Large corporations persist in the belief that innovation can be acquired. But market leadership comes from truly organic innovation. Internal market forces can prove a dynamic mechanism to make such innovation a reality, say Liisa Välikangas and Paul Merlyn of the Strategos Institute.
Among large corporations, acquisition and strategic investment are the primary means to innovation. In the past two years, Microsoft, for example, has acquired 15 companies and invested in another 71. These acquisitions and investment targets include innovators such as ShadowFactor (Internet voice chat), Audible.com (streaming technology), Blackboard (e-learning software and services), SMART (Internet-ready connected homes) and Entropic (speech recognition). During the same twoyear period, Cisco acquired 36 companies. Like Microsoft, it targeted small players with innovative technology.
The practice of innovation by acquisition is not unique to the hightech industry. In the past year, for example, Coca-Cola and PepsiCo have been falling over each other to acquire innovative manufacturers of alternative beverages. This emerging sector – which includes bottled waters, all-natural juices, and teas laced with ginseng and other herbs – has quickly grown into a $5bn industry.
But why do such large corporations pay premium prices to acquire innovative upstarts, many of which have minimal or even negative earnings? Two reasons: corporations need to sustain a record of innovation to remain competitive; and, with a few exceptions, corporations today lack the capacity for organic (internal) innovation.
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