Innovation is expensive — there’s no denying that. No matter how you go about it, innovation takes considerable money, time, talent, and effort. Trying to drive it in-house can be a significant drain on resources, yet many companies make that their sole focus. But really, one of the most efficient ways companies can accelerate innovation is by acquiring it, or buying something that someone else has already built.
Obviously, your company’s innovation strategy will need several approaches, and there will be times when building innovations internally is the right decision. A good rule of thumb is the 70/20/10 model: 70 percent of resources should be spent on incremental core improvements on what you already offer, 20 percent on acquired innovation, and 10 percent on new and transformational innovations.
But don’t fall into the trap of keeping your innovation strategy internally focused. Doblin Consulting found that companies applying multiple types of innovation significantly outperform the S&P 500.
PayPal has used the acquired innovation strategy extensively in the last few years as a key part of its growth strategy. In 2015, the fintech platform snapped up both Xoom, an international money transfer service, and Paydiant, a mobile payments startup. Two years later, the company acquired TIO Networks, a bill payments services company, and Swift Financial, a cash advance and loan services company. These moves were pivotal for PayPal to stay relevant to its ever-expanding customer base.
Harness Disruption for Your Company’s Advantage
It doesn’t matter what industry you’re in: Innovation is key to staying competitive, and acquiring it can make your company’s workflow a whole lot easier. Optimize your company’s opportunities for acquired innovation by applying these strategies.
1. Recognize your innovation limitations.
Every company, from legacy to startup, has limitations in what it can realistically do well, and acquired innovation is not necessarily a magic wand that will erase those challenges. So before you build or acquire anything, be realistic about what is feasible for your company to offer. Start off by asking, “What do we desire to do better? What is possible to offer? What additions are even viable?” These sorts of questions allow you to take a more holistic approach to innovation — and avoid getting stuck in blind spots in your market.
2. Determine whether acquiring innovation is the right move.
Innovation works best when the solution is reverse engineered from a problem. Use that idea when looking at acquisition opportunities, too. When your company is faced with a roadblock, think about what the perfect solution would be — laws of physics need not apply. Once the idea is clear, think about how it might be achieved in a perfect world. Then determine whether your company has the skills or budget to make it happen. If not, acquiring that tool, technology, or talent might be the right move. Remember, if you use the 70/20/10 model, then expect to spend 20 percent of your resources acquiring outside solutions.
3. Admit that others might be able to do it better.
You’ll have to accept that other players in your company’s industry can do a better job at building something. Even though competitive advantages are what companies are built on, your leaders have to be comfortable admitting when they’ve been bested for acquired innovation to work. Trust me, this will work out to your advantage in the end. Once the pride swallowing is out of the way, you can see these areas as opportunities. After all, it’s always better to let others try and fail with a small investment on your part than take on the project yourself and lose the entire budget.
4. Get active in your space.
There’s nothing more difficult or costly than to build from behind, so be aware of what’s going on in your company’s industry. Whether through sponsoring events or hosting workshops, be a part of the conversation. Better yet, lead it. It’s one of the more effective ways of knowing what the next disruptor is working on.
But don’t just size up the competition. Keep tabs on customer demands and what they might be expecting your brand to deliver on soon. Look at companies in adjacent markets and think about how their innovations could apply to your industry. This will help you get a better read on not just your market position but where that market is headed.
5. Establish a venture team.
Innovation is a lot like a game of King of the Hill; someone is always making a play for the crown. In order to stay competitive, your company will need to make a conscious effort to dedicate time and funds. Any strategy worth its salt will likely require a team of key employees and advisers to get involved in seed rounds for adjacent startups. Having dedicated eyes on innovation will pave the way for later acquisitions or provide an infusion of fresh ideas to improve your core business.
Looking at early disruptors is always a safe strategy. The startup community is like the world’s largest crowdsource of innovation. And because startups typically do not have a lot of employees or infrastructure costs, investing in or acquiring a startup for both the tech and the team is a great, low-cost investment in your overall innovation portfolio.
This article was originally published at CEOWorld Magazine.