Newspapers, department stores and call centres may rue the arrival of Seek, ASOS and Twitter but this is the new normal. This is disruption in action. Large established businesses are at the mercy of digital natives eating into their precious rivers of gold.
What’s needed to survive is to fight back but large companies have a problem: they can’t innovate. At least, it doesn’t come naturally.
Big, hulking corporations are designed for incremental change. The focus is on protecting and improving legacy business. But survival in the new world demands transformational action – business as usual is not enough. Sadly, most corporations are not brave enough to pursue ventures that are either initially loss-making or might cannibalise their current revenue.
As one half of Sydney start-up incubator Pollenizer, Phil Morle often ponders innovation. Since establishing a digital design and development agency in 2007 with co-founder Mick Liubinksas, Morle has played a hand in the development of a number of internet start-ups, including group-buying website Spreets, which sold to Yahoo! for $40 million in 2011.
The company takes a co-founder role and helps start-ups grapple with the early viability of new ideas. Initially, Pollenizer would partner entrepreneurs as the co-founder but now it pitches to big companies struggling with innovation.
Morle and Liubinskas want to whip companies into shape. They want to teach the grand old dames of industry how to start thinking more like their more youthful, nimble start-up rivals. To do this, Morle says companies need to pull innovation away from business as usual.
“I strongly believe that you can’t just say, ‘Right, that cubicle, you three people there, make a new product now’. You just can’t do it.”
The separation should occur physically, philosophically and in the way the company and its innovative venture is structured, Morle says.
“My strong view is that the only way for a big company to innovate is to remove itself from the equation and then have some way of having a perspective on it.”
Innovation is hard. It requires the best thinkers but this can be hard to grasp. “If you take your best person off ad optimisation and get them to make something new then your ad optimisation goes down and you’re making less money and everyone’s upset,” Morle says by way of example.
But even once you’ve identified the best person, Morle admits that motivation is difficult. “The opportunity is for companies to find the middle ground and say [to the right employee], ‘I would like to give you less money, just barely pay your mortgage, this means I’m saying to you, ‘You need to earn your future now’,’” Morle says. “That’s what entrepreneurs do.”
It’s a big shift in thinking. A start-up founder going after a new product or service, or marketplace, is often surviving on a diet of ramen noodles. Maybe he has mortgaged his house. Maybe she has borrowed a couple of hundred thousand from family and friends. Perhaps an impatient or nervous venture capitalist is hovering about. But an employee is on a good salary and feeling pretty comfortable – and maybe a bit lazy. It’s unlikely this will translate into the kind of motivation that leads to the kind of dedication and aggression needed to pursue start-up success, Morle says.
He reckons the best people to lead a hived-off project may be the good ones who have itchy feet. “My gut tells me it’s the people who are about to bail anyway, they’re about to leave and start up a company.”
This is exactly the strategy behind the “spin in” at Cisco, chief technology officer for Australia and New Zealand, Kevin Bloch, says. The network equipment maker has a history of allowing talented engineers to “leave” the company to pursue their own ideas. But Cisco likes to keep them close, putting up seed funding, providing use of office space and holding options to later acquire the company. The most famous example is Andiamo, a switch maker, for which Cisco initially invested $US84 million for 44 per cent and later acquired for $750 million – part of which was written down as research and development expenditure. “It’s got to be done judiciously,” Bloch says. “But it’s smart because some of these people are really brilliant engineers and business people. They see an idea that they want to work on that doesn’t quite fit our existing [profit and loss oriented] business trajectory, strategy or whatever the reason.”
But “finding genuine ‘intrapreneurs’ is not that easy,” APN News & Media’s chief development officer, Matt Crockett, says. Instead, the company is testing a few models of acquiring and backing early stage companies. This approach is an admission that there is not yet a foolproof recipe. “We don’t know what’s going to work but we’re going to try a number of different things and see,” Crockett says. “Let’s be innovative about being innovative.”
APN has backed one Pollenizer company (the failed local recommendation engine Friendorse) and sent one employee on secondment to the incubator to work on a recruitment start-up. It has also made early stage investments in group buying platform MyTeamDeals and in digital marketers CC Media. The company also bought 86 per cent in later stage e-commerce play brandsExclusive for $36 million (with a further $30 million tied to earn-out targets).
Of all the forays, GrabOne has been the most successful, Crockett says. APN partnered entrepreneur Shane Bradley to start the group-buying website, which is now the big player in New Zealand and subsequently acquired the full share in May 2012. Crockett is keen to emulate the success of GrabOne and the company is set to join Bradley in a new venture in 2013.
Beyond talent issues, much of the corporate slowness is philosophical. “Like white cells in the immuno [immunological] system protecting the host,” is how Austin Bryan, the vice-president, digital communities and ecosystems for SingTel and Optus, describes senior managers that shun innovation to protect existing revenue streams. “Companies are facing a harsh reality that [to stay viable] they actually have to do something that exacerbates that reality, to move forward. The attributes of companies that navigate that well are a fiercely open leadership culture where those people are prepared to risk the way that they have done things in the past against the need to change.”
The chief executive of listed marketing company Salmat, Grant Harrod, claims not to shy away from that challenge. “We’ve always had the view [that] ‘if anything is going to destroy our business we want to do it to ourselves’,” he says.
For more than two decades Salmat looked after posting bills and statements for banks and electricity providers in its Business Process Outsourcing unit. In 2011 it launched a disruptive competitor, Digital Post Australia, a joint venture with Computershare. “[DPA] was ultimately going to challenge a reasonable part of [BPO’s] operations,” Harrod says. (The company went on to divest BPO, selling it to Fujifilm for $375 million in August 2011.)
Similarly, Salmat – best known for the delivery of physical catalogues – in 2008 established Lasoo, an online aggregator of catalogues. Harrod admits that as CEO he has to get his mind around the initial thought of “Oh my god, this is going to destroy my business”.
“These things don’t necessarily destroy one business,” Harrod says.
This philosophy is driving the team at Mi9 – the joint venture between Nine Entertainment Co and Microsoft (formerly ninemsn) – that is building Jump In, a social app that delivers a “second screen experience” while users are watching television (similar to Channel 7’s Fango). Mi9 chief executive Mark Britt reckons that in three years Jump In will be a bigger media property than the ninemsn homepage. This transition will “absolutely” mean some users will stop visiting the homepage but “the net result will add up to more than the ninemsn homepage,” he says.
Companies can be similarly reluctant to chase opportunities that aren’t immediately profitable. “The economics of some of these disruptive plays aren’t immediately apparent,” Mi9’s chief technology officer, Damian Cronan, says.
Britt says he doesn’t think about return on investment in a definitive way for Jump In just yet. “We believe ultimately that we have to go to where the audience is,” he says.
That sounds justified but what if the vision isn’t shared by some crucial stakeholders? When APN News & Media announced its acquisition of e-tailer brandsExclusive in August, the company’s second largest shareholder, Simon Marais, of Allan Gray Investments, revealed his opposition in the financial press, warning he would agitate for the removal of chief executive Brett Chenoweth or the board if the company pursued other risky digital acquisitions.
“The task is for us to lay out the strategy and the logic and to try and align our shareholders behind that,” Crockett says. “Not all of a company’s shareholders will like the moves they are making and some will be risky and uncertain and will take time to prove and this was an example where that was the case. It takes corporates a little bit of boldness, if you like, and a little bit of courage to say not all our investors are going to like this but we believe it’s the right thing and we’re going to back the strategy.”
Big companies should not forget the strengths that come from their size and history. At Cisco, that means distribution in 120 countries. “The idea is not to become another start-up,” Bloch says. APN director of digital ventures Danny Gilligan says the company brings instant credibility to associated digital start-ups. APN also has a wide reach from its media properties to market a new start-up idea.
Morle at Pollenizer appreciates this. The incubator is testing a tie up with one of its latest portfolio companies, FlikGift, and Mi9. In return for options to acquire a stake in the company at a later stage, Mi9 supplies the start-up with advertising space throughout its digital media portfolio, a reach that a start-up could never otherwise afford. “It is a win-win. FlikGift gets to test it’s business model at scale, while Mi9 get’s early access to start-up innovation,” Morle says.
Big companies can also deliver “gold” to the innovation process by defining the problem to be solved, Morle adds. “That insight that comes out of big companies, the thinking and analysis is better than any start-up could do.”