Innovating when you don’t know what you don’t know

Editor’s note: Xconomy invited this post from PARC CEO Mark Bernstein. You can see the original post + comments here.

Innovation, construed as broadly as it is today, is seen as a universal panacea for all that ails developed economies. In the U.S., innovation has been credited with driving dramatic growth, productivity, and an unprecedented standard of living. Add the disintermediation of the Web, and innovation can also be credited with empowering the individual in driving adoption and contributing to technologies. Look beyond the “fuzzy front-end,” and innovation can be perceived throughout the value chain and across industry ecologies.

Simply put, innovation is everywhere. So then where does differentiation come from?

New business springs eternal in the Valley

Most directly, competitive advantage comes from creating new business propositions in a disrupted environment. (If compelling enough, a novel offering can itself be the source of disruption.)

Startups, especially in Silicon Valley, have been glorified as the vehicles of disruption and creative destruction. As internal R&D—including captive research labs—has increasingly been restructured to reflect the enterprise’s present and near-future strategic interests, new business creation has come from acquisition substituted for organic growth. Why build what you need or what you think your customer wants when you can scour VC portfolios and buy it whole.

This strategy certainly works, or has worked, for some. Cisco assertively dominated its industry with its ability to seamlessly onboard new entities into the parent organization. But the strategy doesn’t work all the time, or for everyone. See AOL’s recent sale of Bebo as a stark example of the mismatch between market disruption and good intention. The list will go on.

From incremental to exponential

Yet… the reality is, when corporations are innovating incrementally, there’s probably not much difference between acquiring a startup, licensing a patent or two from a university, or building a technology with internal R&D. Because in all these cases, the company clearly knows what it wants. The market has signaled what features are desired and getting there is a matter of tactics—identify the right startup, patents, or internal team/expertise.

But what happens when the market doesn’t exist yet? Or when it’s too time-consuming and expensive to absorb a startup into your corporate culture—let alone to compete with your competitors to court the targeted startup?

What if there’s a disruptive change in the industry? An incremental venture in a disrupted market yields a delta of 0.1 when a 1.0 change is happening. When a corporation wants to innovate exponentially—create a new business or initiate a potential market—the question becomes: how do you acquisitively or organically grow when you don’t know what you don’t know?

Lessons learned

PARC has been in the business of breakthroughs for 40 years (yes!; as of this year). We’re also approaching 10 years as an independent subsidiary company of Xerox, which has meant a number of years experimenting with different business models and evolving our role in a new innovation landscape. Taken together, our experiences incubating startups and co-developing and transferring new business opportunities to clients while investing in our own internal R&D have given us a unique perspective.

They’ve also provided us with a “pattern recognition” that informs our decisions about what potential ideas we invest in, and an understanding of what’s required to make these ideas valuable to those who commercialize them.

So with that vantage point, here is some advice we’d share for Xconomy SF readers:

1. Think about the presence of a platform and the necessary strategic portfolio coverage—not just number of patents you’re trying to acquire. It’s also important to transfer know-how into your organization along with IP (which is difficult to do from universities and patent-only entities) if you want to be a creative, leading player in the space.
2. Draw on outside expertise to see breakthrough possibilities where others may not. Internal experts, while immensely valuable, can be so immersed in the inertia of the company’s core directions that it’s difficult for them to see things differently. Meanwhile, acquired startup expertise may seem agile, but may be too focused on the close-in exit strategy.
3. Don’t rely only on VCs to vet options for you. For example, a VC might decline to invest in a capital-intensive industry, where you may already have much of the capital infrastructure in place and can consider that opportunity.
4. Don’t dismiss considering the open source ecosystem, which can be a powerful enabler for creating market opportunity when your value is differentiated upstream.
5. Build opportunity discovery into the front end of innovation. Social science methodologies such as ethnography can help identify new opportunities beyond incremental feature improvements—especially when you can’t know what you don’t know. Otherwise, you’ll be reduced to asking and delivering what people think or say they want, which, as Henry Ford noted, would have led to a faster horse… not the automobile.

When seeking to acquire and grow technologies/expertise that create new business opportunities, consider all the sources—sometimes in partnerships with multiple players—that can make your vision a reality.

The innovation landscape has many players, and the allure of Silicon Valley is the ever-evolving confluence of government funding, startups, VC funding, universities, global enterprises, leading talent, research centers, and R&D businesses that has made this the place it is.