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By Laurent Guengant, Global Vice President - Head of Strategy, Digital Solutions and Business Operations

Incubating business from within a company has become more critical than ever for several reasons. The last wave of digital technologies has resulted in an increasingly disruptive business environment. Commonly used business growth strategies such as Mergers and Acquisitions (M&A) are not always successful, and often result in lengthy time commitment or expensive integration cycles, or even outright failure. Societal and environmentally driven factors, including carbon reduction, reducing waste and concerns regarding safety and security, are also reinforcing the need for businesses to reconsider their business models and partner ecosystems to improve their Key Performance Initiatives (KPIs) and bottom lines. Additionally, the geopolitical landscape has shifted substantially due to the COVID-19 pandemic, giving rise to multiple global challenges including nationalism, restrictions on cross-border movement and a significant impact on global, regional, and local supply-chains.

As a result, it is now imperative for companies to rethink their business and innovation strategies.  Business incubation from within is a promising and proven strategy to remain relevant, improve efficiencies, and build competitive advantages. Business incubation can leverage a company’s strengths, tap into its existing network of customers and partner ecosystems, and help a company to move or expand into new or adjacent markets, industries, and verticals.

The potential is enormous: new business models can be developed that are transformational and that not only deliver positive outcomes for the company, its partners and clients, but also contribute to society, protect the environment, improve safety and security challenges and help shape the sustainable future with a better quality of life for all.

What is corporate/business incubation?

While there are many definitions of business incubation, most commonly, people think the  business incubator supports early-stage companies and startups with several services such as assistance in building management teams, developing business and marketing plans, venture capitalist funds and more. However, within Hitachi Global Social Innovation Business, we define business (or corporate) incubation as efforts that are focused on the incubation of ideas (within a specialized corporate unit) to develop new and transformational business models that deliver environmental, social and economic value to the parties involved.

To accomplish this, we use an industry-proven approach to quickly assess ideas, while leveraging our relationships with new or existing clients and partners and their ecosystems and networks to ideate and validate potential business models. This approach allows us to focus on only the most feasible, customer-centric opportunities – and those that hold the greatest potential for acceleration and scalability. We then expand upon and accelerate those models that are the most viable.

Our approach is successful because we do not only focus on the development of products or solutions. We focus on leveraging our core expertise and that of our clients and partners, and by becoming excellent at defining, understanding and validating the real pain points that customers are experiencing. The outcomes are well-designed business models that solve real-world challenges, with effective business outcomes, relevant results and scalable business opportunities that can deliver revenue and meet the demands of the future.

What are the components of new business incubation?

There are several components necessary to undertake business incubation successfully. The first and most important component is to have at least one or more strategic imperatives. This means that a clearly defined business goal, outcome or objective must be defined before undertaking the growth goals of your business incubation initiative. An example of a clearly defined outcome (and strategic imperative) might be to increase your patent portfolio by 50 percent. Another strategic imperative may be to increase North American revenue by 25 percent within the next 3 years.

The next component for business incubation is to have a portfolio approach. Incubating a portfolio of ideas allows an incubation group to explore multiple opportunities at the same time. This type of approach allows ideation and incubation efforts to occur in parallel, instead of sequentially, thereby saving time and effort if one or more efforts do not move forward to the next stage.

In addition to a portfolio approach, using a “lean startup” methodology, adapted to fit your incubation goals, is essential. In general, the key principles in a lean startup approach are to 1. Find, 2. Validate, and 3. Execute.

We have adapted and modified these steps while maintaining a lean approach and methodology which includes these phases:

1. Ideation

2. Validation

3. Incubation

4. Acceleration

This approach favors experimentation over elaborate planning, customer feedback over intuition and iterative design over “up-front” design. According to the Harvard Business Review, the most important distinction between a lean start-up approach and the standard approach most companies use to conduct business is that most companies execute a business model, while lean startups look for one.

What kind of teams are needed for successful new business incubation initiatives?

New business incubation within a corporate environment also requires clear governance, which ensures that ideas can be developed, validated, and accelerated from early stages to scalability. Finally, a customer-driven, customer-focused approach is essential to new business incubation efforts. Depending on existing corporate culture, building a different mindset that is not solution-driven or product-driven can be challenging. Here again, the iterative, incremental approach of a lean startup methodology, with continuous customer feedback and input, can help break existing habits and help stay focused on the customer and their pain points.

A skilled management team, providers and mentors are needed to ensure successful incubation outcomes, as well as incubator success.

It’s important to have a lean approach to staffing new business incubation initiatives. The incubation journey is about building critical mass for the business at the right time. To accomplish this, the team systematically needs to be lean, not built on the typical staffing template in terms of supplying profiles for a standard organization. Instead, the team’s structure and makeup should be based upon the activities and objectives that have been identified for each different phase.

Another critical element for an incubation team is to include Individuals who can truly understand and synthesize the customer’s pain points and translate customer input and pains into a solution approach. This approach leans heavily on iterative, problem-solving methodologies such as Design Thinking, which focuses on rapid cycles of brainstorming, validating, prototyping, testing and problem/solution framing, all the while concentrating on the end customer and their pain points.

The mantra “Think big. Start small. Scale fast.” is useful for a lean team to ideate and validate ideas quickly. To achieve this goal, it’s essential to assemble an incubation team of “intrapreneurs” that is nimble and flexible so experiments can happen quickly, and ideas can be tested efficiently.

A small, cross-functional team that has a good mix of talent and experience, plus creative, operational, and functional strengths, can be very powerful. A small team also provides greater accountability, since it’s easy to know who is responsible for each task.

Critical attributes of each team member include being highly customer-driven, combined with a well-rounded and strong sales mindset. It’s essential to have people on the team who can framework the entire process and understand what it takes to implement the solutions.

Depending on the strategic imperative that was outlined at the beginning of the effort, the actual makeup of the team will vary. Teams that have a mix of entrepreneurial experience and industry subject matter experts are more likely to be successful. It is also helpful to include a software engineer or architect, a product designer, and a marketer. People with multiple skillsets and varied backgrounds are particularly valuable in lean incubation teams, as they can wear many hats and have often been exposed to and are used to lots of change and tend to be adaptable and flexible.

A “Venture Board”, consisting of management and/or senior executives, to whom the incubation team is accountable and reports on a periodic basis, ensures incubation efforts are kept on track and to help clear internal corporate hurdles or build relationships within or beyond the mothership as needed.

A successful methodology/approach to organically build new businesses

Within Hitachi SIB, we have used a proven, Silicon Valley-tested methodology to incubate new businesses. This model uses a proven framework that is highly focused on solving real problems for potential customers and markets (“identify the market then build it”). This contrasts with a traditional, product-driven approach (“build it then go to market”). This extremely customer-focused and cocreation approach is highly collaborative and market-driven, ensuring true viability of the final solution and that tangible value is delivered.

Step 0: Ideation

An initial step is “Ideation”, which consists of identifying the seeds of a potential incubation initiative. This may take place in discussions with a client or partner who has identified a specific problem within their industry or ecosystem that needs to be addressed. Ideation generally consists of one or more sessions of hands-on, action-oriented, design thinking experiences. The outcome is one or more specific challenge statements, insights, and methods that can be evaluated for further exploration, keeping in mind potential customer-centered business models and outcomes.

Step 1: Validation Phase

The first phase is “Validation”, when the team confirms the business opportunity by validating that there is one or multiple pain points within a specific market, based on the challenges identified in the Ideation phase.  This requires gathering enough information from a representative sample of the customer base. Part of this validation step is to ensure that there are also a sufficient number of customers who need to address the same pain in the short-to mid-term. This phase also includes market research and identification of the primary target market and segments, creating the Minimum Viable Solution definition, designing and developing the business model, and identifying initial co-creation partners or customers who may be ready to engage with prototype and pilot engagements.

Step 2: Incubation / Pilot Phase

The second phase begins to define and ensure that there is a future profitable business model for addressing the pain point(s) that were identified in the Validation phase. Essentially, this “Pilot” phase consists of refining and delivering the Minimum Viable Solution (MVS) in the form of multiple prototypes and pilots to examine and test the viability of the potential service/solution with customers who are willing to pay. This phase also looks at potential competitors and assesses the competitive landscape and potential Go-to-Market (“GTM”) challenges. In this phase, product pilots are developed to narrow down the critical feature set to understand, test and measure the value delivered to customers. There are several milestones or Key Performance Initiatives (KPIs) during the Incubation phase. These include refining the MVS, building the first version of the Minimum Viable Business (MVB), having successful paid engagements in hand, and successfully building a pipeline of opportunities for the new business.

Step 3: Acceleration Phase

After a viable business model has been defined, the third phase is “Acceleration”, which lasts approximately 24 to 36 months. This phase focuses on capturing and bringing in customers based on the new business model, in part by leveraging the opportunities pipeline that was built in the Incubation/Pilot phase. This phase does not yet address building scalability yet - it is primarily focused on technology and building the sales funnel. It is very focused on bringing in early customers and revenue (though not yet about profitability) and building the initial foundation for the new business. In this phase, product/market fit is identified, product delivery and go-to-market infrastructure is built out, and first revenue is achieved.

Step 4: Scaling the business

During the Acceleration phase, standardizing and then preparing for scaling the business are essential components of maturing the new business. Standardizing involves being market ready for scale, solution delivery, creating the initial go-to-market and front structure, and ensuring the business is profitable. Building for scalability focuses on developing repeatable processes for customer acquisition and success, plus reliability for solution builds, architecture, delivery, services, finances and operations. Ensuring the service/solution is scalable also involves developing a repeatable revenue model, and moving towards positive unit economics of the solution, with a reliable sales, delivery and support engine, and a team with the talent and experience to scale the venture.

In Steps 0 through 3, it is very important to apply incubation and startup types of KPIs to these phases, and not let mature business KPIs influence the initiative. Reaching the Step 4 “scaling” phase means that you have successfully incubated the initiative and have entered a phase with more traditional KPIs and business approach.

What are tips and best practices for operationalizing business incubation?

There are several best practices we have identified for operationalizing an approach to creating new business incubation initiatives. Here are some tips and best practices for operationalizing a business incubation approach:

1.      Have a very lean and effective approach for identifying and finding customers to validate pains and the potential business models to which they are willing to adhere.

2.      All new incubated business models must be systematically and consistently customer-driven.

3.      Stakeholders must allow the incubation team to focus on identifying pain points and customers, and in later stages, bringing customers onboard.

4.      In parallel, a shared services layer must be built which will address other needs as the incubation team grows the business, such as operations, governance, marketing, finance, IT and systems, human resources, and other administrative services.

5.     Do not be afraid to kill an idea/issue quickly if it doesn’t have potential – the “kill fast” concept.

6.      If you don’t have a potential business unit within the parent organization with a business that is aligned with what you’re working on, then make sure you carefully understand whether there is enough backing to take the initiative to accelerate/scale. This requires a good understanding of the clear strategic value for the new business model along with one or more business units within the organization – and these need to be aligned.

7.      Incubation KPIs should be clearly defined on what must be achieved within the first 6 months and then the next 12 months (2 separate and major milestones). Without clear KPIs, incubations can easily be derailed.

8.      Ensure a minimum critical mass of at least 3-5 paying customers in the early stages that have validated the approach in the incubation phase.

9.      Often, people tend to put “all their eggs in one basket” with just one customer when working on new business ideas. The validation of one customer is insufficient to address broader market needs and to validate that you can build a $1bn business. It is also contrary to the intent of building incubation models that are transformative, scalable and solve challenging industry-wide problems.

Success Case Study

Using the approach and methodology described above, Hitachi SIB has been highly successful in incubating new business initiatives. Here is an example:

Hitachi Capital Vehicle Solutions (HCVS). Using our incubation methodology, Hitachi Capital Vehicle Solutions (HCVS) is a commercial fleet leasing company and division of Hitachi Capital (UK) PLC. Through the incubation process, an opportunity was identified for HCVS to become a commercial fleets optimization and mobility service provider and has partnered with Hitachi Europe Ltd., a wholly owned subsidiary of Hitachi, Ltd. (TSE: 6501, "Hitachi"), on a three-year deal to collaborate on new net-zero solutions for fleet owners. The partnership has already yielded two new net-zero solutions, known together as  “Intelligent Fleet Decarbonization”.

Full or even partial fleet electrification needs to take a range of factors into account, including the size and age of the existing fleet, the suitability of the depot for conversion and the requirements for grid infrastructure, energy management and driver training.

The partnership’s tried and tested solution examines all these different elements to assess both the opportunity and viability of converting the fleet to electric. The fleet conversion solution simplifies and de-risks the process of switching large commercial and public transport fleet from combustion to electric vehicles. The business case was built for conversion based upon total cost of ownership comparisons and vehicle sourcing and financing options and offers an end-to-end solution to accelerate the transition to low-carbon fleet.

For fleet owners who want to run their operations with the lowest cost and carbon impact, electrification is just one part of the journey. To this end, the partnership has also developed a fleet optimization digital platform, where end users can maximize fleet utilization, predict maintenance and optimize driver behavior in real-time due to the application of data analytics and machine learning.  Full visibility on the usage and condition of vehicles maximizes their use, helping to drive both environmental and economic value. Electric vehicles tend to have a higher carbon footprint during manufacture than ICE vehicles, However, the more they are used, the higher the overall savings on total lifetime carbon emissions. The partnership’s solutions help deliver net-zero outcomes for all asset types - bus, truck, van, car, and for drivetrains - diesel, hybrid, battery electric and fuel cell electric. This collaborative partnership is on track to deliver the solutions for use with multiple clients, with initial pilot deployments. Additional subsequent pilots have also been identified for implementation with several customers. Hitachi ABB Power Grid (HAPG) will partner on the overall EVaaS solution, specifically on the EV charging infrastructure. In line with the UN’s commitment to develop accessible, affordable, and environmentally friendly transport, Hitachi has developed these new net-zero solutions to provide social, economic, and environmental value to society. In partnership with companies, organizations and governments that are actively pursuing net-zero transport policies, Hitachi is addressing the challenges of incorporating electric vehicles into their fleets and is enabling a smarter and more sustainable world.

How can a company that is considering a new business incubation initiative start the process? The first step is to identify one or two potential challenges in a target industry and then speak with enough people (think dozens or better yet, hundreds, not just a handful) in that industry who can validate the real pain points in that market. Too few conversations will lead to one-off solutions that aren’t transformative or scalable, and with limited revenue potential. Our customer-focused methodology begins by identifying the real pain-points in the market, as well as examining how potential customers and partners transact within their ecosystems. We also quantify the value the new business could create for customers, which is derived from the minimum viable solution and the minimum viable business model. By identifying partners and customers with whom we can co-create a solution early in the process, we are able to demonstrate customer value quickly, effectively, and deliver future growth opportunities.

Hitachi GSIB believes that technology alone isn’t the answer - it’s one part of a comprehensive solution that combines subject matter experts, business models, and ecosystem collaboration. Our proven incubation approach along with deep industry knowledge from our customers and ecosystem partners plus Hitachi’s broad expertise and resources solves customer challenges, transform industries, builds our customers competitive strength and delivers revenue, and builds better societies for the future.