Ten success factors for a successful innovation outpost

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How to leverage the innovation powerhouse of Silicon Valley. Based on interviews with german companies pursuing innovation activities in Silicon Valley. Authors: Philipp Schett and Tobias Kaufhold

 Innovation Outposts: German Companies in Silicon Valley

Silicon Valley is well known as a place where ideas for new products and services flourish. Large American corporations like Xerox, ATT, General Electric, IBM or Wal-Mart have long since established innovation labs there to create knowledge and boost their new product-development cycle. As the Valley has evolved from a high tech- to an industry disruption area, more than 500 non-tech corporations have established innovation labs there. The Valley consists of a unique ecosystem, which these firms use to collaborate with innovation accelerators like Y Combinator or 500 startups, universities such as UC Berkeley or Stanford University or think tanks like Singularity University or the Orange Institute. In many cases, they build new and valuable networks, gain access to ideas and startups and likely accelerate their own growth.

These and other examples have created a stir in Germany. In a few cases, the stir forced German companies to set up an innovation activity in Silicon Valley to reinvent themselves and to develop new organizational structures that enable the creation of new business models, products and services.

To bring light into the darkness of the German Silicon Valley landscape, we analyzed those German companies which aim at catching the holy grail of innovation. We identified more than 130 German firms that actively pursue innovation activities in the Bay area.

While automotive companies have been pioneers in the Valley, most innovation activities were set up in recent years. Especially 2015 showed a high increase in established innovation labs. With SAP being the first company who set up a presence in Silicon Valley in 1993, the automotive industry quickly followed suit with Daimler as the first automotive company in 1995.

One observation that stands out is the high presence of DAX30 companies. DAX30 is the German stock index representing 30 of the largest companies trading on the Frankfurt Stock Exchange. Noticeable is that out  of the DAX30, 18 companies (60%) conduct innovation activities in Silicon Valley.

Following the initial analysis, we interviewed 15 executives of German companies that established an innovation lab in Silicon Valley. We conducted this research to deep dive into their view on innovation abroad and synthesized their key learnings. Interviewed firms range from rapidly growing startups to the famous German “Mittelstand” and various DAX30 corporations doing business in the automotive, energy and utility, pharmaceutical, healthcare, media, software, technology, e-commerce or telecommunication industry.

Based on our research, we synthesized the key success factors of corporate innovation activities in Silicon Valley.

Success Factors for Innovation Outposts

We identified ten success factors that differentiate leading companies in establishing and running a successful innovation outpost (see Figure below).

Success Factors of an innovation outpost

Figure 1: Ten success factors that differentiate leading companies in establishing and running a successful innovation outpost

The first success factor concerns the mindset of a company that shapes their future. Two extreme examples can be made. On the one hand, the backward-looking mindset of a company tends to hold on to past successes, focusses on proven approaches and best practices, possesses. Such a mindset is shaped by a modest willingness to take risks, focuses on incremental innovation and defines the market to a specific industry. The future oriented mindset on the other hand, tends to focus on future and new opportunities, engages in continuous change management, takes higher risks, focuses on radical and disruptive innovation and defines the market more broad. Companies need to identify their mindset across all hierarchy levels and define their range between a more conservative and a more visionary acting. For example, a conservative company should be careful in suddenly trying to pursue radical innovations with a R&D setup or a corporate venture capital outpost. This is due to the fact that they are historically only trained in incremental improvements. The successful consideration will lead to a higher acceptance and higher will to implement actions and products by executives of the middle management and employees.

Next is the strategy alignment. Innovation labs are solving problems that are of high strategic relevance. Therefore, these activities need to be tightly interlocked with the strategy process, company goals as well as with the company strategy itself.

The setup of successful innovation labs are built on four main pillars: clear objectives, high autonomy, focus on identified areas and decentralization. Clear qualitative and quantitative objectives enable the company to steer the innovation output more effectively. A high level of authority should be given to the team on-site, which typically knows the best way to engage and develop in order to achieve the goals. While many firms lose focus shortly after starting their innovation lab , successful firms focus on only two to three actions at a time.

“Keeping focus is important. It’s like being a kid in the candy store, you have endless possibilities.”

Decentralized units help larger outposts to be more effective when organizing their own e.g. HR and IT units to be fast and more effective.  One of the most important factors influencing and shaping the innovation activity profoundly are the employees. Composing the right team and keeping them motivated is crucial for the overall innovation output. Research makes it increasingly clear that corporations with a diverse workforce have a more creative output and perform financially better. Characteristics of smart creatives include playfulness, openness, and flexibility combined with a high level of energy and a willingness to take risks. Organizational leaders need to be more tolerant of those who are in some way “different,” but have extraordinary talents to contribute.

In the case of innovation activities as scouting, partnering or venture capital, different nationalities and especially an experienced local employee are essential in establishing the right contacts. Thus, trends and innovations can be detected more effectively, influencing the overall success significantly. The right mindset, a high level of experience and being well connected within the corporate German structure are also important. Top managers need to be clear about the type of workers they are seeking and to take charge of the hiring process.

“Hiring the right people and allowing them to work on the things they are passionate about spurs our innovation labs’ success.”

After the strategy has been crafted and the decision to build the innovation lab has been made, the overall speed matters. The process starts with the initial setup, where a pragmatic approach has been found successful with the exception of a more capital and human resource intensive R&D setup. Next is the onboarding process of new employees. Compared to the more common process in German corporates that can take up a whole month until new employees are completely ready to work, employees in Silicon Valley need all hardware, software and tools ready on their first day of work. If not, these employees see their chance of making a fast and high impact on the organization, product or service decreasing and leave the company soon.

“Once the strategy is formed and the innovation lab is built, velocity and market momentum beat perfection.”

A high-speed approach in performing all innovation activities, like developing minimum viable products (MVP), scouting or partnering, are also regarded as essential. In addition, continuous and quick exchange of information and status reports are benefitting the collaboration between the two geographical areas. With respect to the latter, it should however be noted that the German counterpart being a large company, needs generally more time for their decision making process and corresponding exchange of information.

The sixth success factor is the overall attractiveness of a company’s unique offering. Various corporates are competing to collaborate with, mentor or support certain startups and their technologies to be the first to benefit of their developments. The attractiveness of a company increases with regard to the quality and quantity of their offering. Some surveyed companies achieve a higher attractiveness by offering startups in Silicon Valley market access to the customer base of the German corporation. Others offer low rent conditions, mentorship, and strong support and the possibility to work on leading edge technologies. A recognized criterion for startups and academic research institutions for a beneficial collaboration is also the record of accomplishment of a corporation. If the latter can demonstrate a successful partnership and collaboration history, they possess a competitive edge.

“When we tell startups that they can talk directly to our CEO, who is leading a DAX30 company, then we deliver that promise.”

Building a broad network is the seventh success factor. A well-functioning network enables companies to hear of new startups, technologies, trends and emerging changes regarding the Valley but also offers the chance to be the first to get access to a new technology or venture capital investment round. Depending on the innovation activity type, the importance of being immersed in the local startup ecosystem varies, but it is generally considered very important for most of the categories. Silicon Valley also enjoys a presence of global top class research institutes and universities that have a world-renowned reputation in scientific and applied research. Forming a network beyond these segments is important, because various other parties exist that might also be beneficial to German companies such as incubators, accelerators and venture capitalists. The focus should be on building a company network, not specifically a personal network due to the high labor mobility. A restrictive corporate mindset or hiring the wrong people are the top two reasons for not achieving a broad company network.

The implementation of innovation is the bottleneck of the external innovation process. It is highly individual and needs constant adaption. The implementation  involves an early as possible stakeholder engagement and focuses on the most suitable point of contact within the business unit of the German organization. An integral part of this process is the careful preparation of the innovation:  Stakeholders have to understand the topic as well as they need to be convinced that the partner in Silicon Valley is suitable for the joint project regarding agreed requirements (e.g. in regard to data privacy, company size, status of the prototype). Once these conditions are met, decision-makers on the German side are more likely to engage with the startup based on intrinsic motivation. Now they build trust in the innovation and implementation capability of each respective startup as well as the potential technology, product, or service.

Two factors have proved to be effective in accelerating the process of innovation implementation. One factor is to create events, e.g. a pitch event, where innovations are introduced to all decision-makers that collectively decide on the spot about the future course. The second factor is an expatriates and inpatriates program, where employees from Silicon Valley are sent to the German corporation and vice versa. This enables employees to take the Valley mindset and culture back to Germany and provides the opportunity for employees from the German side to experience a different workstyle. Overall, the mutual understanding is increasing on both sides as well as the chance to form new relationships in business units that work together.

A strong support of the management is necessary for a fruitful implementation that every interviewed company possessed. In various cases, the CEO or executive board were directly in charge of driving innovation forward and therefore signaled internally and externally that the innovation activity in Silicon Valley is of high importance for the overall success of the company. Occasionally, executives should also physically engage on-site, to decide about potential partnerships with established companies and startups. This also has a positive signaling effect, offering startups and firms the opportunity to directly talk with the leaders of the company and gain trust in the future business relationship.

“In the first year, our CEO flew to our lab five times, spending valuable time with innovative businesses, startups and us.”

Constant adaption and patience is the last success factor, meaning that a company needs to adapt their activity consistently and constantly depends on the status of the parent company’s strategy as well as recent changes in market conditions. The innovation process takes time -and patience is an integral part of it. However, it does not mean that the new norms are long stretches without any progress. Furthermore, it doesn’t make sense to expect progress reports in a two-week rhythm to avoid frustration and create trust among employees. Socalled micromanaging can be seen as unfavorable in these creative settings. If the Silicon Valley team focuses on the key factors mentioned before and has a strong leader, the HQ is likely to see success finally.

In order to make innovations possible, corporations need the courage to embrace change. Innovation labs are not different and need the power to make a difference within the organization. An idea that will never be implemented is not an innovation.

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