Everyone wants to innovate these days. In fact, you might not have a choice. If you don’t innovate, and fast, your organization may die. Yet when we think of innovating, the first thing that comes to mind for most people is products or even services. That’s because there is a time-honored tradition of employing a research and development (R&D) approach to creating new innovative products. That typical gate process begins with ideation, then moves into prototyping, refining, testing, manufacturing and launch phases. Some companies, especially those in software development have further refined this process, by employing an iterative Agile process to get new products to market as fast as possible.
But what if I told you that R&D isn’t the only way to innovate? What if I went further and said that there might be an even better way to generate innovation for your business? Let me explain.
The truth is that when we commit to R&D, we take on the entire risk of the product development process. We are exposed to all of the missteps, mistakes, and failures that come with trying to develop something new and cutting-edge. We also face market risks in that we might invest considerable money and time in scaling up a new product only to find that we don’t have any customers willing to pay for it. All that R&D can be wasted. Agile approaches help, but do not eliminate all the up-front risk, particularly market risk.
That’s why a potentially better approach to R&D is a strategy we call search-and-acquire, or S&A. This involves constantly scanning the market for cool new technology or services that are already gaining traction and revenue in the market. This is similar to how the investors on the popular show Shark Tank might evaluate opportunities. What we can do is essentially de-risk an investment by acquiring the R&D and market development work someone else has already done.
They already know how to make the product and they’ve proven that customers will buy it. Even better are situations where they have created a product or service with a subscription or recurring revenue model associated with it. By acquiring this company, technology, or service, you take on significantly less risk that if you tried to develop this same offering on your own. The bad news is if it is already gaining traction in the market, you’ll be forced to pay up. It won’t’ come cheap–but it can worth every penny of that investment to avoid the risks.
This is precisely the strategy employed by Cisco, the global router and technology manufacturer. Cisco has acquired 175 companies over the last two decades as a way to add new technology to their portfolio, complimenting their own R&D efforts. Cisco was able to leverage the fact that they have a sky-high stock price to go out and hunt for earlier-stage companies that they could then acquire with their stock. Oftentimes, Cisco was willing to even pay a premium for those companies, sometimes into the billions of dollars. But, when they were then able to plug those offerings into their global sales and distribution network, they could easily generate positive returns on those investments. In the technology space, both Amazon and Google use a similar approach.
Another company that continues to employ an aggressive S&A strategy is Coca-Cola. While Coke does do some R&D on its own, they are constantly on the hunt for upstart companies with a successful niche that they can then plug into their own sales and distribution network. Recent examples of Coke’s S&A deals include Moxie, a small brand established in the 1950s, to other more cutting-edge innovative product lines like Smart Water, Vitamin Water, and Honest Tea. I was involved in an unsuccessful beverage startup with the basic strategy of launch, establish a market and get bought by Coke. Unfortunately, it didn’t work out.
Obviously, if you’re a smaller, fast-growing company you might not have the resources to acquire the same kinds of companies that Cisco or Coke can. But that doesn’t mean you can’t employ this same S&A strategy just at a smaller scale. Your goal is to look for smaller companies or offerings that you can afford to acquire that will both enhance your position in the market and help you get there quicker than if you were to try and do it all on your own.
So when it comes to innovating inside your business, think beyond the risks that come with R&D and developing your own products and services. Use search-and-acquire instead as a great way to stay on the cutting-edge of the market without taking on all the risk of going it alone.
You can find Jim at www.IncCEOProject.com
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