The Incumbent’s Deep Tech Strategy Playbook
By taking a three-step approach to engaging with deep-tech ecosystems, incumbent companies can remain competitive, drive innovation, and create commercially valuable offerings.
Deep tech — the innovative use of emerging physical technologies enabled by digital technologies to solve large-scale problems — has the potential to create transformative growth opportunities for businesses. By tapping into these advanced technologies, leaders are better positioned to address large-scale problems and reshape entire markets. Consider the impact of synthetic biology; by 2030, this rapidly advancing field could affect industries that account for as much as 30% of global gross domestic product.
In the pharmaceutical industry, the disruptive power of deep tech is evident in the development of mRNA vaccines. Through decades of government-funded research, academic ingenuity, and backing from venture capitalists and accelerators, mRNA technology gradually emerged as a groundbreaking innovation. However, it took medical urgency and the strategic involvement and operational support of established companies such as Pfizer to usher in an mRNA-based vaccine at scale and enable its commercial success. Partnering in 2018 with BioNTech, a spinoff of Mainz University that had been founded a decade earlier, Pfizer played a critical role in developing the record-profit-making COVID-19 vaccine.
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But the disproportionate coverage of deep-tech successes masks many failed attempts in commercializing them. For every Pfizer, there are cautionary tales from other well-known health care giants. Clearly, the tectonic changes caused by deep tech compel executives across industries to come to grips with the underlying technologies right away and identify the right engagement models. Striking the right balance is critical: Investing in deep tech too early can be counterproductive, but delaying too long or choosing the wrong approach can be detrimental.
To help executives at incumbent companies identify and execute their deep-tech engagement strategies, we’ve developed a three-step deep-tech playbook. This framework puts a system behind the questions we hear from companies looking to engage with the deep-tech ecosystem. It is based on our experience in deep-tech client work, discussions with executives, observations of industry dynamics, and academic research.
Investing in deep tech too early can be counterproductive, but delaying too long or choosing the wrong approach can be detrimental.
Steps 1 and 2 introduce the two key dimensions influencing the choice of deep-tech strategy — urgency to act on challenges, and the innovation momentum of the surrounding ecosystem — along with guidance for executives on assessing those factors in their business context. For steps 1 and 2, we will use the European steel industry as an illustration. This industry serves as a useful example, given the need to address its large carbon footprint and the adoption challenges that its advanced technologies need to overcome, such as high capital intensity.
In Step 3, executives must identify the company’s unique positioning and strategy based on the assessment of the aforementioned factors. This assessment is not a monolith for a company; it differs for each challenge its specific industry faces. Because our framework can be applied in various industries, the resulting deep-tech strategies will differ by company and industry. We, therefore, illustrate four archetypal engagement strategies with examples from other industries.
Step 1: Incumbents must assess the urgency to act on challenges.
Given the combination of challenges related to climate change and geopolitics, businesses are waking up to the urgent need, or are being compelled, to develop and deploy deep-tech-based solutions to tackle them and generate novel opportunities. The graphic below provides an overview of the assessment of the following factors through the example of the European steel industry.
Executives must start by identifying the long-term emerging or aggravating challenges that their business or industry is facing. The European steel industry faces massive pressures to manufacture steel much more sustainably, given that the sector produces approximately 5% of European CO2 emissions. Current plans to decarbonize the sector are insufficient because they fall short of the industry’s ambitious 2030 target of reducing emissions by 55% compared with 1990 levels.
To determine how urgent the need for deep-tech solutions is, executives must next gauge the impact of the challenges. Applied to the European steel industry example, the impact could come from the effect of carbon pricing or the EU’s carbon border tax on the industry’s competitiveness. Analysts predict that European carbon prices will reach more than 120 euros ($130) per ton of CO2 by 2030; if their predictions bear out, the cost of supplying European steel through existing technology would increase sharply once free carbon allowances are phased out completely.
Then, companies must evaluate how constraining existing approaches are in adapting to these challenges. The dependence on carbon-intensive thermochemical reactions for steel production, an inability to fully capture carbon emissions, and limitations in steel scrap availability and quality are exemplary constraints of the current steel manufacturing paradigm that further increase the urgency.
Lastly, companies must assess the opportunity in reimagining the existing paradigm. For this, they can apply methodologies such as backcasting — that is, starting with the desired outcome and charting a path backward to the present scenario. In our steelmaking example, an alternative sustainable high-efficiency conversion pathway could be an opportunity to tap into the market for sustainable building materials in Europe. Many leading automotive and consumer durables companies have announced ambitious targets for Scope 3 emissions reductions, which means major demand disruptions for noncompliant steel producers. Switching to green steel would have limited cost risks while curbing Scope 3 emissions for these steel buyers.
When we look at the level of urgency for deep-tech innovation in the European steel industry example, it can be considered high.
Step 2: Incumbents must evaluate the surrounding innovation momentum.
Deep tech is different from digital innovation in several key ways. If digital innovation is about generating economies of scale, network effects, and speed to market to seize first-mover advantage, deep tech’s characteristics are the convergence of multiple rapidly maturing technologies, a need to navigate both tech and market fit, larger investment needs, and longer development times. Deep tech focuses on challenges that span multiple scientific disciplines and sectors, requiring a collaborative approach. For deep tech to thrive, its development relies on innovation ecosystems that encompass everything from R&D to commercialization. Established corporations may find it difficult to work with these ecosystems, which operate with rapidly evolving technical risk and market fit.
Deep tech focuses on challenges that span multiple scientific disciplines and sectors, requiring a collaborative approach.
To evaluate the innovation momentum, incumbents must first identify the solutions or scientific advances that are or will become available to address the business challenges they have identified. Potential solutions within the steel example could be an electrochemical or a green hydrogen-based thermochemical pathway for conversion. We focus our subsequent analysis on the green hydrogen-based reduction technology, as it is relatively advanced in terms of technology readiness and is one of the most CO2-efficient pathways for steel production, with the potential to reduce emissions by more than 75%. Innovation momentum should be evaluated from two angles: technology factors and stakeholder factors. The graphic below provides an overview of the assessment of the following factors through the example of the European steel industry.
On the technological side, incumbents should assess the level of granularity of the technology, dependencies on other innovations, and the technology’s interfaces. To assess granularity, incumbents can evaluate the technology’s physical size, divisibility, capital expenditure (CapEx), complexity, and nonfinancial risk. In the European steel example, increasing the production capacity for direct reduced iron or building greenfield thermoelectric plants will require significant CapEx.
Unlocking new technologies’ full potential will require incumbents to consider dependencies on the success of other innovations, such as the convergence of technological streams, to make these solutions possible. Beyond determining how to use hydrogen efficiently in steelmaking, the success of the technology will depend on developments and innovation in green hydrogen production and infrastructure.
Finally, incumbents should evaluate the technological innovation momentum by considering the extent to which the technology’s interfaces are sufficiently stable and mature to facilitate easier co-innovation. The hydrogen-based steelmaking pathway, for instance, demands stable, consistent, and large quantities of low carbon-intensity hydrogen supplies.
On the stakeholder side, incumbents need to evaluate the ecosystem inertia, stakeholder contributions, and need for stakeholders to adapt. For instance, the European steel industry profits from economies of scale and faces significant inertia to change, due to extensive capital lock-in and low profitability.
Incumbents further need to ask how stakeholders are aligned to progress on the identified deep-tech solutions. Consider that the risk of being outcompeted by cheaper and less-sustainable imported steel can likely be mitigated only by a steadfast policy commitment to carbon border adjustments and further regulatory support. But such regulation could also create pockets of geographies where momentum is higher. Government funding, such as from the European Innovation Council or the European Investment Fund, plays a role in supporting deep-tech efforts and contributes to de-risking private investment. Investors’ commitments allowed European deep-tech startups to raise $17.7 billion in 2022.
Finally, incumbents aiming to leverage the deep-tech ecosystem to support their project’s scale-up can count on facilitators like accelerators, incubators or consortiums, and stakeholders from academia; in fact, many European deep-tech successes have their roots in universities, such as the aforementioned Mainz University spinoff BioNTech and Climeworks from ETH Zurich.
Lastly, incumbents must ask themselves to what extent stakeholders across the value chain must adapt. Within the European steel industry, energy suppliers need to provide a steady, ample, and cost-effective supply of green hydrogen, requiring a significant expansion of electrolyzer capacity and renewable energy generation. End consumers, however, would not need to adapt much since the quality and form factor of steel from a new process would not be significantly different.
Despite the good number of incumbent projects and government interest, the momentum for hydrogen-based steel production technology is mellowed significantly by existing technology ecosystem inertia and the need for a transformative but capital-intensive new technology ecosystem. Hence, the innovation momentum in this illustration can be gauged as medium to low.
Step 3: Incumbents must define and execute their engagement strategies to manage deep tech.
The factors of urgency and innovation momentum offer executives valuable signals regarding the potential impact of deep tech on their various industries. Assessing these aspects is a crucial prerequisite for any business before determining and implementing a strategy to engage with a deep-tech ecosystem. The urgency to change, and the momentum for innovation, will keep evolving as new challenges arise, research breakthroughs occur, investment flows in, and startups emerge and churn. For each emergent challenge your business faces, your approach toward deep tech will differ.
By assessing the two key factors of urgency and innovation momentum, executives can choose from four archetypal strategies for engaging with deep tech. Below, we provide guidance to incumbent companies across industries looking to execute any one of these four distinct strategies.
- Facilitators focus on maturing deep technologies through significant investments while leveraging ecosystems to share costs and diversify.
- Orchestrators reinvent their core business to embrace deep tech, brace for a large and rapid deep-tech transition, and stay ahead of the curve — thereby orchestrating change toward a new reality.
- Scouts proactively use deep tech to expand into new markets, increasing their value pool and positioning themselves as leaders in their own playground.
- Observers acknowledge deep-tech opportunities and scan the horizon for potential disruptions.
Companies can consider the facilitator engagement strategy when innovation momentum is low but addressing external challenges is critical. Facilitators build and nurture deep-tech building blocks and ecosystems, identifying and developing promising new technologies for real-world impact.
To evolve technologies at each stage of development, companies must identify constraints, align with complementary organizations to scale promising solutions, and promote systemic adoption. This results in consortia-style collaborations for joint research and/or pilot projects aimed at scaling a specific technology. Companies must focus on solutions for the key issues relevant to their core while leveraging collaborators to drive additional innovations.
Consider the Swedish steelmaker SSAB, which is developing a path-breaking sustainable hydrogen-based steelmaking process. In Sweden, SSAB leads the Hybrit project in tandem with Vattenfall, a multinational power company, and LKAB, a state-owned mining company. Together, the consortium members hope to use the new process to produce 1.2 million tons of steel annually by 2027. Because the availability of electrolyzers is a key constraint, SSAB is using its years of operational experience to improve the effectiveness of hydrogen in steel production while relying on partners for complementary techno-commercial capabilities — like Vattenfall for renewable energy and hydrogen production, and LKAB for raw materials.
Success with technology-oriented solutions that affect large-scale systemic (or systems-of-systems) value-chain transformations would require business model innovation too — either upstream or downstream. For instance, Volvo has committed to purchasing the premium green steel supplied by the SSAB pilot partly because it aspires to introduce a range of carbon-free electromobility solutions. Further, government support, like the EU Innovation Fund’s investment of up to 20 billion euros in low-carbon technologies, often plays a critical role in enabling systemic change for deep-tech facilitators.
Incumbents can become orchestrators when it’s imperative that they react to urgent external challenges and the deep-tech innovation ecosystem offers an effective response. This strategy demands defining an ambitious vision, reinventing the company to tackle it, and committing resources to generate significant revenue and profits from deep-tech solutions.
Hyundai Motor Group (HMG) exemplifies this approach in the way it addresses the environmentally unfriendly problem of urban mobility, where there’s a business opportunity in rethinking and overhauling the automobile industry. HMG hopes to become a complete mobility solutions provider, offering novel mobility services and developing the infrastructure solutions to deliver them. For some orchestrators, much of the innovation will take place outside the company’s boundaries; HMG has invested in several mobility upstarts, such as Metawave for autonomous driving systems and SolidEnergy Systems for fuel cell technology.
Incumbents must invite and incentivize many stakeholders — such as competitors, suppliers, and distributors — to become complementors in their ecosystems, build deep-tech platforms, or form industry working groups. HMG unveiled open-source platforms for each of its automotive brands, gathering myriad kinds of data from connected automobiles and ultimately making it accessible to its partners via APIs while it develops proprietary solutions.
Orchestrators can ease bottlenecks and relieve key frictions in their deep-tech ecosystems by using their assets and capabilities, such as giving startups access to manufacturing facilities — ultimately with the goal of scaling solutions or coordinating go-to-market tactics to create a faster path to commercial deployment. HMG, for instance, is testing Boston Dynamic’s Spot robots in a facility in South Korea, where AI developed by HMG’s Robotics Lab has been integrated with the robots to ensure their suitability for factory work.
Incumbent companies that have high innovation momentum on new technologies but experience lower urgency with external challenges can opt for a deep-tech scout strategy. This approach begins with replacing existing technologies with available deep-tech solutions. Through this approach, companies benefit from their ecosystem’s innovation dynamism and the ease of plug-in solutions, which in turn reduces risks and catalyzes higher returns.
A plug-in solution is best handled through a corporate venture or incubator arrangement that externalizes technical risk as equity risk. Since true plug-ins are rare, incumbents should have the capability to understand the potential trade-offs and effects of using a new material or component. Incumbents should also have strong investment and technology scouting teams that can identify compelling, technically sound deep-tech plays at attractive valuations.
When developing a scout strategy, incumbents can use a mix of research and/or development partnerships, corporate venture capital investments, and strategic deals, such as M&As, to foster collaboration. It’s smart for companies and promising startups to strike exclusive deep-tech partnerships for specific applications so the benefits accrue only to them. Companies can either codevelop or license technology exclusively. For instance, Unilever and Geno jointly invested $120 million in 2022 to develop a plant-based substitute for palm oil that only the former will use in its cleaning and personal care products.
If an incumbent company and its ecosystem are hesitant to adopt new technologies, they can consider remaining deep-tech observers — even though that’s increasingly a risky strategy. Proactive leadership teams will constantly scan the business environment to find opportunities for deploying emerging technologies. This type of monitoring and vigilance will help them anticipate deep-tech-based disruptions and avoid the perils of inaction. By leveraging their ecosystems — academia, incubators, accelerators, vendors, and suppliers — along with their technology teams, they can minimize the cost of developing their own deep-tech “observatory.”
For example, the fast-food industry has been surrounded by deep-tech innovations in recent times, but none of them have had a significant business impact on quickly delivering affordable, consistent, quality food through a network of retail outlets. Consider that plant-based meats — driven mainly by upstream food and agriculture businesses — or robots specifically designed to automate cooking tasks such as deep-frying can easily be integrated into restaurants. These robots are, for instance, developed by companies such as Miso Robotics and used by companies like White Castle.
Deep tech may not (yet) usefully address key imperatives for growth, sustainability, or margin that businesses in some sectors may find worth the investment. Sectors like construction, water, and waste management have had limited venture investment, given regulatory barriers, value-chain lock-in, and limited technological choices. Yet even here, changes in regulations or technologies can catalyze investment. For example, urban mining — reclaiming and reusing electronic waste materials — is an emerging area of investment, given strong incentives for electrification and the domestic supply of battery materials. For fast followers, valuations and access to emerging capabilities may be significantly less attractive.
By nature, the deep-tech strategy archetypes described in this article are not one-size-fits-all solutions. Some companies may want to proactively address challenging problems with deep tech, whereas others may focus on other priorities in the short term. Also, few companies will have the bountiful resources needed to execute ambitious deep-tech plays.
Nonetheless, many incumbents are in a unique position in the innovation ecosystem due to the tangible and intangible assets and capabilities they’ve developed over time, such as expertise in scaling manufacturing processes or market access. Unsurprisingly, many have started to recognize this advantage and are exploring the potential to use new technologies to create commercially valuable offerings.
Deciding which play to make is crucial and will depend on a company’s aspirations, its urgency to change, and the vitality of the innovation ecosystem it is engaging with. By embracing the right deep-tech strategy, incumbent companies can avoid being disrupted, help foster ongoing success, and drive the development of innovative, world-changing solutions.