Innovation Labs: Establishing a Model that Works (Part 1)
By Surabhi Reddy and Casey LeJeune

 

This is part 1 in a 2-part series on What Makes – or Breaks – a Successful Innovation Lab. While innovation labs may appear as glamorous think-tanks independent of corporate drudgery, their success requires a combination of luck, preparation, and management. We’ll explore successful models of innovation hubs in Part 2.

 

In the 1970s, Xerox PARC (Palo Alto Research Center) was a division of the main company dedicated to research and development. Gary Starkweather, an engineer at a New York Xerox location, saw the potential of lasers to transmit digital images directly to a printing medium. With the desire to construct a prototype of his idea, Starkweather demanded a transfer to Xerox’s PARC facility, where he would have access to the innovative capacity and resources to develop what would become Xerox 9700 – the world’s first high speed, laser printer. Despite initial skepticism from Xerox management, Starkweather’s printer eventually received a green light and resulted in billions of dollars in profit for the company.1

Ironically, the laser printer only scratched the surface of radical innovation occurring at PARC in the 1970s. PARC engineers developed the Xerox Alto – the first personal computer to incorporate graphical user interface and a mouse attachment for navigation. Steve Jobs, who offered a hundred thousand shares of his company for access to PARC’s innovative designs, was given a demonstration of the Alto, to which he remarked “Why aren’t you doing anything with this? This is the greatest thing. This is revolutionary!” Unfortunately, the PARC engineers were unable to cut down costs of the Alto, and its total production never exceeded 2000 units. Xerox management, displeased with costs, speed, and lack of computing power, eventually withdrew the project – while Jobs returned to Apple to develop Macintosh and revolutionize the entire industry.1 Collectively, PARC represents the tremendous success and failure that innovative branches of a company can face.

In the digital era, radical innovation (“RI”) has emerged as a priority for companies in many industries – for some, a necessity for survival. Different from incremental innovation, which seeks to build on existing projects, fix minor discontinuities in technology, and improve access to consumers, RI is built on the principle of creating entirely new products and potential industries. Driven by the threat of being disrupted by a start-up company or new entrant, companies have engaged in a RI arms race. However, the competencies of incremental innovation and operation (i.e. cost-efficiency, quality, productivity) are different from those of radical innovation (i.e. adaptability, risk-taking, vision).2 The solution? Numerous companies have established separate structures dedicated to RI projects. Dubbed innovation labs (of which PARC is an early example), these entities enlist the brightest minds to work on developing new products, formulating new business strategies, and fending off competition from the start-up sphere.


In the digital era, radical innovation (“RI”) has emerged as a priority for companies in many industries – for some, a necessity for survival.


From Target to Sears to Visa, big names across industries have invested a sizable chunk to set up their own innovation centers in Silicon Valley and other “technology towns.” Their innovation labs try to emulate the start-up M.O. – with a bottom-up approach, brainstorming sessions, and strong efforts to recruit talented engineers and programmers.3 To meet operational costs of innovation labs, corporations have increased R&D budgets and expanded VC investment.4 Even the government has invested millions in creating innovation labs to complement current departments.5 The consulting industry provides another good example: many of the major players (Deloitte, PwC, Accenture, Ernst & Young) have also set up innovation centers, and smaller, boutique firms are beginning to follow suit.6 In today’s economy, RI is required to stay competitive, leading to the widespread growth and proliferation of innovation labs.

These innovation labs can take on many different forms, depending on organizational goals and the industry itself. The traditional innovation lab acts as an offshoot of an organization that solely focuses on internal innovation to support the core business. Accelerators are bodies that provide capital, partnership, and connections to external projects (typically conceived from the start-up realm). Incubators are bodies that bring in external management to see internal innovation projects to fruition. Lastly, venture arms are parts of an organization that target and manage investments into promising start-ups. These bodies all fit under the umbrella term of an innovation lab – and are similarly dedicated to maintaining a competitive edge in the market.

 

Set Up for Failure: Risk Factors in Innovation Labs
Yet, the history of innovation labs resembles a graveyard of untapped potential, failed expectations, and sunk costs. According to a leading bank executive, “About 80 to 90 percent of innovation centers fail, and end up being a massive waste of resources.”7 Take, for example, Nordstrom Inc., which established its Innovation Lab in 2010. Initially, Nordstrom was commended for demonstrating a commitment to technology as a traditional retailor. Four years later, however, the Nordstrom Innovation Lab was largely disbanded and shifted employees and projects to other parts of the company. Similarly, Amazon’s Lab126 innovation hub downsized and fired engineers after the failure of its Fire phone.3 Case after case, it is evident that traditional companies face significant challenges in launching and sustaining innovation labs. With no clear model for RI, companies must carefully consider their approach to innovation. Here, we will examine what can drive these entities to fail.

First, companies must acknowledge that there are many sources of risk inherent to RI. First, developed products can be difficult to evaluate because the product is so different from its predecessors. Second, the life-cycle of RI is highly variable, with long timelines and sporadic breakthroughs. Lastly, there is an intrinsic conflict between the innovation arm and the main organization, due to the differences in their competencies and goals.2


To be perceived as industry leading, many companies are using innovation labs as marketing tools rather than for actual innovation – to the detriment of their own success.


These risks all applied to the failure of Xerox Alto. Their newly-developed gold-plated mouse cost $300 and reportedly broke after two weeks. Without previously mass-producing a mouse, they were unable to understand and fix the problems in its design. And despite being built nearly a decade before other personal competitors, the sporadic rate of progress in developing the Alto failed to keep Xerox ahead of competitors. Lastly, as a multinational corporation with numerous stakeholders, Xerox had to shoot down many of the innovators’ ideas – including eventually withdrawing from the personal computer market.1 For any company seeking to engage in RI, it is important to weigh these risks and anticipate failure.

To be perceived as industry leading, many companies are using innovation labs as marketing tools rather than for actual RI – to the detriment of their own success.8 It was found that consulting firms and their clients are more likely to overtly report if the innovation centers are achieving good outcomes.6 Unlike many start-ups, which build a brand after product development, large corporations can dip into a large pool of capital to support the notion of them being innovators and creators. As a result, innovation labs may stray from a deliverable-oriented strategy. What is left is a division that serves the sole purpose of marketing… as it is lapped in the RI race by start-ups.

In a study of six innovation labs of large companies, three failed within the first three years.2 Some trends emerged among these companies that likely contributed to their failure. First, these labs were established with overeager and unrealistic expectations. When the labs were unable to commercialize their ideas within a period, they were shut down. Underlying this was a lack of understanding of the time required to successfully establish an innovation lab (a decade or more) and of the resources required. Second, these innovation labs focused too heavily on being idea factories, and failed to properly incubate and accelerate these ideas into reality. This pitfall can occur if the innovation lab is distanced from the main organization and fails to envision how ideas can fit into the manufacturing and distribution process. Lastly, unsuccessful innovation labs started out too large in their early phases.

We acknowledged earlier that it takes a long period of time to see a return on investment in RI, and by spending a lot of money upfront on recruiting and facilities and adding unnecessary and superfluous expenses, these innovation labs were setting themselves up for failure. Overall, these pitfalls stem from a failure to understand the risks involved with RI. While innovation labs may appear as glamorous think-tanks independent of corporate drudgery, their success requires a combination of luck, preparation, and management. We’ll explore successful models of innovation hubs in Part II.

 

 

1Malcolm Gladwell. Creation Myth. The New Yorker. 2011.
2J. O’Hare, P. K. Hansen, N. Turner and E. Dekoninck. Innovation Hubs: Why Do These Innovation Superstars Often Die Young? International Design Conferance. 2008.
3Elizabeth Dwoskin. How Nontechnology Companies Are Trying to Mimic Startups. Wall Street Journal. 2015.
4Lou Kerner. Running Scared? Big Companies Increase Innovation Spending. Forbes. 2014.
5Hallie Golden. The Rise of Agency Innovation Labs. NextGov. 2015.
6Patty Wood. Examining the Rapid Proliferation of Consultancy Innovation Centers. InfoDesk. 2016.
7Brian Solis. The Innovation Game: Why and How Businesses are Investing in Innovation Centers. CapGemini Consulting. 2015.
8Anderee Berengian. It’s time to ditch your innovation lab. VentureBeat. 2017.
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