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The best of ‘frenemies’: Why corporates should embrace, not fear, start-ups—and vice versa

by Peri Kadaster and Matthias Schmidt-Pfitzner

If you feel like your team is lagging on all things innovation, you’re not alone. In fact, a recent McKinsey report highlights that 84 percent of global executives believe innovation is extremely important, yet only 6 percent are satisfied with their organization’s innovation performance. Even more confounding, these corporations have assets and scale that in theory make investment in innovation more feasible than any start-up’s.

What is the cause of (and solution to) this discrepancy? And what role does innovation play within a broader digital transformation effort?

One way to answer these questions is to leverage one of the strengths of corporations—their assets—and gain start-up talent and ways of working through acquisition. Alternatively, they can create a new digital unit in the core business, or even as an adjacent brand, and ultimately radiate that culture across the organization. In either approach, utilizing the assets and scale of the corporation to enable a start-up mind-set can be a win-win investment.

Innovation should not be framed as “corporates versus start-ups” but rather as the notion that these different entities can and should find new ways to work together; they are symbiotic, not zero sum. To do so, it’s important to look at the people behind the product or service. The people in the organization and the capabilities they bring are the most important drivers of success in digital ventures, not only for start-ups but especially for corporates undergoing a digital transformation. Getting the people element of the equation right is a universal and non-negotiable requirement.

At a high level, these requisite capabilities include:

  • Customer-centricity, especially in decision making about product and service development and other user-facing offerings
  • A cross-functional, nonsiloed working model, which includes a customer journey-based approach as opposed to a business-unit approach
  • A risk-taking mind-set. This is not to imply that decisions should be unmoored from reasonable caution, but rather that, at the executive level, deployment of capital should be viewed as an investment in the future, with an awareness that any investment’s returns may vary over time. At the front lines, it can mean embracing a culture of experimentation and agility via activities structured around a test-measure-learn approach.

Sounds straightforward, right? But developing these capabilities requires embracing four core beliefs, critical for corporates in a successful digital transformation:

  1. That innovation is not limited to “digital only.’’ Products are certainly part of the equation, but also critical are “analog” considerations, such as governance and people.
  2. That trusting and enabling everyone in the organization is critical to unlocking their full potential for innovation, which requires agility and transparency. A “waterfall” decision structure results in wasted time; with an agile approach, not only do iterations move more quickly but the full workforce is engaged and helping to enable it. Top-down ideas can spur one or two exciting products or developments, but the key to unlocking innovation in the long run is by creating an “engine” in which every employee is empowered to propel the entire organization forward. The people who are critical to the process are often the ones closest to the company’s customers/users; they can often provide the most accurate and insightful read on customer feedback and unmet needs.
  3. That organizations must “go all in”: the entire operating model, including the way the business is run, evolves, and is measured, must change. Instead of prioritizing quarterly financials and metrics like EBITDA and free cash flow, companies must adopt a long-term perspective and an investment-led approach to redeploying their profit pools. That shifts the critical metrics to customer engagement and retention over a longer time frame.
  4. Lastly, but perhaps most critically, that any innovation effort must be supported from the top; without this element, success is not possible, as a clear vision from the top flows across and into every corner of the entire organization. This is often the most difficult area for large, incumbent organizations to tackle, as it requires a fundamental increase in velocity of new ideas and embrace of change; it also requires shifting from a ‘waterfall’ model to an agile approach that may include imperfect minimum viable products for piloting and learning, which can leave some execs skittish.

Corporates can learn from start-ups about breakthrough product innovation, just as start-ups can learn from corporates about successfully handling large processes and assets that stand behind products at scale. By finding ways to learn from or even integrate the unique advantages of each, both start-ups and corporates can unlock tremendous latent value for themselves—and for their customers.

Peri Kadaster is global director of marketing at McKinsey Digital Labs, based in San Francisco, and Matthias Schmidt-Pfitzner is a partner at Digital McKinsey in Hamburg.