The startup ecosystem and its impact on the business transformation of large firms
The importance of startups as a source of innovation for large companies has reached a new high- point in the context of digital transformation. New digital technologies are transforming every industry to such an extent that if you can’t master the idea of digital inside your business you open the door to commoditization. This poses a serious challenge for many large, previously successful companies, which in times of discontinuous change may have difficulty innovating and even surviving.
The resources, processes and cultures meant to strengthen existing lines of business tend to stifle exploration of the new. As they seek ways to stay relevant in an age of digital transformation, mature companies discover that internal initiatives are not enough. According to David Teece, the value of the enterprise is to a high degree determined by management’s ability to buy, build and/or re-configure assets and resources to continually improve performance in a changing competitive landscape. These capabilities are labeled dynamic capabilities by Teece. He puts the ecosystem as the center piece of an analytical framework within which corporations can assess new opportunities.
The logic is that the expanding and evolving knowledge base in most industries changes the locus of innovation from individual corporations to networks of learning. As a result, in recent decades there has been growth in partnering and different forms of external collaboration among organizations. Most recently, the digital transformation of industries has increased the emphasis on external collaboration with tech startups. For startups this strategic avenue is also of interest as it can be a means for them to overcome problems with scaling their business. However, external collaboration with tech startups requires new and different organizational practices to access the external startup community and its entrepreneurial ecosystems.
From R&D to ecosystems
The Internet, cheap information processing and artificial intelligence, as well as cloud technology and Internet of Things (IoT), have not only shortened product life cycles in many industries but created a need among companies to assess complementing or totally new assets in order to stay relevant.
In a rapidly changing environment with an increasing pace of technological development, the dilemma for large firms is that their innovation success is not so clearly related to their market share, or size of their R&D lab, but rather to their ecosystem with external innovators and their capabilities to access these missing complementary or even substituting assets.
As large firms increasingly rely on external technology and innovation, they need to develop capabilities to manage resources that they do not fully control across boundaries. In the quest for speed and innovation, many industries have produced a variety of ways of engaging with startups. But, because of the very different behavioral characteristics of large and small firms, such a relationship can be problematic. There are many reasons for this, one being a lack of ‘startup-friendly procedures’ such as shortening payments times, simplification of vendor registration and qualification process. However, a small number of large firms have successfully combined their market strength with the nimbleness and creativity of external small firms.
Models for startup collaboration
Due to the increasingly important role startups play in corporate innovation, it is of importance to identify and understand different ways companies collaborate with startups, and thereby access new, complementary resources and assets. Based on a decade’s empirical studies of more than 100 large international firms and their startup collaboration models, conducted by the author, her research colleague Sverker Älange and, more recently, Vincenzo Corvello, a framework was developed, including multiple models for corporate-startup collaboration. These different models were then clustered into four main categories, originally developed by Tobias Weiblen and Henry Chesbrough. The categories and identified collaboration models are:
- Outside-in and equity-based: Corporate acquisition and corporate venturing
- Inside-out and equity-based: Corporate incubator and corporate accelerator
- Outside-in and non-equity-based: Co-creation and co-location
- Inside-out and non-equity-based: Platforms and startup programs
Here, Outside-In means that a large firm leverages externally developed resources and assets, while ‘Inside-Out’ means that the corporation leverages internally developed resources and assets. Equity- based refers to a corporation taking equity in a startup, while non-equity-based refers to a commercial agreement/partnership with the startup.
Category 1: Outside-in and equity-based
A corporate venture unit is investing in external startups of strategic interest, which, like corporate spinouts, may be acquired at some point. Acquisition in general is a common way of obtaining assets developed elsewhere—including technology, talent, competencies, and/or patent portfolios.
Category 2: Inside-out and equity-based
Large firms have realized the need for rapid learning, and therefore use probe-and-learn processes with success, primarily in computing and Internet companies. This has influenced the design of corporate incubations, where internal ideas may lead to spinout companies, which put internal assets to use and can also potentially be re-acquired later, and corporate accelerators such as Disney Accelerator and Fastworks in General Electric’s energy storage business. In contrast to a corporate incubator, an inside- out corporate accelerator can be viewed as an intensive, brief program in which cohorts of internal idea providers are trained to take their ideas further. These accelerators are focused on very early-stage innovation, and in many cases on contributing to a shift toward an entrepreneurship and innovation culture in respective corporation.
Corporate incubators and accelerators could also be positioned in the category ‘outside-in and equity- based’, if the startups present in the incubator, or in the acceleration program, are generated externally and invited/selected to be a participant in the incubator or accelerator, by the large firm (such as in the case of Disney Accelerator).
Category 3: Outside-in and non-equity-based
Recently there has been a growing interest in co-creation around business problems through open innovation (OI) units at large firms. This function usually does not, in itself, involve investments in startups. Rather it involves interaction with external startups to mediate access to ideas, innovations, and competencies. The function (or parts of it) can be performed by a dedicated Open Innovation unit or by various internal units such as technology offices, IP offices, and industry solution labs. However, this function can also be performed by an external incubator or accelerator with which the large firm is connected with – such as taking part of pitch event and offer the winning startup the opportunity to take part of a proof-of-concept project together with the large firm. Another form of co-creation is crowdsourcing ideas from broad populations of developers, makers, and/or users. This is increasingly practiced, both within organizations and in larger communities, and there are two basic approaches: a clearly defined problem can be presented for solution, or general challenge areas for innovation can be presented to invite broader idea generation. Another form of co-creation involves hackathons at large firms, or even physical locations, where idea providers/startups can generate, prototype, or further develop their ideas within a very short time.
Some large firms have created labs or workspaces for small firms in their vicinity (the corporate version of the Maker Movement). The idea in many of these cases is to co-locate, so the small firms can benefit from access to the larger firms’ competencies and resources, while the larger firms develop relationships that could provide useful innovation inputs.
Category 4: Inside-out and non-equity-based
By platforms it is meant a large firm’s proprietary platform – such as Android or iOS -- and the primary purpose of setting up a Startup Accelerator is for the large firm to support entrepreneurs with access to the large firm’s products, services, or other assets. An example here is Google for Startups.
In summary, these four categories and different models are examples on how large firms utilize startups to access new or complementary assets and resources, important for corporate innovation in general, and specifically for their business transformation.
A framework for digital transformation
The main challenge in the context of the business transformation of larger firms, is not incremental innovations, but to fully exploit the new technologies’ transformative potential.
N. Venkatraman’s 1994 research suggests there are five different phases in a corporation’s business transformation based on new digital technologies:
Localized Exploitation (evolutionary level)
Localized exploitation is according to the author the very first level in a business transformation, enabled by information technology. In this phase the company enables IT by deploying it in isolated systems such as e.g. inventory control system. The decision and implementation are decentralized to the appropriate function, operational manager. The result is isolated learning of benefits and limitations from such initiatives.
Internal Integration (evolutionary level)
The second level is reflecting a more systematic attempt to leverage IT throughout an entire business process. According to the author, this level integrates technical interconnectivity and business process interdependence. Both types of changes are needed on this level.
Business Process Redesign (revolutionary level)
On the third level, IT is used as a lever for designing the new organization and business processes. This level is based on the rationale that the benefits from IT are not fully realized if superimposed on the current business processes.
Business Network Redesign (revolutionary level)
The three levels above focus on IT-enabled business transformation within one single organization. On the fourth level of transformation, IT enables interconnections and integrations with external partners such as suppliers, customers, and other intermediaries.
Business Scope Redefinition (revolutionary level)
The final level is reached if the firm utilizes IT to influence their business scope and the general logic of their business relationships. According to the author, this last level is dependent of a redesign of the firm’s business networks (level 4), that is that the company moves from transaction processing to knowledge networks. Technology in this phase redefines the rules of the game.
Stena Metall AB, a multinational company with a long history in recycling, has been studied by the author and Sverker Älange. Separating scrap materials more efficiently in order to recycle is a challenge globally, and the industry is increasingly relying on new digital technologies including VR/AR, image analysis, and AI.
Therefore, Stena Metall has organized a corporate Digital Transformation Team with responsibility for its digitalization strategy, which includes funding proof-of-concept projects. Further, each company in the Stena Metall group has digitalization teams that can access the corporate fund to test new ideas that go beyond incremental innovation in customer projects. Most of the digitalization development is conducted in cooperation with suppliers, both large and small firms, and in close cooperation with customers. In total there are more than 100 smaller projects on customer portals, sales systems, robotized invoicing, e-commerce, and transport planning.
In 2016, Stena Metall created its New Ventures Unit to further expand the existing range of services by investing in startups, spinning out internal ideas, and creating startups together with other companies. The main focus of the unit’s activities is on what is coming ahead. However, the unit also supports Stena Metall’s R&D organization by constantly following what might happen more long-term, as well as supporting existing operations by scanning what may happen on a short-term basis. New Ventures started as a unit to develop internal and external ideas either in-house or with external incubators and accelerators but has broadened its mission to include corporate venturing with possibilities for acquisitions. This means that the unit has responsibility for both outside-in and inside-out models including equity investments.
According to the head of New Ventures, its focus is on internal and external ideas that do not fit into the existing companies within Stena Metall but would benefit from being connected to the group. This includes “temporary risk-projects” for existing Stena Metall companies, with separate budgets and license to fail to gain speed. Teams are put together for each project. New companies can be started if needed, and they can involve co-working and co-owning with external firms. New Ventures invests in startups supporting Stena Metall’s future business. The benefits for the startups are access to technical and marketing know- how, client connections, capital, and opportunities to test their idea live. Recently, Stena Metall established its Stena Nordic Recycling Center in Halmstad, Sweden, where startup companies are invited to locate for periods of one to six months. Proximity to a large industrial recycling facility, with access to experienced staff, materials, operations, and data, gives the startups excellent opportunities to test ideas and prototypes. The goal of this Recycling Lab is ultimately to develop functional solutions for customers, which sometimes may also be done together with larger partners such as ABB, Electrolux, Ericsson, and Siemens.
The New Ventures unit plays an important part in Stena Metall’s business transformation. An example of this is the development and investment in Halosep—an innovative method for recycling and reuse of waste streams from incineration plants. This was developed within Stena Recycling, requiring a new setup for further scaling and investment in BioImpakt, a company involved in water analysis using IT development, machine learning, and the testing of the efficiency of analyses. Another example is BatteryLoop Technologies, a startup founded by Stena Recycling, which offers power electronics and energy storage solutions for renewable energy systems.
The New Ventures approach is to develop collaboration with startups in a flexible way—probing and testing, using an array of models and instruments, in order to gradually evolve the relationship through a learning process. The role of top leadership is central for the unit, which has strong support both from operational leaders and from the owners. This is expressed through a strong intention to do something new, which leads to fast decision-making on the funding of new initiatives in combination with investment endurance.
Startup collaboration supported Stena Metall’s business transformation and also improved the company’s dynamic capabilities to understand market and technology trends, as well as being able to mobilize resources, and to re-configure current assets, to leverage new opportunities. The company is now evolving its approach with new, complementing ones, that have a different focus and therefore potential end result. A single approach can shift in focus over time and therefore produce different outcomes in a firm’s transformation – such as when a corporate incubator for internal ideas also starts to invite external startups to apply an ‘outside-in approach’.
Finally, independent of degree of business transformation, Stena Metall has through its collaboration with startups developed its own emerging digital ecosystems, which provides new knowledge of both emerging technologies and business models, affecting its industry.
A number of managerial implications can be drawn from these conclusions. First, large-firm collaboration with startups is an interesting strategic avenue for developing increased dynamic capabilities. But, the setup of the new approach does affect those capabilities, as well as the type of entrepreneurial opportunity (incremental or disruptive innovative), and the end result in a firm’s business transformation. As a result, the company needs to think over the purpose and end goal with each startup collaboration initiative and might develop a portfolio of different initiatives.
Professor Annika Steiber is a specialist in corporate start-up collaboration and the Director of the Rendanheyi Silicon Valley Center and is based at Menlo College in California.
Annika Steiber and Sverker Älange, ‘Corporate start-up co-creation for increased innovation and societal change’, Triple Helix, 8 June 2020.
Tobias Weiblen and Henry Chesbrough, ‘Engaging with startups to enhance corporate innovation’, California Management Review, February 2015.
David J. Teece, ‘Explicating dynamic capabilities: the nature and microfoundations of (sustainable) enterprise performance,’ Strategic Management Journal 28.13 (2007): 1319-1350.
N. Venkatraman, ‘IT-enabled business transformation’, Sloan Management Review, Winter 1994.