Disruption!

A growing number of startups are doing something that once seemed unthinkable. Disrupting corporate giants. This is a trend that gives corporate executives — particularly executives of publicly listed companies — sleepless nights.

And the solution?

The answer that executives often come up with is the introduction of “corporate innovation programs” that attempt to create a more agile and innovative corporate environment that better equips incumbents to deal with the challenge of aggressive new players.

Such programs might consist of establishing innovation labs, setting up corporate venture capital units, introducing training sessions by serial entrepreneurs or even organizing “fact-finding” visits to Silicon Valley.

Unfortunately, many of these corporate initiatives are just “theater”. They are an attempt to project an image of being innovative and cool, when in reality they are shallow or even empty. For instance, investing relatively small amounts in startups or a venture capital fund is not going to work (or will not have the desired impact) if the large company’s culture is characterized by conservatism and a “not-invented-here” syndrome.

What then should established companies be doing to make this type of program more effective?

They need to adopt processes that can help to genuinely transform the corporate culture of bureaucracy and conservatism to one more focused on innovation and entrepreneurship.

This matters because the future prospects of companies will not be solely determined by developments in technology, but rather by a firm’s capacity to introduce processes that help maintain a corporate culture of innovation that is necessary to maximize the chances of sustained success.

But making this kind of change isn’t always easy.

Take a simple example. Motivational speeches by serial entrepreneurs, explaining the “lean startup”, do not necessarily resonate with people that opt to work for a multinational. Such employees may not necessarily have a “founders-mindset” and such motivational efforts are usually met with indifference or skepticism.

Speaking from personal experience, programs aimed at recapturing the “startup feel” are usually not enough for large companies to survive in a world where the pace of innovation is constantly accelerating.

In fact, employees can usually see through the theater. Rather, than foster a culture of innovation, the result is to reinforce negative perceptions and preexisting resentment.

It is time for a more imaginative approach.

In our work on Governance Tomorrow, we have distinguished five strategies that can make an important contribution to creating an open, inclusive corporate culture through which large firms can capture some of the important innovation characteristics that are attributed to startups, such as speed, passion and efficiency.

Here, we would like to describe the strategies that involve partnering with startups operating within the innovation space. Ironically, some of these strategies are just a smarter version of some of the existing “corporate innovation strategies”.

Building open and inclusive partnerships with startups can be an effective way of gradually re-energizing the corporate culture of a large, established firm.

• (1) Partnering with Incubators and Accelerators

The first strategy is the mobilization of incubator and accelerator programs in order to assist a startup in developing its nascent business capacities. This entails building partnerships between the large and mature company, incubator-accelerator service providers and startups.

The advantages of incubator and accelerator programs are that they allow large companies to work alongside startups and their founders.

Understanding the strategic benefits of more fluid boundaries between the different stakeholders is a crucial step, as it opens up a range of additional possibilities.

In particular, it allows employees of large companies to collaborate in a more personal and less formal environment (as would be created when the large company clearly operates as an indirect or direct investor).

Such open collaboration encourages innovation processes within the large company, thereby gradually dismantling more conservative attitudes and reducing their negative effects.

• (2) Co-Working Spaces

Co-working spaces — open architecture — afford startup-founder-employees with the opportunity to routinely mix with corporate employees.

By putting actors together in this way, the boundaries between corporate and startup can be blurred and new opportunities for positive encounters are created.

It appears that employees, particularly millennials, often feel more comfortable in a space/area/environment which not only gives them more control over their jobs, but also enhances their identity and facilitates them in being part of a bigger community. By working “cheek-by-jowl” with startup founders, employees appear to be better able to identify “out-of-the-box” solutions to particular business problems.

Recognizing that “place” has an important role to play in forming and transforming corporate culture, more and more large companies appear to embrace the open architecture of the co-working space which is per definition more conducive of the kind of happenstance interactions and collaborations that foster innovation.

• (3) Acquiring” & Retaining Founder-Entrepreneurs

The aim of the acquisition of startups companies is not “assimilation” of technologies and innovation in the sense that a startup is expected to lose its identity and be passively assimilated into a larger, fixed corporate identity. Quite the contrary, in fact.

The aim of this open and inclusive style of partnering is to build a more fluid relationship in which opportunities for mutual learning are emphasized.

Consider Amazon and Zappos. Amazon acquired Zappos, an online shoe retailer in 2009 for about $847 million, its largest acquisition at the time. Both companies have a reputation for innovative — possibly controversial — organizational approaches that drive employees hard. Zappos had earlier instituted a system of “holocracy” that scrapped management positions and left it to employees to independently decide how to get the work done. This organizational principle was not for everyone and the company itself admitted that 15–20% of employees left the company, dissatisfied with the “flatter” operating environment.

Furthermore, Zappos instituted a “pay-to-quit” policy in which they offered all employees a $1000 to quit. The logic of “The Offer” seems clear. If an employee is not 100% committed to the firm and its “flat” culture, then the company would rather “pay now than pay later”.

The interesting thing about the Zappos example is that after the acquisition Amazon did not seek to change Zappos’ identity and internal organizational culture. Aspects of Zappos became part of the larger Amazon ecosystem, in the sense that the “pay to quit principle” was adopted elsewhere within the Amazon group. Instead of Amazon assimilating Zappos, the Zappos way of working was retained, assessed and — ultimately — integrated into Amazon’s own culture and practice.

In turn, this flatter, more open style of relationship makes it more likely that the founders will stay, other talent will be attracted, and that — in consequence — the startup maximizes its chances of long-term growth.

• (4) Introducing Corporate Values of Innovation

The fourth strategy is without doubt the most important.

Companies that have transformed “innovation” and”entrepreneurship” into the main driver of their corporate culture are the winners of the future.

An example of this strategy is Netflix. In 2009, its founder Reed Hastings pointed out that too many corporations have “nice sounding” value statements, such as integrity, communication, respect and excellence. However, he understood that these “values” are often not what is really valued within a corporation and, all too often, are just empty window dressing.

For instance, everyone knows that in the event of a commercial setback, the corporation will be restructured and jobs will be sacrificed. This will undoubtedly have a corrosive effect on a firm’s commitment to such values: “If the corporation does not take care of me, then why should I care for the company”.

In a 124-page slide deck, Reed Hastings (and Netflix) outlined that the dynamic of this employer-employee relationship needs to be changed. Corporate scandals have eroded the reputation of large companies. They are no longer seen as a “better” option than a younger startup. Moreover, the quality of the working experience and environment now matters so much more. Of particular importance are opportunities for learning and capacity building.

As stated in the slide deck:

“The actual company values, as opposed to the nice-sounding values, are shown by who gets rewarded, promoted, or let go.”

On this type of account, Netflix has realized that it becomes imperative to roll back the corporate attitude by hiring and promoting people who demonstrate the following behavior traits:

1- judgment (make wise decisions, think strategically)

2- communication (listen, be concise and articulate in speech and writing, treat people with respect)

3- impact (focus on great results, rather than on process)

4- curiosity (learn rapidly and eagerly)

5- innovation (discover practical solutions to hard problems)

6- courage (make tough decisions without agonizing)

7- passion (inspire others with your thirst for excellence)

8- honesty (non-political, admit mistakes)

9- selflessness (seek what is best for Netflix)

This forward-thinking approach to culture helps to attract talented people as it offers them a much greater degree of freedom and responsibility.

Indeed, the opportunities afforded by such freedom and responsibility can make corporations attractive (again). In the absence of this type of culture, the best young talent will simply leave. Inside Netflix it is all about context, not control. The result is that every Netflix employee is basically treated as an entrepreneur.

• (5) Giving Back to Society

Arguably, Reed Hastings focused on building the right kind of internal culture first.

However, an important fifth strategy involves “giving back” to society or the local community in order to improve that community.

For instance, Salesforce has integrated “a giving back” policy into its business model. This involved offering grants to support the communities “where our employees live and work”.

A similar approach has also been adopted by Under Armour’s founder-CEO Kevin Plank. He has built a reputation for investing (through its fund Sagamore Ventures) in a number of startups in the Baltimore area.

Some of the younger companies that have received such support — for example, a flower delivery company — are not necessarily in fields that that Under Armour will ever be able to exploit commercially. By encouraging such firms to re-locate to Baltimore in the vicinity of Under Armour’s corporate campus, Kevin Plank correctly recognizes the potential value for his company in community-building and creating a business and social environment that makes a particular region more attractive to the best talent.

We will build on these five strategies in our future work on “Governance Tomorrow”.