Innovation is an essential activity for any fast-growth company. The question is in how exactly that should be done. Many companies turn to their staff, customers and the market in general to determine where to direct their efforts. That generally results in two outcomes – developing innovation internally, or buying it through licensing or acquisition.
For the multi-billion dollar US networking technology company Cisco, the best solution is a little of both worlds.
The company is famous for its rapacious appetitive for acquiring dozens of start-ups each year (notably the Australian wireless networking technology company Radiata which it purchased for US$295 million in November 2000).
The company is also an incubator of its own brood of start-ups. Chief technology officer Guido Jouret says Cisco is incubating nine companies, across topics including high-fidelity video conferencing (known as telepressence), security, smart buildings, digital media systems and desktop video.
Each investment is designed to further Cisco’s own market position. Jouret says the model is based on many of the principals of venture capital investment. The model has been in existence for four years, with a framework that enables Cisco to identify new opportunities and create teams to build them. Half of the staff are hired from outside of Cisco, and around 600 people are employed across the nine business units.
“That compares favourably to the start-ups in Silicon Valley both in terms of funding and size,” Jouret says.
Telepressence was one of the original start-ups, and has become one of the fastest growing products in Cisco’s history. The media processing group meanwhile has only just begun selling its first product, while the collaboration start-up is just getting started.
Cisco’s goal is to create four new businesses each year that will generate revenue of US$1 billion each within five years of bringing their first products to market.
While such high targets are well beyond most innovative companies, according to entrepreneur and Churchill Club chairman Brendan Lewis it is important that companies set goals that provide a challenge and ensure they focus on commercial reality.
“In 12 months time, 20% of revenue will come from products that don’t currently exist,” Lewis says. “That is a great way of crystallising a goal.”
“To compete in today’s market you really need multiple versions in the pipeline, knowing what features you are going to release as your competitors are playing catch-up. And if you’re not thinking multiple versions ahead, you are simply not in the game.”
Large companies are generally considered to struggle with innovation, but Jouret says it is not because they fail to see opportunities. The US$1 billion target is one of the five criteria that must be satisfied before Cisco will fund a new start-up. Others include assessing its fit with Cisco’s existing technologies and skills, and whether market acceptance will be well timed.
“Large companies are in lots of markets and get lots of feedback, and what happens is they actually invest in too many initiatives,” Jouret says. “What we have tried to do by setting the hurdle rate of $1 billion is see our way towards where this becomes material to our business within a reasonable period of time.”
Lewis says it is important all growth businesses build a culture that fosters innovation, enabling the team to come up with ideas and creating a pipeline to manage and deliver innovation.
“It has to be part of an ecosystem, and everyone has to value it,” Lewis says. “So it’s cross-organisational groups, rather than a group owning it. If you have the ‘innovation team’, you are pretty much buggered, because you marginalise and barricade these people inside the firm.”
In terms of physically gathering ideas from staff, there are number of alternatives, including appointing one person as a sort of idea keeper, setting up an email address or database where ideas can be lodged, or even building an old-fashioned suggestion box.
Lewis likes the idea of a wiki where team members can add or develop ideas and also recommends the tool Ning, which allows users to set up their own social networks and share information.
But Lewis says true innovation also involves customers and partners as well as staff.
“That way you are getting feedback at the time that it matters, when you are developing the new products, rather than keeping it all internal and releasing it to the market to find out if it passes or fails,” Lewis says.
For the Brisbane-based business software maker Technology One, the percentage of external to internal input into the innovation cycle varies. Chief executive Adrian Di Marco says it is important to capture ideas that are raised internally and through customers.
“If you don’t have all of those dimensions happening, then you’ll come unstuck,” Di Marco says. “Your sales people tell you what your competitors are doing. You listen to your customers and what they have to say, and what is driving their business. And then you listen to your own people.”
“We back a lot of our people to do interesting things – they have ideas that we as a company never really thought about.”
One example is the company’s customer relationship management software, where a staff member identified a niche that Technology One could exploit.
For Mary Henderson, listening to her customers led to an entire refocusing of the product line of her company, GeekIT, which makes computer accessories and operates a software development group. The software group is continuing, but whereas once the company made a range of PC peripherals, now it is concentrating exclusively on notebook bags for fashion-conscious buyers.
“The greatest thing that I experienced in the last 12 months was meeting different buyers in retail and getting their feedback,” Henderson says. “I realised through their guidance – which was fantastic because it was all free – that when you’re open to listening you can get a lot of clues, and that’s how we defined the business.”
The company is now poised for expansion and has now appointed agents in Japan and North America.
Queanbeyan-born solar technology company Dyesol is almost entirely beholden to its customers. According to executive director Richard Caldwell, Dyesol has outsourced manufacturing of its solar technology to customers such as the British steel company Corus, and focuses just on developing the core technology.
Dyesol outsources the manufacturing risk that it could not afford, while its customers outsource the risk in innovation.
“We know what is really important for [customers] is for us to keep providing the next generation of product, which in our business is about achieving longer life, more stability and greater efficiency,” says Caldwell. “There is always room for a new iteration of the product.”
“We both know each others’ strengths and each other’s weaknesses. And that makes for a good partnership.”
According to the chief executive officer of the Sydney technology commercialisation hub ATP Innovations, Hamish Hawthorn, for start-up companies the best innovation model is generally the simplest one.
“Particularly when you are a start-up and you have so many other challenges, like market, technology, people and finance,” Hawthorn says.
Typically he witnesses start-ups that are either starting from scratch with an idea, or looking to productise an existing service.
Recently he has witnessed many that are seeking to raise revenue through selling advertising, although this model has waned as hoped-for revenues have failed to materialise. Similarly, the model of offering a service free-of-charge as a teaser has also come in for criticism, although Hawthorn says this can work if implemented properly.
What is more certain however is the appetite for innovation from customers.
“A couple of years ago you really struggled with this idea of risk versus benefit to a customer for a new innovative product,” Hawthorn says. “Whereas what I’ve seen over the last 12 months has been an acknowledgement that the cost benefits are starting to really outweigh the risks of adopting new technology or dealing with a start-up company.”
“If you can save a company money by doing something cheaper, better or faster, then they’ll be much more interested than what they were when things were going well.”
Smart Company is the leading online publication in Australia for free news, information and resources catering to Australia’s entrepreneurs, small and medium business owners and business managers.
