Riding the wave of disruptive innovation

July 10, 2018

Keoy Soo Earn

An article by Keoy Soo Earn, M&A Leader for Deloitte Southeast Asia

Technology has been driving unprecedented global cross-industry disruption at an accelerating pace. Companies are now constantly changing business models to respond to waves of innovation, and innovative start-ups are disrupting traditional products, markets, industry incumbents, and creating completely new industries. This dizzying pace of technological innovation has unleashed a fundamental shift in the M&A scene - nearly 60% of disruptive technology acquisitions was done by the non-technology sector in 2017. We are seeing this build-up continuing in 2018 as companies realise the importance of adapting to evolving customer demands and creating business models for the future.

Disruptive technologies

The dynamics of disruptive technologies are playing out in the following ways[1]:

  1. Shifts in technology: Declining computing costs, and the significant improvement in computing power and data bandwidth have contributed to the widespread adoption and development of technology. This accordingly has led to breakthroughs and advancement in innovation categories such as Artificial Intelligence (AI) and robotics.
  2. Shifts in consumer behaviour: The revolution of digital consumption has not only increased scalability and reach for the traditional markets but has also diversified and multiplied viewpoints. We have observed three main types of shifts in consumer behaviour -consumers preferring peers over corporates, for example peer to peer rating sites such as TripAdvisor; consumers preferring access over ownership, for example ride-hailing apps such as Grab; and businesses preferring ‘collaboration over competition’, for example, Power BI developed by Microsoft, and other new service offerings like it, has relied heavily on user collaboration to further develop its software. As at May 2017, more than 400 features have been added to the Power BI service as a result of input from over 50,000 users.
  3. Convergence across sectors: The advances in disruptive technologies along with the increasing digitisation of business models are lowering barriers to entry and allowing non-traditional competitors to enter the markets. This in turn is blurring the gaps between products and market offerings across many sectors. This cross sector convergence allows companies to innovate, collaborate and increase their existing market offerings into new areas such as Fintech, Healthtech and others. In the case of Fintech, one example would be WeChat, a social media platform launched in 2011.  WeChat Wallet was subsequently integrated into their platform, allowing subscribers to perform mobile payments.  In a short span of time, it became the leading e-payment provider in China, giving traditional banks a run for their money.

Disruptive technologies can either threaten existing business models or provide sources of opportunity. Companies who can successfully harness and integrate them into their business will certainly find new value propositions and competitive advantage against their peers.

Capturing disruptive innovation growth opportunities through M&A and corporate venturing

Deloitte analysis shows that companies are using M&A as a strategic expedient to capture disruptive innovation growth opportunities. Increasingly, companies are adopting inorganic growth strategies to create “businesses of tomorrow” through M&A and corporate venturing.

Globally, companies spent $634 billion on disruptive innovation-related M&A deals in 2017, an eight times increase over the $72 billion spent in 2012.  There has been a sharp and continuing increase in M&A deals done with the primary purpose of acquiring capabilities or technologies across disruptive innovation categories such as Fintech, AI, robotics, and cyber security among others[2].  We are observing similar M&A trends playing out in Asia as companies attempt to capture disruptive innovation growth opportunities. Key reasons driving non-technology companies to acquire technology companies include:

  • Wanting access to big data to understand customer behaviour and preferences: Toyota’s recent investment in Grab is a perfect example of collaboration in the capture and use of big data. The investment allows the Japanese conglomerate to work with Grab to further develop connected services by installing Toyota data recorders in Grab’s operated rental cars. This would provide Toyota with a plethora of driver data. In turn, the connected car services on the Toyota Mobility Service Platform will be able to enrich the Grab experience for drivers on the Grab platform.
  • Unlocking new sources of revenue: Singapore-based company ST Engineering grew its service offerings via its acquisition of Aethon, an autonomous mobile robotics company. Through this acquisition, ST Engineering will be able to expand its footprint in the industrial and hospitality segments in the Asia Pacific markets using technology developed by Aethon.
  • Investing for future growth and product innovation: A classic example would be Shiseido’s acquisition of a series of technology-related companies to fuel product innovation. These acquisitions include Olivo Laboratories - a US start up specialising in artificial skin technology, MatchCo - a software developer with a product allowing customers to create customised foundation products based on skin tone, and Giaran - an artificial intelligence technology start up. Through a combination of investment, innovation and digitalisation, Shiseido expects sales to grow at a CAGR of 8% through 2020, according to a recently released three-year plan.

In addition to transactions between the non-technology and the technology companies, there has been significant transaction flows between established technology companies and up and coming start-ups with the aim to adopt new and innovative technology while expanding their portfolio of market offerings. Some examples include Tencent’s investment in VIPKID, an online language school platform which connects English teachers with students in China and 35 other countries, and Rakuten’s investment in Southeast Asia-based mobile C2C e-marketplace start-up Carousell.

Investments from corporate venture capital (CVC) funds saw a steep increase in 2017, with nearly $49 billion invested globally.  Corporate venturing has emerged as a fundamental part of the corporate innovation strategy for many companies, as it provides companies with an important conduit into the external innovation ecosystem.  As an example, Toyota announced its first venture capital in 2017 - Toyota AI Ventures - which will deploy $100 million to focus on early stage investments in AI, autonomous mobility, robotics, data, and cloud.

Other than corporate venture capital funds, a large number of VCs such as 500 Startups, Vertex Ventures, and Sequoia Capital have also been supporting the start-up ecosystem in Asia. Other than funding, VCs also actively work alongside their portfolio companies, assisting founders in developing their businesses and curating their strategic direction. Start-ups such as Redmart, Grab and Go-Jek which were backed by various VCs early on have grown tremendously over the past years. Go-Jek, an Indonesia-based start-up, received its first VC funding from Openspace Ventures in 2014. Within 2 years, in August 2016, the company had a pre-money valuation of $750 million and raised an additional $550 million from KKR, Warburg Pincus, Sequoia Capital and Rakuten among others. The company continued its exponential growth and by February 2018, had a pre-money valuation of $3.5 billion, raising an additional $1.5 billion from major investors such as Google, Tencent and Temasek.

The road to success

While M&A or corporate venturing provide companies with immediate access to technological innovation, it is imperative that companies consider the following to ensure success:

  1. Have clarity on the role of the acquired innovation and how this can allow the company to achieve their strategic ambitions. It is critical that strategies are planned according to long term goals and objectives in order to achieve success.
  2. Commitment across the organisation to work towards strategic goals.
  3. Develop competencies internally to monitor signals in technological shifts, consumer behaviour and market trends.
  4. Use collaboration as a business model as this minimises risks and capital outlay, while at the same time allowing the sharing of skills and expertise.
  5. Use smaller acquisitions and investments to drive company cultural change. Assimilating external innovation into company culture is perhaps the most challenging aspect and change needs to begin from the top to inspire the bottom.

As companies actively use M&A and venture capital to invest in innovative start-ups, it can be expected that in the coming months, small strategic deals will be made that will create new market offerings, reshape competition and lead to the convergence across sectors such as technology, finance, health, consumer, and manufacturing. Indeed, fuelling growth through innovation not only provides companies revenue growth, there are advantages well beyond it, for example, to attract talent, increase customer loyalty, and command premium margins, among others.

Deloitte Innovation Series

To spur technology collaboration opportunities in ASEAN, Deloitte will be launching a platform titled “Innovation Insights” across the ASEAN markets in partnership with a panel of international experts that will include IP and innovation specialists. The platform will bring together ASEAN’s innovation-driven business community, particularly those who are interested in identifying, acquiring and nurturing innovative start-up businesses, giving them an opportunity to share their experiences and innovation journey, and discuss how they can successfully capture the growth opportunities that technological innovation brings. At these platforms, participants will also be encouraged to explore with one another potential collaboration opportunities to prepare their organisations for the era of exponential growth.


[1] The Deloitte M&A Index 2017 “Fuelling growth through innovation

[2] Deloitte report: "The beginning of a new M&A season – Future of the Deal"