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In the Next Mobile Economy everyone needs a new game plan

As an introductory piece, and at this particular phase of the campaign, this will introduce the overall concept of the Next Mobile Economy.

14 aug. 2018
How Partnering with Startups is Helping Incumbents Grow

ONE OF THE unforeseen outcomes of the 2008 economic crash was that it indirectly fueled the growth of the phenomenon of incumbent companies partnering with startups.

As Michael Schrage, research fellow at the MIT Sloan School of Management’s Initiative on the Digital Economy, explained, the crash flooded the world with liquidity, depressing fixed income. “So where’s growth going to come from? Well, startups,” he said.

The idea isn’t new — legacy technology companies have done it for decades — but in the past decade the idea has gone mainstream. A 2016 survey from Boston startup accelerator MassChallenge found that 67 percent of companies said they prefer working with earlier stage startups as they seek new technologies in business models. A 2016 OpenAxel report claimed more than half of the world’s largest 500 companies work with startups.

It’s now common for companies in industries ranging from consumer packaged goods to fintech to seek growth from startup partnerships.

The practice has become so prevalent that it is often an empty exercise. Partnering with startups is now a “checkoff” item that companies can tick off to show that they’re on top of things.

But successful partnerships can happen. The key is that each participant gets something out of the arrangement. The incumbent gets new capabilities while the startup gets legitimacy and access to new distribution.

Why established companies are mad for startups

A few years ago, there was little that startups could offer incumbent businesses. Categories like automobiles and financial services had such high barriers to entry that it was ridiculous to think that a newcomer to the market could bring anything new to change the business in a material way.

One factor that changed the equation were the rise of platforms. In a mobile app store, a startup and a blue chip share an equal plane. This led to opportunities for disruption since a new app could upend an existing business (as we’ve seen with lodging and the taxi industry, among other categories.) Since consumers now spend more time on their smartphones than on desktop , mobile has become a major disruptor, forcing established companies to redefine themselves.

“Today, no single company can provide every solution to clients,” said Terry Halvorsen, CIO and EVP of Samsung in Next Mobile Economy, a recent report from the company. “Those which learn to collaborate with B2B partners will be the ones that prosper. We’ve seen this in how the world’s leading companies have changed over the last 20 years. Companies resisting collaboration have failed, while those embracing it now lead.”

The infusion of capital from such partnerships combined with the liquidity that flooded the global market after 2008 made working at a startup a solid career choice — one that has a much higher upside potential than working at a blue-chip. “The large corporates have a hard time attracting the startup talent — the people who think outside the box and really push the limits,” said Anderee Berengian, co-founder and CEO of Cie Digital Labs. The appeal isn’t just monetary. Berengian said that if you work at a large company, you are likely to be doing one thing. But if you work at a startup, you can solve problems. “It’s a different mindset,” he said.

Those different mindsets can be complementary or they could lead to a culture clash. Large companies are conservative and often look at business in a defensive way and try to limit losses as much as possible. Startups follow the mantra of “fail fast” and tend to look more at the upside of a win than the downside of a failure. Berengian said he uses the term “learn fast” at large companies because many can’t embrace the idea of failure in any form.

Capability versus point solutions

While the culture clash between startups and incumbents can be insurmountable, another danger comes with success. Schrage calls these “successful failures.”

What he means is that large companies often use startups to handle point solutions that don’t give them a long-term market advantage. “It’s really good for a year or 18 months,” but the company merely solved a problem, he said. “What you really did was more of an anesthetic; you killed the pain rather than built the capability.” The OpenAxel report found that 48 percent of startup partnerships were for “quick-fix needs.”

A common big-company problem is that it creates multiple point solutions instead of learning a new way to adapt to the market. “That’s not a function of the technology, it’s a function of the laziness of top management,” he said. “They’d rather solve a problem in the next 90 days than position themselves for success over the next two years.”

A counterexample is Unilever. The consumer packaged goods giant launched Unilever Foundry in 2014 to accelerate business innovation and efficiency on a global scale. The Foundry uses a Shark Tank-like pitch-pilot-partner approach, meaning startups pitch ideas and, if accepted the company launches a pilot program and then partners with the startup if all goes well. “Over four years of Unilever Foundry, we have evolved our unified model and identified something that works for us, with a concrete process for startups to engage with us that can work anywhere in the world,” said Jonathan Hammond, the head of Unilever Foundry.

One of the partnerships that came out of the Foundry is between mayonnaise brand Hellmann’s and on-demand delivery startup Quiqup. The offering targets shoppers who are likely to make impulse purchases and allows such consumers to choose their favorite recipe and get it delivered to them directly within an hour. “By embracing pioneering ideas, we are establishing more efficient and effective solutions for consumers. Our people are developing an understanding of what’s possible, feeding into what consumers want and need today and tomorrow, and generating real business value,” he said.

Learning new capabilities versus creating an enemy

It’s possible for a small startup to use an incumbent’s help to become that incumbent’s worst nightmare. This danger can complicate these types of arrangements. So can financial arrangements between the two. “This is why a lot of organizations don’t want to go through the bother,” Schrage said. “They don’t feel like they have the capability or the competence or the guts to manage a frenemy relationship. But often if you don’t manage a frenemy, you wind up with an enemy.”

The best startup-incumbent relationships leverage the strengths of both parties. Startups are adept at bringing new ideas to market and understanding new platforms and can provide the credibility to open new channels. Established companies are better at sustaining growth and providing expertise in navigating the complexities that come with serving a larger customer base. That also makes them better suited to getting the most out of the relationships by ensuring that they get the most benefits. That means creating capabilities rather than using startups to solve problems as they appear.

“It isn’t easy for large companies, but they’re in a better position to do strategic partnerships rather than tactical ones,” said Schrage.

Discover the Next Mobile Economy .