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Corporate innovation labs: Source of innovation or marketing hype?

(Image credit: Image Credit: TeroVesalainen / Pixabay)

While they have been a fixture in traditional enterprises for decades, today, Corporate Innovation Labs are in a boom period. Increasingly, companies position them as a means to regain, maintain, or expand market dominance. Their number and role have grown rapidly in tandem with the growth of the digital economy where innovation is a crucial differentiator.

Tech innovation labs apply the latest R&D to build solutions that create new buyer value. Different from pure R&D labs, they are focused on applied R&D – which is all about innovation, that is, bringing inventions to market.

Their primary focus is on making technology-based products and services operational and market-ready. In experimenting with advanced technologies and prototyping new solutions, these labs also help better position their company on the tech ladder by building up their innovation capabilities.

Perhaps its most distinguishing feature is its ambition for market differentiation through technology arbitrage. In other words, firms with tech-enabled innovation labs create business advantage by leveraging their R&D applications, something which their less-technically innovative peers may not so easily achieve.

Two key factors have propelled traditional companies to invest in more formalised approaches to innovation.

The first is disruptive tech companies. With their consumer fixation and new breed of business model they are overturning long-established industries and unseating incumbents. The second is a prolonged period of low-interest rates that have lowered barriers to acquire capital.

Although traditional corporations are taking a more structured approach to innovation through dedicated labs, the outcomes have been patchy at best. Their beguiling promise to turbocharge business growth remains just that – a promise rather than a reality.

Disruptive tech firms are pressuring traditional corporates to rethink their approach to innovation

Today’s new industry leaders – think Alphabet, Apple, Amazon, Facebook, Tencent, and Netflix – have swept in and laid waste to whole industries in record time. Their ultra-modern tech stack, low-cost structures, customer-centricity, experiential design, and innovation-growth mindsets have helped vault the likes of Airbnb and Uber from scrappy start-ups to Wall Street darlings in record time. 

These new and nimble entrants are creating unprecedented change in the S&P 500. In 1964 the average tenure for a company listed on the S&P 500 was 33 years. In 2016 that narrowed to 24 years. By 2027 the number is expected to shrink to just 12 years. 

Stable economic conditions support investment in corporate innovation

Thanks to easy access to credit and sound economic fundamentals, Chief Innovation Officers have leaped ahead to steer their companies’ innovation efforts with minimal interruption.

In this climate, global spend on R&D has been on the rise. In 2019 it broke into record territory reaching a whopping US$1.7 trillion, with tech companies leading the way.

This mirrors the upward trend in openings of new innovation centres, which shows no sign of cooling off. A recent survey of leading global firms shows that more companies will be aggressively increasing their R&D budget over the next three years. In-house innovation programs represent a key area of investment.

Traditional corporates’ innovation labs focus on optimisation rather than radical innovation

Traditional enterprises are using innovation labs in support of their strategically aligned projects. And yet, despite having well-funded programs steered by the best people, these efforts are not preventing their exit from the S&P500.

Many firms hold a simplistic view of how innovation can be tamed, harnessed, and industrialised. The conventional approach is functional and process-driven: it’s about making things work. In a lab-controlled setting, employees need only crank out a methodology – ideate, “fail fast,” gather feedback, draw connections - and lo and behold a disruptive innovation is born. Such processes are enormously helpful in stirring up good ideas and polishing them quickly into workable solutions. But they are not enough.

Consider the spate of lab closures, against the backdrop of new innovation lab openings. Some high-profile casualties include Disney’s research lab and Coca-Cola’s Founders Initiative. Just as there is a growing appetite for innovation labs, there is increasing scepticism about their actual effectiveness.

This bottled form of innovation – which is the mainstay of innovation labs within big corporations – tends to produce small-scale innovation. It is good at reducing waste, errors, increasing efficiencies, and in dealing with regulatory compliance issues. That is, it is good at helping big business maintain the status quo.

In recent years, the methodologies underpinning tech-enabled innovation labs have refined. Agile methods, design thinking, human-centred design, and lean manufacturing approaches have surfaced into various innovation frameworks to help companies bring product to market. Key principles in the innovation process include research, ideation, proof of concept, rapid prototyping, pilots, minimum viable product, continuous design and delivery, and product market fit.

Tech-enabled innovation labs’ version of this emphasises product development and delivery. Teams coalesce around brainstorming product ideas; evaluating the market; prototyping, testing, and commercialisation.

Using these techniques, engineering rigor and a start-up mentality, technology innovation labs aspire to both increase the speed of innovation and support scaling. Integrated teams of product experts, engineers and innovation specialists assemble to hasten their ideas forward, working on technology validation and product delivery with faster and faster turnaround times.

Accelerator programs, open innovation initiatives with external tech start-ups, incubators, hackathons, and other outreach techniques are often activated by innovation labs to widen the ideas net more efficiently or to expedite the honing of good ideas into testable products.

In the past, it wasn’t speed so much as the prohibitive cost of technology, and the limited pools of tech talent that gave well-endowed firms a distinct advantage. Having deep pockets and connections to elite institutions enabled leaders to exploit their technical prowess, keeping them at the technological frontier.

Today, this competitive leverage has all but melted away, consistent with the plummeting price of technology and accelerated speed of computation. Automation and information technology came within reach of smaller firms. Accordingly, as new entrants continue to crowd-in, the head-start enjoyed by the marquee firms is evaporating.

A different picture appears when looking at the kind of innovation practiced by Big Tech firms. Instead of seeking optimisation, tech giants seek to launch radically new innovations into the world – as an example, Google X’s ambitious “moonshot” projects. These radical innovations aren’t defensively justifying their existence to their corporate masters, meeting standard profitability and ROI metrics. They aren’t focused on using innovative tech to expedite compliance. Nor have they much to do with efficiency gains with the existing product set. Instead, their innovation practice is tethered to the customer and finding creative solutions to the most painful problems they face.

Dr. Sharon Springell, Senior Manager of xLabs, Virtusa

Dr. Sharon Springell is the Senior Manager of xLabs at Virtusa. She researches business and technology subjects to help leaders formulate strategy.