions for improving corporate innovation?

Problem #1

The smartest people are always and without exception outside your company.

Solution #1

Build a diverse network outside your company.

This means more than simply going to conferences and collecting business cards.

It means building strategic relationships with key players who have diverse networks themselves.

The focus should especially be on people connected with early-stage start-ups, because that is the most diverse ecosystem, and large companies are poorly equipped to try to engage directly with early-stage start-ups.

Problem #2

The structure of power laws results in impact being more important than probability.

Solution #2

Focus on imagination, not knowledge.

Knowledge deals with what has happened in the past.

It anchors our reality, which is generally helpful for day-to-day living but is relatively poor at dealing with power laws and high-impact but low-probability events.

Imagination empowers us to think about the future without the constraints of knowledge.

The best way to start building something like imagination is through habits, starting small at first.

Problem #3

The world is path dependent, and small inflection points have significant consequences.

Solution #3

Experiment early despite limited information.

It is tempting to rely on being a fast follower, but, as the Telegraph Co. found out, even reversing a decision quickly may already be too late.

Instead, it is more helpful to have a portfolio of experiments.

That way, you can be involved in potential breakthroughs before it is too late.

In addition, even the unsuccessful experiments will result in some learning, building the foundation for better decision making.

Beyond Predictions

Rather than being discrete problems and solutions, all of these issues are related and can be integrated.

The common theme is that large companies should find ways to engage with the diverse start-up ecosystems globally.

Of course, the actual mechanics of engagement are not trivial.

Holding contests and events is helpful for marketing but does not really address the issue of deeper engagement.

On the other extreme, starting a corporate venture capital fund is not simple.

For most companies, the most practical route is to partner with early-stage venture funds that can act as a bridge with start-ups.

Regardless of the implementation, all companies need to find a way to make better decisions about the future and their corporate innovation strategy, so as to avoid being replaced by toys that transform into platforms.

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Managing Director of Fresco Capital. He is involved in all aspects of investment and operations. He has been investing, working and living in Asia since 1999.