How can a traditional conglomerate (aka a global business producers) can be innovative?
How can a traditional conglomerate (aka a global business producers) can be innovative?
<Mitsubishi Corporation as “Business producers” >
Mitsubishi Corporation, called as business producers, has been developing new businesses globally in almost all industries through investments and organic launch globally since 180 years ago. Having gone through the history, MC nowadays has over 200 offices in 90 countries, and 10 business groups(table 1).
(table 1)
MC has been operating wide variety of businesses such as BtoB, BtoC, Manufacturing, Oil&Gas etc. An example of its BtoC business is Lawson, which is one of the biggest convenience store chain in Asia started by an employee’s, Kenji Niinami(HBS MBA ), idea. An example of BtoB business is Cermaq, 2nd biggest salmon farmer in the world. Each business was started from one of employees idea. Typical business production flow is one employee generate an idea from one’s daily business, write an application, have meetings with corporate department and management of the Group the one belongs to. After having long due diligence process(on average 6 months), the management judge if they approve and finance the idea with the criteria of whether the idea help expand group’s existing businesses.
<Why Open Innovation is important for MC to improve the process of business production?> Regardless of its renowned nick name, business producers, MC is facing a problem as tech giants and startups disrupting the existing businesses all around the world across industries with latest technology and new type of business models. One of the most prospective employees Takato Tsukagoshi just resigned MC and joined a startup mentioning “MC is too big and too inflexible to startup new business. Management only understands obsolete business models and they don’t have any interest if the business idea is outside of their industry.”. There are two problems in the process of business creation in MC: 1)Because of the strong vertical organization structure, management of each group only focuses on business expansion of its group. 2)Almost no one in management has agile and lean startup experience and tech expertise, which makes management difficult to judge new type of ideas.
<What is MC’s management doing?>
Short term
1)Create two departments
MC creates two departments which can horizontally work with 10 silos(table2).
(Table 2)
2)Pitch contest
Two groups in MC started business pitch contests in 2017 where employees in the group can pitch new business ideas in front of managements of the group, so that management can expedite the evaluation process. However, Yusuke Kayama, one of organizers of the contest, addresses two problem in its procedure: 1)Evaluation criteria is blurry as the lack of tech expertise in evaluator. 2)If the new idea is not largely related to group’s business, the idea won’t be selected even if it is attractive.
<Recommendations for MC>
Overall, I strongly recommend MC to have open innovation taskforce, Joint Venture, and platform to utilize external knowhow and idea to catch up with rapid exponential growth especially in tech industry.
Short term
1)Set up a Joint Venture(JV) with Venture Capital to drive innovation
It is important to MC to have someone who has deep knowledge and experience in tech business and startup process in management, and have the one to evaluate the potential of the new type of businesses, as well as to educate employees as to enhance idea generation capabilities. Setting up a JV with a Venture Capital(VC) and organize the pitch contest in this new JV will help solve problems.
2)Business idea sharing platform among all employees
Business idea is developed when the idea is refined through exploration and exploitation. In order to increase the exploration part, having a common communication platform among all employees will be instrumental, as the open innovation team in LEGO mentions “an innovative idea often comes from outside of its department”.
3)Crowd sourcing tech engineering employees
As MC currently does not have internal tech engineer, when one of employees come up with a new business idea using mobile apps or PC software, it will take time to produce Minimum Valuable Product and to start Proof Of Concept. Crowd sourcing of engineering employees will help solve this problem.
Mid term
1)Crowd sourcing new business ideas for BtoC business
As General Electrics does, sourcing new product ideas for BtoC business(e.g. Lawson) will stimulate new product development, reflecting market demand. Besides, crowd funding for the new product will also a possible way to hedge the risk and check the market demand before judging to launch the product.
2)M&A startups through the JV
As Samsung does in Silicon Valley, investments to startups through the new JV outside of MC will help expand businesses without having a problem of slow due diligence and silo problem in MC and help catch up with growth outside of MC.
<Open questions >
What are merits for VC to work with MC?
What would be the risk of Open Innovation for a traditional conglomerate?
(798 words)
Endnotes
Citations from below sources:
https://www.mitsubishicorp.com/jp/en/about/
https://www.mitsubishicorp.com/jp/en/about/plan/
https://www.samsung.com/us/ssic/investments/
https://ideas.lego.com/#all
Masato Nakamura – Thanks for the essay. It was interesting to read that Mitsubishi Corporation is striving hard to innovate through Open Innovation, as my expectation for such traditional Japanese companies was that they would be very rigid, traditional, and not open to changes. I think Mitsubishi is doing a great job trying to stay ahead of its competition through Open Innovation.
I think there are numerous benefits for VC (as well as Mitsubishi) to partner with each other. Mitsubishi, as one of the largest conglomerates in Japan, likely has massive scale and power across all the industries they operate in. VCs can benefit from Mitsubishi’s wide network and resources to better source new ideas and look for opportunities. Mitsubishi should even consider having their own VC arm, where they can look for new innovations and technologies that can help the company.
While reading the essay, I had two questions come up to my mind that I wanted to pose to you:
1. Instead of limiting the Open Innovation participants to Mitsubishi employees, do you think it’s possible to open it up to public and anyone can participate with good ideas?
2. Given the very hierarchical nature of Japanese culture, do you think this works against the Open Innovation projects that Mitsubishi is doing right now? And if so, what are some of the ways to mitigate this risk?
Thanks Masato!
I think partnering with a VC will work for both parties. The VC would absolutely be ready to co-invest in a project that has Mitsubishi’s buy in. However, there may be misalignment of goals in partnering with an external VC, hence I personally would vote for setting up Mitsubishi’s internal VC arm. That would help with more strategic decision making that is in line with the company’s overall objectives. I believe, open innovation is ideal for a large conglomerate since the already diverse portfolio can benefit from newer and wider ideas. While I do believe that Japanese style of business may be hierarchical, we have seen a lot of innovation and institutional interest in newer technologies that tells me this model would work even if it calibrated according to Japanese sensibilities.
Great example! This article very well focuses on not just why companies use open innovation, but how they actually implement it with their existing organization structures and some challenges they face in implementing these changes. A good point highlighted here is how to adequately provide funding to the multiple ideas being worked upon in a company where open innovation is implemented at the employee grass root level. In one of the previous firms I worked at (Sumitomo Electrics), they setup a corporate venture fund to fund innovations being worked on by the bottomline employees. This helps boost more innovation within the company and provides an organized format for employees to gather funding for their projects.
Great article, Masato! It’s definitely interesting to read about how traditional corporations -aka the dinosaurs of the industry- are tackling innovation. You list two great ideas to foster innovation at Mitsubishi: internally through an ideas sharing/development platform for employees, and externally by partnering with a VC. The main risks I see of launching it internally through an open innovation platform is 1) a steep learning curve for the organization, resulting in wasted time and resources; and 2) setting barriers to prevent overloading employees with additional work on top of their current hours (as we saw it happening with Rakuten employees learning English at night). I also agree with the risks that Jayant brings up regarding an external VC partnership. Two potential, hybrid solutions to mitigate risks could be to launch an in-house accelerator or to partner with a collaborative corporate accelerator. A third one would be to innovate through acquisition.
Very interesting Masato! It is great to see traditional players recognizing the need for change. I do agree with your idea of partnering with VC funds in the short term instead of building their own right at the start in order to learn from the business and have visibility to many of the potentially disruptive technological innovations that exist today and the ones that might develop in the future. I see how not only the skill sets, but also the culture of Mitsubishi Corporation versus the one of a VC fund is too different in order for them to have a good shot at being successful with an internally developed VC fund. It would be interesting though to see whether medium term an in-house VC fund could make sense in order to have more agency as to which projects the VC fund invests in.
Interest article Masato Nakamura! Really helps us contextualize how even the biggest companies can face issues related to innovation despite all the monetary or talent resources. Would be interesting to understand how companies similar to Mitsubishi crowd-source innovation – for example in the automotive industry Toyota and Suzuki are focusing quite a bit on getting any and all ideas through the funnel, so would be curious to know why Mitsubishi still applies such a rigorous process for evaluation of ideas. Would also suggest Mitsubishi to hold competitions, partner with universities, within and outside Japan to get the most “raw” ideas and then develop them along the way. This way the funnel of ideas will be extremely wide, but they can still use management’s or other experts judgment to pick those top 5 ideas.
Masato Nakamura- great insights into how start-ups are disrupting major corporations due to their agile nature. I think VC can work within MC if it has the buy in of upper level management and there is a clear idea of how the VC arm will be judged (against other MC employees) and staffed. One of the issues if potentially the amount of ideas that need to be evaluated before a good idea can be found that may or may not work. Typical metrics such as P/L cannot be used to judge employee’s performance, so another form of evaluation must be considered when ranking employees. IF they are not adequately rewarded or valued within the orgnaization (i.e. can someone in VC become a MC executive one day?) then you may have high attrition rates to traditional VC companies. Do you see MC employees moving in and out of the arm as they switch jobs? How do you ensure an innovative culture that is still aligned with MC’s values?
Mr. Nakamura, I am delighted to see your article on Mitsubishi Corporation. Like the focus of my article (a historied enterprise called Sherwin-Williams), Mitsubishi is well-known as a mature and established business, so it is always fascinating to see these companies adopt open innovation. One risk that may materialize is that because the end-result of open innovation is often rather uncertain (sometimes capital and human resources can be poured into open innovation efforts with low probability of commercial success), and because the practice is relatively new, it may be difficult to gain institutional buy-in from senior management, making it difficult to push forward on new projects. Hopefully Mitsubishi adopts some of these practices you mentioned however — I believe they show lots of promise!
Thanks for sharing your experience and insight, Masato! As someone who used to work for a traditional conglomerate, I found this article very pertinent. In my previous employer, we attempted a similar open innovation approach, specifically focussed on soliciting employee feedback for the innovation pipeline. We assessed the risks to be minimal and proceeded to have a crowdsourcing competition for digital innovation and product development. However, when we executed this competition, and we filtered ideas, we found there was pushback as some employee ideas were not deemed relevant and they were then demotivated and felt undervalued. Thus, I think when working with open innovation for a very diverse employee base for a traditional global conglomerate, it is important to structure and phase this interaction and provide a forum where all employees feel truly heard and valued.
Great post, Masato!! I agree that not only MC but also Japanese “established” corporations in general have two problems you mentioned, which are 1) strong vertical organization structure where horizontal/cross-functional interaction is rare and 2) lacking of agility (too big to move quick!). And I like the idea of MC having JV with Venture Capital. I believe how MC should pitch to VC is definitely MC’s 1)vast business network and 2)abundant money. Instead, VC can bring to MC the agility and open innovation. I can imagine win-win relationship, but at the same time, I know it is also difficult to ‘move’ Mitsubishi Corporation, the biggest conglomerate in Japan. I suppose the “key” to make it happen will be “talents” or “leaders” who can make the change. — I hope you can be one of them, after learning here at HBS!!
Masato, thank you for the great article! It is fascinating to read about Mitsubishi and all the markets they are playing in. I am wondering if this process of open innovation would work as well in the US. My feeling is that employees in the US – if they have a great idea – would just leave the company and start their own venture. I would be curious to know why MC employees stay and start their businesses inside the Conglomerate. Is this for financial safety reasons? Is this by loyalty for the company? or is this another reason?