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Fortnite Was a Blockbuster for Epic Games, What’s the Encore?

BRIAN KENNY: In December of 2000, a little-known Japanese film director by the name of Kinji Fukasaku released his new film to a limited number of theaters in Tokyo, and the reverberations are still being felt today. “Battle Royale,” as the film was called, created immediate controversy both for its disturbing theme as well as its thinly veiled criticism of the pressures that Japanese culture placed on its children. and it sparked a cultural phenomenon that remains highly influential in global pop culture. Battle Royale is its own very lucrative genre and in a case of life imitating art, competition in the video gaming industry resembles its own version of Battle Royale. To the victor goes the spoils.

BRIAN KENNY: Today, we’ll hear from professor Andy Wu about his case entitled, “Epic Games.” I’m your host Brian Kenny, and you’re listening to Cold Call, recorded in Klarman Hall Studio at Harvard Business School. Andy Wu conducts research on strategies for how technology entrepreneurs internally organize and externally mobilize resources to achieve scale for competitive advantage. I think that’s spot on for the case we’re going to discuss. Thanks for joining me.

ANDY WU: Thank you very much for having me, Brian.

BRIAN KENNY: All right. I’m not a gamer. I’m just going to confess that right up front. I’m not part of that generation, but I certainly have children, a son in particular who is in his early twenties now who spent a fair share of time playing video games. Are you a gamer? Do you play?

ANDY WU: I do occasionally, although I’m not very good myself.

BRIAN KENNY: Well neither am I, suffice to say. But I think many of our listeners are going to really enjoy hearing about Epic Games. It’s a great case and I think it’s highly relatable and somewhat ripped from the headlines too. I mean there’s been a lot of publicity about Fortnite which is their main product, so we’re going to talk about that. And so I think people will really enjoy hearing you talk about it. But let me just ask you to start by setting up the case. How do we begin here?

ANDY WU: So Epic Games started in 1991 by Tim Sweeney as a storied video game company, so they developed both video games as well as the game engines that other video game developers use to create video games. And so, they have had a long series of big triple A titles that have been very successful. But the key thing we focus on in this case is the situation after September 2017. So in September 2017, they released Fortnite Battle Royale, the game that you were describing earlier, and this is a free to play game that changed their path forever. They had unprecedented success with this game. By March 2019, they had 250 million players registered and then in February 2019, they had 10 million users logged in concurrently at once.

BRIAN KENNY: Wow.

ANDY WU: And given their current position of strength, the question is how do they parlay that strength into continued growth opportunities in the video game industry.

BRIAN KENNY: Part of that is about them becoming a platform company, I’m going to ask you to just describe for our users what a platform company is, if they’re not familiar with that term.

ANDY WU: Absolutely. So a platform allows different types of stakeholders to directly interact and generate value through network effects and the positive feedback loops that result from network effects. And to clarify, there are two kinds of platforms that we might think of. First, there are marketplaces or transaction platforms. You can think of this as like eBay or Airbnb, and this is what we’re talking about in the case with Epic Games’ launch of the Epic Games store. Second, there’s also what we consider innovation platforms, which are technical foundations for third parties to develop applications or content. Microsoft Windows is a classic example of this and Epic Games product, Unreal Engine, is also in that category.

BRIAN KENNY: What made you decide to write about this case? How does it relate to the research that you do?

ANDY WU: Right, so I research and teach technology strategy for entrepreneurs in nascent markets, and one is just as far as impact goes, the game Fortnite has been unbelievably successful and I’m sure among our listeners here, almost all their children have seen or played this game.

BRIAN KENNY: For better or worse, right.

ANDY WU: For better or worse. And that’s sort of the general impact level motivation. But as far as for me personally, I think what this game and Epic Games represents is the intersection of several trends in technology and media that we’re seeing right now. The first is the rise of digital distribution and the idea that the games are being delivered via the internet as opposed to traditionally via like a disc that you would buy in a store. And in terms of Epic Games entering with the Epic Games store in itself becoming a distributor, this is very similar to what we’re seeing with the pattern of Disney and HBO entering streaming themselves, bypassing say Netflix. Related to that, in the video game industry, I think we’re seeing the forefront of many new business models that are going to apply to other industries. And what we’ll talk about later I think is that this is a game that is free, Fortnite Battle Royale, is a free game and they monetize it in a very peculiar way to you and me, which is that they charge for micro transactions in the game that have no, at least to you and me, have no direct real value. Finally I’ll just mention that this also represents I think the trend of globalization that we need to think about. So in 2012, the Chinese tech giant Tencent made a major investment into Epic, $300 million. And we’re also seeing some of the patterns of that Chinese investment in Epic and in other video game companies.

BRIAN KENNY: Again, for those who aren’t really following the gaming industry very closely, there’s a lot of, I was surprised to learn in the case about how many different players there are in that landscape. What does it look like?

ANDY WU: Video games are a very complicated business, I’ll say. Beyond the developers, there are publishers that take the games that the developers create and then bring them to market. And so these are big companies like Electronic Arts. And then you have hardware and operating system providers where the games are being played. So you could think of this traditionally as like things like Microsoft Xbox, Sony PlayStation, and also like you know a Windows PC, but increasingly the platform, the hardware OS that matters is the mobile operating system. So Apple and Android count in this category as well. And then there are game engines. Those are the tools that game developers use to create the game. And then there’s finally the distribution, which is the marketplaces.

BRIAN KENNY: That’s a really confusing ecosystem.

ANDY WU: It is very confusing because it’s a complicated business with a lot of money.

BRIAN KENNY: How many of those businesses I guess, or aspects of the business is Epic involved in?

ANDY WU: So at the time of the case, Epic is a developer. They occasionally publish. They have their own game engine, the Unreal Engine, and with the entry of the Epic Games store, they’re also a distributor.

BRIAN KENNY: Okay. Boy, you need like a little chart in front of you like you had in the case, but our listeners can’t see the chart. How do they make money?

ANDY WU: So again, with the time of the case, Fortnite is their big, big offer, and remember that this game is a free game. So how do they really make money on this? And for me it’s very peculiar and that’s what drew me to it. They make money through in-game micro transactions and these in-game micro transactions accounted for $2.4 billion in revenue in 2018. And so what is a micro transaction? So in Fortnite, essentially what the players of the game are doing is they are paying money to have cosmetic aesthetic items that they put on their player during the game. This includes like the clothing their virtual avatar wears. This includes even dance moves that their virtual avatar can do.

BRIAN KENNY: And we should tell people, if you want to describe kind of what the plot is behind Fortnite, that might be helpful for people.

ANDY WU: Fortnite Battle Royale is an online multiplayer game, online shooter game. And so the way it works is that a hundred players are dropped onto a map where they must explore and scavenge weapons and then fight to the death to survive, where the last man standing wins. One hundred players, one left standing, and an average game is about 15 to 20 minutes.

BRIAN KENNY: Okay. And live streaming is pretty critical to this whole business model.

ANDY WU: Absolutely. So what’s really amazing about this setting is how many people watch other people play video games. It’s kind of an amazing number. To give you a sense of scale, more people watch people play video games than watch HBO or ESPN or Hulu combined.

BRIAN KENNY: That’s amazing. Do people pay to watch? Do you pay for the live stream?

ANDY WU: It depends on who the streamer is. So some of the bigger celebrity streamers like Ninja will get paid for the work that they do by the subscribers. And also they’re also paid by often the video game companies to play a specific game.

BRIAN KENNY: Okay. And there’s also a subscription service here, so even though the game is free, people are subscribing.

ANDY WU: So in this particular game, they’re not required to pay any direct subscription fee. There’s an additional add on feature they can pay for. That would be a subscription based one. So a subscription model is the counterfactual to the business model that Fortnite Battle Royale has gone with. So other companies that have similar types of Battle Royale games are instead pursuing a subscription model where users pay a monthly fee to play the game.

BRIAN KENNY: And have you sort of looked at the efficacy of one model versus the other, or are they both pretty substantial?

ANDY WU: I think this is similar to what we’ll see in all kinds of media distribution. There will be a proliferation of different business models. I will say that for the business model of Fortnite Battle Royale, I think this is one of the things that really stands out. Because the game relies on network effects and having a large user base to be successful, giving access to as many gamers as possible is really important to its success. And so of course making it free allows for that to happen. And in the course of getting that many users, you have some subset of users that are going to really spend some serious money on those micro transactions.

BRIAN KENNY: Are they the first to adopt this model? Was this sort of Epic’s idea?

ANDY WU: They were the first to adapt this free to play model for the Battle Royale game format. But the concept of free to play is not new, and in fact, Epic was one of the early pioneers in the 90s in this type of business model. So in the 1990s, they would distribute games via Shareware. So they would mail people like CD disks that had a game for free and then you’d be able to pay money for extra content beyond what that disc contained.

BRIAN KENNY: Okay. We actually did a podcast, a case on Candy Crush, the whole story behind Candy Crush. Where do they sort of fit in that scheme? That’s not a multiplayer game, right? That’s a, is that a single player game?

ANDY WU: Single player, but there’s definitely a social virality effect related to that game. In this game, there’s obviously direct interaction between the players in the game. One is you need all the players in a given game, but the more important part to think about is actually when you have a large number of players, it allows games to form faster. So what gamers really hate is the time in between games where the game is, they need to find all the players for the game and they’re just sitting there waiting. With millions of players on board, you can form a game virtually instantly because there’s another hundred people that aren’t in a game yet.

BRIAN KENNY: Right. Tell us a little bit about Epic. How did they evolve over time?

ANDY WU: Tim Sweeney started Epic Games in 1991 and their first major hit was a game called Unreal in 1998, that was a shooter game. And so that game actually led to the technology called the Unreal Engine that they now license out to other game developers. And again, I mentioned earlier that they leveraged their early Shareware business model to grow early on. And then the next big hit they had was in 2006 with Gears of War. So this is another shooter game that was originally exclusive for Microsoft Xbox. And this is what we would call a triple A title. So this is a big title, lots of money, very expensive to develop. And then the big transition for the company was in 2011, 2012 where Sweeney wanted to move away from the traditional model. So in the case of Gears of War, that is a game where they went through a publisher, Xbox Game Studios and sold the game at retail for $50 or $60. And so Sweeney wanted to move away from that business model, and so they raised $300 million from Tencent to start this transition. And the transition was towards the model that we talked about earlier that is emblematic of Fortnite, which is that free to play model.

BRIAN KENNY: Now you mentioned there are millions of people on the system at any given time. Like who are these people and how much time do they spend on the system?

ANDY WU: Majority of players are under age 24 so what we’d call Gen Z, although there’s still millions of millennials and Gen X that are playing this game, and these players play a huge amount. Almost half of the players play more than 10 hours a week. So, more than an hour a day.

BRIAN KENNY: I don’t know where they’re finding the time to do that.

ANDY WU: I think they just basically take all their spare time and play and remember that this is a game that you can play across platforms. You can play on your PC at home, but you can also play it on your mobile phone when you’re waiting for the bus.

BRIAN KENNY: Right. But they faced a little bit of controversy around this, too. Fortnite I mentioned before has been in the headlines and not always in a positive way.

ANDY WU: That’s right. And I think that the headwinds that Fortnite is facing are emblematic of the broader headwinds that the video game industry in general is facing. I think the first is that there is this concern about video game addiction. And so there’s players who go beyond what they should be and play an enormous amount on these games, more than what is healthy. Beyond that, there’s also the relationship that Epic Games has with China that has drawn some controversy. Again, they received investment from Tencent several years ago. And the company itself says that they’re completely operationally independent from Tencent, but detractors would counter that.

BRIAN KENNY: So one of the questions that’s central to the case is them creating their own storefront, moving into that marketplace. What are some of the challenges that they face along the way in trying to do that?

ANDY WU: I think the first thing that’s been very much on the message boards among gamers is that there is a question about the overall quality of the marketplace itself in terms of the technology that goes into the marketplace. They’ve taken much longer than Epic expected in order to develop the technology and add reviews and other features to the marketplace. The other thing is what we call the chicken or egg problem: how do you get users to use the marketplace if there’s no games on it? And how do you get games on the platform, to list on the platform, if there’s no users using the marketplace? And so they definitely had limited offerings at start. They obviously had a big advantage coming into this space because they can move users from Fortnite into this marketplace. But even with that, people are pretty frustrated if you’re going to a store and there’s nothing to buy. And so what they’ve done is that they’ve had to incur some huge expenses in order to get exclusive games from other video game developers to list on their platform as opposed to the competitor, which is Valve’s Steam marketplace. And so they’ve had to pay lots of money to get those exclusives, and they also have to give away free games to get people on the store. So they’ve actually, if you sign up, you can actually get free games to play.

BRIAN KENNY: Okay. Now you mentioned Valve’s Steam. Who are some of the other players? Like who’s doing this really well? What are the best marketplaces?

ANDY WU: Yes, so the market leader is absolutely the Steam Marketplace by Valve. They’ve absolutely dominated the market. The other key marketplaces we want to think about are one, the marketplaces that are specific to certain consoles. So Xbox and PlayStation each have their own marketplace for games. And then the other thing I would say the more important one to keep an eye on is actually, not even what we think normally is a video game marketplace, it’s the Apple app store and the Google play store. As we shift more and more gaming to mobile gaming, those marketplaces are going to have an increasing amount of power. And again, they’ve already gotten into a lot of conflicts with the other, not even video games, with other third party applications that are listed on those stores. So, for example, Apple and Netflix. Apple and Spotify have gotten into lots of arguments about what’s the right way to split the revenues coming off the store.

BRIAN KENNY: Talk about console games a little bit too because it feels like as everybody moves onto mobile devices, the need for a console kind of seems to be much less than it used to be. And that was where I think a lot of these companies were making a lot of their money was off the hardware itself.

ANDY WU: Actually, in the video game industry, there’s been a traditional model of actually losing money on selling video game consoles. So the price of an Xbox or a PlayStation is below the bill of materials to produce the hardware. And the reason for that is to essentially create a large installed base of consoles, so that the video game developers and publishers will want to write games for that console. And so the way it works actually is that the video game console company, so Microsoft Xbox and Sony PlayStation, they make money by charging the video game publishers and developers. So they don’t make money from the people who buy the consoles.

BRIAN KENNY: So how is Epic thinking about they’re moving this at this point. I mean do they know kind of where they go next?

ANDY WU: I think they’re going to push on this for a while. Again, they’ve got a lot of opportunity in terms of improving the product quality of the marketplace, in terms of refining the technology and then on top of that, again they’re still going to put out money to bring additional games on the platform. I think we might want to keep an eye out for the possibility that they’re going to try to raise a large amount of money in the near future in order to be able to continue to support the growth of the platform. And remember that for Epic and their marketplace, some of this motivation is more than just the direct ability to make money on the marketplace. There’s been a lot of complaints in the industry about what Valve has done for the industry. So Valve itself charges essentially a 30% cut of the revenue for a particular game that’s being sold through that marketplace. Now, if you’re an artist or creator that is developing a game and putting up millions of dollars to develop that game, giving 30% to a middleman seems a little bit unfair. And so what the Epic store marketplace does is they charge 12% which is a much, much lower rate and they’ve been trying to change the status quo of Steam dominating the space.

BRIAN KENNY: Okay. You know, there is a quote in the case by Sweeney where he talks about kind of what he sees as like where this is all going, kind of the future of the gaming space. I don’t need you to say the quote directly, but can you just describe kind of what his vision is around this?

ANDY WU: Tim Sweeney is a very under spoken guy, but I think his heart’s in the right place and he’s always been very true to the gaming industry. So Sweeney is striving towards what he describes as a “metaverse,” that is his vision for the future. And so what he imagines is that gaming is going to be a part of all the other virtual worlds. So that includes things like virtual reality, augmented reality, social networks, and the other forms of entertainment and engagement that we participate in. And so gaming will be an active part of that. And in addition, I think his view is that there’ll be an active ecosystem in the future where all parties can consume content as well as contribute content. And so I think he’s much more about supporting the broader ecosystem as a whole.

BRIAN KENNY: So, he doesn’t see this as a Battle Royale where Epic will be the only one standing at the end.

ANDY WU: I mean, I think they hope that a little bit with Fortnite, but they definitely had a differentiated position and I don’t think he is out to like fight it all the way to the last man standing per se. But you know, at least with the marketplace, I think the hope is to make the space a bit more fair for the regular game developer.

BRIAN KENNY: Andy, thanks so much for joining us today.

ANDY WU: Yes, Brian. It’s been an absolute pleasure. Thank you so much.

BRIAN KENNY: If you enjoy Cold Call, you might like other podcasts on the HBR Presents network. Whether you’re looking for advice on navigating your career, you want the latest thinking in business and management, or you just want to hear what’s on the minds of Harvard Business School professors, the HBR Presents network has a podcast for you. Find them on Apple podcasts or wherever you listen. I’m your host, Brian Kenny, and you’ve been listening to Cold Call, an official podcast of Harvard Business School on the HBR Presents network.

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Why “De-growth” Shouldn’t Scare Businesses

Executive Summary

With today’s the climate crisis, debates around degrowth have been reinvigorated: many major figures such as Noam Chomsky, Yanis Varoufakis and Anthony Giddens have expressed support for the idea. Others, especially business leaders, view degrowth as completely unthinkable, arguing that growth is an economic necessity and any threat to that not only undermines business, but basic societal functioning. The problem is, the degrowth movement has already begun: at a grassroots level, consumer demand is actively being transformed, despite political and corporate reticence. This opens new opportunities for firms, if they act now.

Daniel Grizelj/Getty Images

The concept of degrowth dates back to the 1970s, when a group of French intellectuals led by the philosopher Andre Gorz proposed a simple idea: In response to mounting environmental and social problems, they suggested that the only real solution was to produce and consume less — to shrink our economies to cope with the carrying capacity of our planet. The proposal was considered by many at the time to be too radical. But with today’s the climate crisis, debates around degrowth have been reinvigorated, and many major figures such as Noam Chomsky, Yanis Varoufakis and Anthony Giddens have, to varying degrees, expressed support for the idea.

For others though — especially business leaders — degrowth is completely unthinkable, not least because of the anti-capitalist and anti-consumerist roots of the term. The prevailing view is that growth is an economic necessity, and any threat to that not only undermines business, but basic societal functioning. For instance, the CEO of H&M Karl-Johann Persson recently warned about the dire social consequences of what he perceives to be a movement of “consumer shaming.” Framed in these terms, the resistance of multinational CEOs and entrepreneurs alike is predictable, as is the reluctance of politicians to promote degrowth policies that would potentially prove unpopular with key constituents. The economist Tim Jackson provides a concise assessment: “Questioning growth is deemed to be the act of lunatics, idealists and revolutionaries.”

Critics of degrowth have also put forth other arguments that, at face value, seem valid: the economist Joseph Stiglitz argues, for instance, that since growth is unquestionably good for human development, we simply need a different kind of growth that is better for the environment, not less of it. Others argue that the philosophy of degrowth does not seriously account for technological innovation — specifically the idea that we can continue current growth patterns if we innovate products that are less resource-intensive and generate fewer waste by-products.

There are, however, problems with these perspectives. First, given the finite nature of our planet, infinite economic growth — even of a different variety — is a logical impossibility. Secondly, innovation and improvements produce, in many cases, unintended consequences. One of which is the Jevons paradox, where individuals compensate for efficiency through increased consumption. For instance, more energy-efficient refrigerators lead to more refrigerators in a home.

The third and most fundamental issue is that the degrowth movement has already begun: at a grassroots level, consumer demand is actively being transformed, despite political and corporate reticence. A recent YouGov poll in France highlights that 27% of respondents are seeking to consume less — double the percentage from two years prior. The number of people eating less meat or giving it up altogether has been rising exponentially in recent years, too. Similarly, the movement of Flygskam (literally “flight shaming” in Swedish) has had early successes in reducing pollution: 10 Swedish airports have reported considerable declines in passenger traffic over the past year, which they attribute directly to Flygskam. In the apparel industry, fast fashion is still popular, but garment manufacturers like H&M are preparing for a backlash as consumers voice growing criticism of the ecological impact of clothing. Accounts such as these indicate how consumers in many contexts are increasingly conscious of the negative consequences of consumerism and are seeking to change their habits. We are witnessing the emergence of consumer-driven degrowth.

These stories also indicate how degrowth opens new opportunities: some companies and industries will certainly be disrupted, but others that are sufficiently prepared for such transitions will handily outmaneuver their competitors. For instance, Flygskam has been a boon for train travel, bolstered by a social media movement called Tågskryt (“train brag”). Meanwhile reduced meat consumption has been accompanied by an explosion in meat substitutes that produce one-tenth of the greenhouse gases compared to the real thing. Accordingly, degrowth reshuffles competitive dynamics within and across industries and, despite what many corporate leaders assume, offers new bases for competitive advantage.

Based on our examination of companies at the forefront of the degrowth movement, we’ve identified three of their strategies that can apply to larger incumbent firms.

First, firms can pursue degrowth-adapted product design, involving the creation of products that have longer lifespans, are modular, or are locally produced. Fairphone, a social enterprise, eschews the built-in obsolescence of larger mobile device manufacturers and produces repairable phones that dramatically extend their longevity. Similarly, the start-up The 30 Year Sweatshirt sells high-quality, durable products that run counter to fast fashion principles. Although incumbents have yet to follow suit, such transformations are not without precedent: for example, the American auto industry was forced to move away from planned obsolescence, which was a common practice dating back to the 1920s, when Japanese competitors seized the market in the 1970s-80s with more reliable and fuel-efficient vehicles that were built to last.

Second, firms can engage in value-chain repositioning, where they exit from certain stages of the value chain and delegate some tasks to stakeholders. As an example, the vehicle manufacturer Local Motors created a proof-of-concept recyclable vehicle crafted with 50 individual parts printed onsite, compared with the roughly 25,000 parts required for a traditional vehicle. The company crowdsourced designs and crowdfunded the project from their potential consumers. Larger firms such as Lego have also taken advantage of this model, launching marketplaces for either creating new designs or trading used products. This way, the firm creates different ways to consume despite production limits. Firms that incorporate stakeholder engagement in their operations are thereby faster to adapt to degrowth when it becomes more mainstream.

Third, firms can lead through degrowth-oriented standard setting. This entails creation of a standard for the rest of the industry to follow. The apparel company Patagonia — that explicitly follows an “antigrowth” strategy — is the poster child for this philosophy, offering a worn-wear store and providing free repairs for not only their own products, but also for those of other garment manufacturers. Walmart and Nike have solicited advice from Patagonia on such practices, and more recently H&M imitated the service with a pilot in-store repair facility. In a similar vein, the automobile company Tesla released all its patents in 2014, seeking to catalyze the diffusion of electric vehicles. Such initiatives were not merely marketing ploys, but also strategies to standardize a practice or technological platform throughout an industry — one in which companies like Patagonia or Tesla would have existing expertise.

These strategies illustrate potential ways that firms can adapt to consumer-driven degrowth. Firms may pursue more than one strategy (or all three) simultaneously: In 2016, for example, Google attempted to create a longer lasting phone with modular components, soliciting feedback from supply chain actors on how to create standardized parts for their handset. Although “Project Ara” was ultimately cancelled, it did reveal a common thread among the strategies. Effective and inclusive communication with stakeholders across the supply chain is crucial, but framing the project in a way that all those stakeholders can buy into requires considerable effort and adjustment through trial and error.

As we continue to grapple with climate change, we can expect consumers, rather than politicians, to increasingly drive degrowth by changing their consumption patterns. Firms should think in an innovative way about this consumer-driven degrowth as an opportunity, instead of resisting or dismissing the demands of this small but growing movement. Businesses that successfully do so will emerge more resilient and adaptable — instead of necessarily selling more, they will sell better, and grow in a way that satisfies consumers while respecting the environment.

Source: HBR.org

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To Be More Data Driven, Look for the Right Business Partner

Executive Summary

When it comes to building a more data-oriented organization, it can be smart to pool resources. A large, established business that partners with a nascent technology startup stands to benefit from collaborating with emerging technologies. In return, a startup could gain clout and support from its larger partner, while it continues to grow its brand and expand operations. One reason partnerships are so attractive is because they can offer the flexibility to walk away. The decades-old “fail-fast” mentality is still valid in the digital era and applies to business relationships as much as to new projects. Hunt for data-driven partnerships that fall outside your immediate universe. Be willing to walk away from a partnership that isn’t delivering the anticipated results, but be the first to give a non-obvious alliance a chance. The types of businesses that can benefit from an alliance are nearly endless. As with any relationship, it’s most important that the two organizations share a similar culture and values, as well as a common goal.

Eric Pelaez/Getty Images

Data-driven insights are essential for companies that want to optimize their operations or introduce a new product or service, like a tailored customer experience. However, some companies lack the tools to analyze their data, even though a rich supply is available. Other companies have the resources for analysis but lack the abundance of data needed for quality insights.

Even when both the data and the analytics exist, it can be smart to pool resources. A large company hoping to gain better insights from its data might acquire a tech startup as a way to deliver on its goals more quickly. Another viable option is to look at innovation partnerships. These can provide valuable access to technology and talent with few strings attached.

Innovation partnerships can be advantageous for both companies. A large, established business that partners with a nascent technology startup stands to benefit from collaborating with emerging technologies. In return, the startup gains clout and support from its larger partner, while it continues to grow its brand and expand operations.

Identify the right partner and goal

A legacy organization partnering with a startup is one obvious configuration, but the types of businesses that can benefit from an alliance are nearly endless. As with any relationship, it’s important that the two organizations share a similar culture and values, as well as a common goal.

The goal itself should be laser-focused on solutions that will benefit the end-user. For example, in 2017, IBM and the U.S. Tennis Association partnered to create the IBM SlamTracker application, giving fans a new way to visualize stats at Wimbledon and U.S. Open matches, while raising the profile of IBM technology. In 2014, Spotify and Uber partnered to develop an audio control for Uber’s consumer app in a move that improved the rider’s transit experience, while exposing Uber and Spotify to a wider pool of customers.

Insight Center

To replicate the success of these types of partnerships, a company should first look through its customers’ lens to identify the problem that needs solving. If both partners agree on the need and work together to solve it, the relationship will likely succeed. But, if the partnership is one-sided or exists only as a formality or a publicity stunt, it’s unlikely to yield meaningful results for either business.

Think big by thinking small

A partner doesn’t have to be a large enterprise with a huge pool of resources. At XPO, we typically pursue technology that will make a difference for our customers and employees through efficiency. Often, we’ll partner with very small technology companies that can add something specific to the supply chain. While, for example, a new kind of gripper for a robot hand may seem less significant than a complete robot, highly specialized partnerships have great potential to improve efficiency.

The ideal time to get involved with a small tech company is in its embryonic stage. Startups are often eager to work with established companies, and we’ve found that a good place to start is with a few pilot projects, which allow us to provide feedback to the startup and quickly evaluate whether the platform suits our goals and existing technologies.

Don’t be afraid to be first

Some partner opportunities will be obvious, while others may come from unexpected places. For example, XPO has partnered with MIT’s Industrial Liaison Program (ILP). A logistics company and a university may not seem like an obvious partnership, and in fact, MIT’s ILP had never partnered with a logistics company before, despite its highly respected supply chain management program.

This partnership has already connected the bright minds and research capabilities of MIT’s ILP with our technology team and the data we’ve accumulated over years of supply chain operations. It also adds an extra layer of credibility when we recruit employees or sell our services to prospective customers. Furthermore, we’re in the process of formalizing MIT tuition discounts for our employees, giving them access to MIT’s online curriculum. And students in MIT’s supply chain management program can gain valuable, real-world business experience working with XPO, preparing them for a successful career.

One reason partnerships are so attractive is because they can offer the flexibility to walk away. The decades-old “fail-fast” mentality is still valid in the digital era and applies to business relationships as much as to new projects. I encourage business leaders to hunt for data-driven partnerships that fall outside their universe. Be willing to walk away from a partnership that isn’t delivering the anticipated results, but be the first to give a non-obvious alliance a chance.

Source: HBR.org