David Duncan, who has spent decades helping large enterprises overcome “The Innovator’s Dilemma,” says chief financial officers have a key role to play in helping their companies avoid missing out on disruptive innovations.
“The CFO feels this most acutely, there’s only one pool of money in the company,” says Duncan, during a virtual conversation hosted by Fortune in partnership with Workday. Along with the CEO, financial chiefs must help companies determine “where you think the future is headed, what that means for where you are today and where you need to go, and then that gives you the conviction to start making investments in that direction,” he says.
The premise that a company can seemingly do everything “right” but still miss out on a new wave of disruptive innovation is featured in the book “The Innovator’s Dilemma,” written by late Harvard Business School professor Clayton M. Christensen, who also co-founded the consultancy Innosight, where Duncan spent over 18 years of his career.
With full control of corporate budgets, the CFO plays a critical role in moving money away from the core business—which is where the strongest margins and revenue may be—toward new ventures that may look very different from what’s made the company successful up to that point.
“It’s often very hard to prioritize investing in those new types of innovations, for very rational reasons,” says Duncan. To successfully innovate, he advises that large organizations create enough structure to ensure team members are focused, but also allow enough room for creativity to flourish.
Volkswagen teams with Rivian
A fresh example of a legacy business taking a big bet on disruptive innovation is Volkswagen, which earlier this month formed a joint venture with American-based electric vehicle manufacturer Rivian Automotive that will result in the German automaker increasing its investment with Rivian to $5.8 billion up from $5 billion previously announced. Volkswagen’s investment includes a 50% stake in the venture.
“There's a high degree of respect for the innovation mindset and approach that Rivian has, that Volkswagen Group also wants to pull into their own culture and how they operate the business as a whole,” says Claire McDonough, CFO at Rivian.
Under the joint venture, developers and software engineers at Rivian and Volkswagen will work together to develop software technology and next-generation electrical architecture that can be deployed for future electric vehicles in both manufacturers’ fleets. By working together, they can share in the development costs necessary to support innovation.
“When we think about the scale that we'll now have collectively, working with the Volkswagen Group, that actually funds a bigger opportunity for innovation for both parties, but it does it in a way that's also more cost effective,” says McDonough.
Creating some space for innovation that’s apart from the core business is a fairly popular playbook for larger companies that can often reap positive results. Embraer, a Brazilian aircraft manufacturer, pursued this path in 2017 when it created the venture arm Embraer X, which focused on new projects and disruptive technologies like electric vertical takeoff and landing, or eVTOL, aircraft.
The company later combined its electric aircraft subsidy, known as Eve, with a special purpose acquisition company, known as a SPAC, and listed it on the New York Stock Exchange in 2021. This allowed Embraer to continue to pursue a new innovative technology, which can be costly, with the support of outside investors.
“My job was to get money in the market and also try to reduce, as much as possible, the risk involved,” says Antonio Carlos Garcia, executive vice president and CFO at Embraer.
Taking the long view at Embraer
Garcia joined Embraer in January 2020, just as the airline industry was about to face one of the most turbulent years in its history, as the pandemic grounded flights, resulting in passenger traffic and revenue to plunge. Amid the turmoil, rival Boeing terminated a strategic venture with Embraer that was intended to jointly develop new aircraft.
Even as the industry’s outlook has improved, and while larger rivals like Boeing and Airbus face challenges related to safety concerns and order delays, Garcia and Embraer finance team have to be keenly focused on budget planning for aircraft development projects that can take a decade before completion.
He also has to commit funding to new innovations, like autonomous flight, and the financial department is encouraged to work closely with engineers and other colleagues across the business to closely understand the innovation roadmap and how finance can help.
“Curiosity helps you to make a better valuation and a better judgment about those investments,” says Garcia.
McDonough says she takes a similar approach at Rivian, where “we're really part of the core business as a whole and seen as that strategic partner that can help steward the business, help make better decisions, and help see cross functionally. Because the role of finance is really touching every single element of the business.”
