Corporate Innovation Ventures: Separation vs. Integration

Probably the most critical structural ingredient for innovation capability is how new ventures – internal as well as external ones – are to be implemented in the organization in order to get validated and scaled. Should a new venture be entirely separated from the core business as stand-alone venture? Should it be integrated into an existing business unit? Or is it indicated to balance separation and integration by implementing an ambidextrous organizational setup? In many organizations, no appropriate guidelines for this issue have been given up to now, although this poses a necessary condition to dual, integrative innovation success.

In the following a framework is suggested, drawing on the recent work of Charles O’Reilly and Michael Tushman. The underlying matrix is spanned by determining two criteria:

  • What’s the venture’s strategic importance for the company? Strategically important ventures mostly address a company’s growth or future business and can be assigned to H2 or H3 in the innovation portfolio.
  • Can the innovation venture leverage existing firm assets to gain competitive advantage? Those assets mainly consist of competencies, customer base, sales and marketing channels, manufacturing, technology platforms or brands.

Depending on the innovation venture’s  particular characteristics, four quadrants can be considered:

Innovation Ventures - Separate vs. Integrate

Adapted from “Lead and Disrupt” by Charles O’Reilly and Michael Tushman

 

Neither strategically important nor operationally related: In this case, it is recommended to spin out the venture within the larger company or to the public.

Operationally related but not strategically important: Under these conditions, the venture can be integrated into an existing business unit or contracted out, depending on the value to the company. For example, many incremental innovations or improvements within H1 (such as service or process innovations for existing products) may be operationally related to and even required for the existing business. However, they are not deemed to be strategically relevant for long term success. The choice is to cover them internally or rely on a partner in order to free up resources for strategically relevant ventures.

Strategically important but no leverage from core assets and capabilities: In this case, the new venture should be implemented as an independent business unit. This often occurs in case of disruptive (competence-destroying) ventures and when entirely new and different technologies, business models and capabilities are required to build the business, respectively

Strategically important and able to leverage core assets and capabilities: This is the case of competence-enhancing, explorative innovations where an ambidextrous organizational design, building upon a dedicated exploration unit, is required. To strictly separate the new venture from the core would risk to sacrifice the future by not drawing on existing competencies and resources. Upon given fit with core (sustaining innovation), the venture is eventually going to be transitioned after a critical size. Therefore, a careful balance of independence and connection is needed here to maximize likelihood for success. Another case addresses strategic adaptation of existing core business by partially renewing the existing business model or applying new technological capabilities. As these innovation ventures are primarily driven out of the existing business units, a sufficient degree of separation to the operational business, e.g. through dedicated teams, labs or startup accelerators, needs to be ensured at the outset.

 

Takeaway

Strategically important innovation ventures – mostly located in H3 (future business) or H2 (growth business) – usually demand a high degree of or even complete separation from the core business. If competitive advantage can be gained from leveraging existing firm assets, a proper balance with integration in the core is crucial. Existing assets and capabilities can be considered the main advantage of large companies in their competition with nimble startups and cross-industy competitors in the face of accelerating disruption and industry convergence.

Consequently, the following combination is key for established companies to stay ahead:

  • Selection of strategic internal and external innovation ventures that draw on existing assets and capabilities
  • Proper implementation of appropriate dual corporate innovation structures and approaches to tap this individual competitive advantage

 

About Ralph-Christian Ohr

Experienced innovation management and corporate development professional. Consulting on organizational and personal capabilities for high innovation performance. Integrative thinker. T-shaped.

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4 Responses to Corporate Innovation Ventures: Separation vs. Integration

  1. Kevin McFarthing June 10, 2016 at 10:52 PM #

    Hi Ralph – this is a very sensible approach. The only other option I would suggest is in the case of areas that are operationally related but not strategically important, the initiative should either receive a low priority for resource, or simply be stopped.

    • Ralph-Christian Ohr June 12, 2016 at 11:56 AM #

      Thanks for your comment, Kevin – great additions!

      I think the option to stop/kill a venture basically exists for all four quadrants. So the matrix suggests how to implement a selected venture, deemed viable, in the first place. The quadrant “high strategic fit / low operational proximity” often comprises incremental innovations that need to be pursued in order to stabilize or enhance core business – in the most efficient way, though. Therefore, their resource priority should, as you rightly suggest, comparably low in contrast to srategically important ventures and should also take outsourcing options into consideration.

  2. Bart Doorneweert June 11, 2016 at 9:01 AM #

    Hi Ralph,

    Nice overview for helping with deciding on how to allocate venture related value. I do want to add thought that the success of the venture is not always the (only) metric to follow. I know of internal corporate venture programs, that also included success metrics for personal development, and enhancing existing staff to appraise entrepreneurial skills. That relates directly to company core strategy, but is not so easily fixed with either placing the startup vehicle inside our outside the organisation. There might be another dimension to this.

    Bart

  3. Ralph-Christian Ohr June 12, 2016 at 12:22 PM #

    Thanks for stopping by, Bart!

    You definitely raise an important point. I agree with you that there are a couple of other influencing factors – in particular on the people side – to contribute to an organization’s innovation capability.

    As I have pointed elsewhere, getting a a dual approach and the “separation vs. integration” issue right are necessary – while not sufficient – conditions to corporate innovation. This post particularly aims at calarifying basic structural requirements for innovation ventures in the corporate context since these are often confused in my experience.

    In my view, a good and pupular example for what you address is IBM. While they already have an implementation system for new ventures in place for decades, they have recently been spreading design thinking skills within their core organization in order to develop their people in terms of customer centricity and entrepreneurial mindset.

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