The corporate world is at a precipice. For the first time in modern history, simply having a ton of money is not a guarantee of position. Now, a kid with a computer and some basic coding (or even ‘no-code’) skills can launch a credible business threat for a Fortune 500 company. And here’s the thing: this precipice is only getting steeper. An estimated 50 percent of the S&P 500 getting knocked out in the next 15 years, a staggering drop from the cushy 33 year lifespan that companies in 1965 enjoyed on the prestigious list.

What’s causing this issue? It’s a few different things, all interacting together in a similar way to a combustion engine. New information has become available to more people via the internet. That led to two things: the demand from consumers for more and the ability of creators to build more.

When these two elements — consumer demand and the ability to build — come together, it opens opportunities for new market entrants. As the costs of starting up a tech-based business fall to record lows of nearly nothing, it’s easier than ever to start challenger companies.

With a process like this rapidly playing out, it’s no wonder more than half of CEOs feel they can’t keep up with innovation.

However, the combustion that produces a large company’s biggest issues also provides its greatest opportunities. Instead of hearing the word ‘innovation’ and seeing technologists cranking out the latest cool app, large corporations need to think about it like any other process: structured, measurable, and made to serve business goals, not made for its own sake.

There are two kinds of innovation that large enterprises must understand and leverage so that ‘innovation’ becomes a weapon in your arsenal, not a weapon used against you.

The two kinds of innovation

Just as old business frameworks have become defunct and new ones rose up, innovation is a new process that’s built for the modern world.

Internal innovation

The key goal of internal innovation is to optimize your core business and produce a 5 to 10 percent (or more) increase in efficiency. This efficiency can be defined in multiple ways:

• More top line revenue from better marketing and sales.
• More bottom line revenue from cost savings.
• The ability to sell the same product to a new audience or in a new way.
• The ability to attract and retain more top talent.
• Or any other business goal.

This system can be used for multiple issues as well, providing incremental improvement to many systems, netting out at significant efficiency gains.

The long-term benefits and limits of internal innovation

Internal innovation should always be your starting point for two key reasons:

1. You build the capacity and infrastructure necessary for external innovation to thrive in your company.
2. You get more long-term benefits such as knowledge retention, employee engagement, and a higher ROI from future innovation projects.

However, internal innovation has its natural limits. No matter how big your organization is, you will not have all the insight and knowledge you need within your four walls. If you focus solely on internal innovation, you risk falling in on yourself, as famous examples like Blockbuster and Eastman Kodak eerily illustrate.

External innovation

Even when a 5 to 10 percent efficiency bump represents millions or billions of dollars, there’s more at stake. Innovation is forcing all companies to think differently and build differently, meaning large enterprises will have to completely transform over time.

That’s where external innovation comes in, offering two key benefits:

1. Generate further efficiencies on internal innovation.
2. Provide new opportunities by connecting with other established ecosystems.

Generate further efficiencies on internal innovation

In some cases, it doesn’t make financial sense to build everything in-house. For example, you might be working on an internal innovation project to empower salespeople. You might redesign the prospecting and closing process internally, but realize you need a technology tool to aid the sales reps in executing this new design.

If the technology would cost you 10 full-time developers working for 6 months to build in-house, the salary costs and time costs are enormous. However, signing up for a SaaS product costing $50,000 per year is, by contrast, far cheaper and enables you to get started immediately.

Provide new opportunities

Getting out of the four walls of your office is essential for new ideas, relationship building, and learning from sector experts. In the world of innovation, this means looking to connect with:

• Entrepreneurs in your industry or similar.
• Researchers with relevant work to your goals.
• Accelerators and incubators at the ground-level of innovation.
• VC firms who have a bird’s eye view of what’s going on.
• Large companies in adjacent industries.

Who you seek out depends on which challenges you’re trying to solve, but a good external innovation strategy leverages all of these ecosystems as part of their tool kit.

Innovation isn’t lightning in a bottle

When it comes to successful innovation, an informed crowd is more powerful than a single mind. Employees know the company at all levels, and external partners know the process of innovation. Developing internal systems magnified by external partnerships creates a new engine for every organization, leading to more growth and adaptability.

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Interested in connecting with other Innovation and technology executives to share strategies, experiences and learnings? The Innovation Forum brings together Innovation execs across sectors to connect, share and support each other. Get exclusive resources, expert talks and first access to our growing community of B2B startups. Learn more by emailing me at Jon@forumvc.com.