Why Your Organization Needs an Innovation Ecosystem – Harvard Business Review

Executive Summary

To ensure their companies stay innovative, leaders need to create an ecosystem that allows winning ideas to consistently emerge. In two decades of strategy consulting and research, the authors have learned that building such an ecosystem requires developing capabilities for exploring new ideas, experimentation, accepting failure, and working with external partners.

Ecosystems have become an important topic for business leaders. The pace of change in contemporary business environments means that the creation of value and decision making cannot be centralized. This is particularly true when it comes to innovation. Leaders need to accept that they dont always have the winning ideas and focus on creating an ecosystem that allows winning ideas to consistently emerge. In two decades of strategy consulting and research with over 100 companies, we have learned that building such an ecosystem requires developing capabilities for exploring new ideas, experimentation, accepting failure, and working with external partners.

The first step is for leaders to focus on how they manage their internal innovation teams. These teams should be managed using the same principles that are used to manage external startups. For example, instead of only selecting ideas that come from business plans and roadmaps, companies should take a portfolio approach that involves making multiple small bets on projects, tracking progress via key metrics, such as customer willingness to pay, and increasing investments only in those ideas that show evidence of traction. For this process to work, leaders have to accept that not all projects will work some will fail.

Our research and consulting work with Bosch provides an example of how to set up and manage an innovation pipeline with internal startups. The Bosch Accelerator Program provides a structured way for internal innovation teams to systematically validate the viability of their business ideas. Leaders and innovation managers select cohorts of 25-30 teams from all over the world that work together for 6-12 months. Teams receive an initial funding of approximately 120,000 and get three months to test whether their business-model ideas could scale. Depending on the results, teams can obtain an additional budget of 300,000 or more.

Since 2017, Bosch has invested in more than 169 teams. From these teams, 70% stopped their projects after the first investment and 72% of the remaining teams stopped after the second investment. With this process Bosch has discovered 14 teams that have successfully taken their projects to scale with follow-on funding.

Of course, even with the best in-house talent and innovation process, companies cannot come up with the best ideas on their own. Thats why a complete innovation ecosystem requires collaboration with external innovators. Just look at successful tech companies Tencent and Alibaba: according to the Financial Times, they generate over a third of their revenues from investments in external startups.

The banking industry is one arena in which incumbents have found it useful to work with external startups. Given the high number of emerging startups and technologies (in 2018 global venture capital investments in fintech startups set an annual record of $39.6 billion, with 1,463 companies raising funding), corporate leaders cant predict which fintech startups will eventually win the market. The best way to find out is to work with these startups by providing a collaborative platform that allows the best ideas to gain traction.

Several Nordic financial institutions we have interviewed and worked with recognized this challenge. Institutions such as Nordea, Spar Nord and Danske Bank co-funded and sponsored the creation of Copenhagen Fintech, an institution that gives large financial institutions access to invest in and collaborate with the startups. In our interviews with Thomas Krogh Jensen, the CEO of Copenhagen Fintech, he noted how collaborating with startups has provided companies with accelerated market validation and global scale.

We also conducted interviews with another member of the Copenhagen Fintech board, Ole Madsen, who is Senior Vice President of Spar Nord bank. Madsen and his team created an open platform on which fintech startups could build and test their applications. The aim was to give innovative startups access to a platform with a banking license and a large customer base. In return, Spar Nord gets access to the latest fintech innovations. So far, Madsen told us, the bank has invested in a dozen startup ideas, six of which have been successfully integrated onto the Spar Nord banking platform.

This ecosystem approach to innovation, leveraging talent both inside and outside of the company, is the best way to respond to a competitive, ever-changing environment. If leaders want to build a sustainable growth engine for the company, they need to create the right conditions for the best ideas to get picked up.

This article is part of a series connected to the 11th Global Peter Drucker Forum.