Innovation: Why big companies should look outside themselves to develop new concepts
McKinsey recently observed that in the past, large organisations typically chased 3 or 4 big M&A deals a year, and mainly focused on gaining synergies and share. However this has now changed to an average of 10 to 20 much smaller deals a year, focused on creating a growth portfolio.
A good example of this in practice is Proctor & Gamble who, in the past, were proud and vocal about their ability to develop new products, but who recently spoke of their aim that 50% of their NPD ideas in the future would come from outside of their organisation. Indeed, more than one retailer has spoken to me recently about their desire to build more formal relationships and collaborations with their most innovative suppliers and competitors to drive their future developments.
This concept isn’t new to those in other industries - IT and media have, for years, operated virtual development networks, with small companies being partnered, bought into or bought out by interested larger parties to drive their innovation and keep them at the cutting edge – Microsoft and Google are prime examples of constantly buying into small, leading edge companies to leverage their IP into growth, whilst AOL and Time Warner floundered in the more traditional “big synergy M&A” market. It’s also increasingly the case in Pharma and Hi-Tech industries that small, nimble players and IP-related deals play a large role in the development agenda of bigger companies.
So in a networked world where innovation can be bought and sold, what does this mean for the retail and leisure industries? For every successful concept that makes it out of the big companies, dozens fall at the fences, costing money, focus, and more money to put right after the event.
In leisure yes, there are some examples of big companies successfully developing concepts in-house: “Table Table” and “Millers and Carter” are two of them, but at what cost? And there are at least as many examples showing the value of an external approach:
· Greene King have just opened 9 new Loch Fynes, adding 25% to their number having acquired the brand, and the top management, in 2007.
· M&B have opened over 30 Project S pubs since buying into a profit share with Paul Salisbury based on his Orange Tree pub – the only one of several pub-dining concepts they were working on at the time to survive
· Costa coffee had 45 shops when bought by Whitbread in 1995, it now numbers almost 900 in the UK (200 more than Starbucks)
In retail Boots spent several years and many millions developing new concepts around “wellbeing” and health services, to no avail. Tesco partnered with RBS in developing a financial services offer, finally buying out RBS at the end of 2008. Tesco’s financial services will generate £250m profit this year.
So What?
If leisure and retail operators really want to build innovative concepts and crack new customer groups fast, perhaps they need to ditch their development programmes and build a different skill-set that combines concept identification and business analysis with partnership M&A.
For example, Punch is currently holding a fire-sale of free holds to it’s tenants, some of whom have innovative, scaleable concepts. If cash weren’t such a big short-term driver, it would pay them to consider building true partnerships with their most interesting retailers. For example, rent deals and purchasing scale in exchange for a ratcheted equity stake could give tenants the opportunity for rapid expansion at low risk, whilst exposing the pubco to innovative growth streams and cementing a relationship without the need for an explicit tie. Wouldn’t that be innovative?
