The new innovation paradigm
New developments in information technology as well as the rise of emerging economies (especially, emerging Asia) are forcing companies to radically rethink how they must manage innovation.
Here are three key elements of what may well be termed the new innovation paradigm.
Multinational companies such as Unilever, Philips and General Electric have long relied on local research and development laboratories in foreign markets to adapt their products to local market needs. Today's reality, however, is very different. GE's 5000-person R&D centre in Bangalore, India, is dedicated only partly to localisation of the company's products for the Indian market. The bulk of its resources is channelled into developing the next-generation technologies for GE's businesses globally - wind turbines, aircraft engines, washing machines, hybrid locomotives and the like.
Similarly, Microsoft's R&D centre in Beijing has played a leading role in the development of speech technologies, new user interfaces, and new mobile operating systems not just for China but for the company's needs globally. Also, virtually every big pharmaceutical company in the world now finds that, if it wants to stay competitive in new drug development, it must conduct a good chunk of its drug discovery and clinical research activities in India and/or China.
In short, distributed innovation is no longer driven merely by the need for local adaptation. Rather, it's being driven by the fact that China and India now produce large numbers of highly capable, often less expensive, and easily scalable scientists and engineers. As a senior executive at Goodyear China noted to us: 'The United States will probably graduate three PhDs in tyre technologies this year. In China, we know of at least 50' people who study ways to improve tyres, such as introducing various materials to the rubber base.
Along similar lines, a senior executive at GE's John F. Welch Technology Centre in Bangalore remarked: 'It's not easy to find expertise in computational fluid dynamics in the US. In India, we can find dozens of specialists in this field.'
As these examples illustrate, today's global enterprises need to become skilful at distributing and managing not just peripheral product development but also the creation of next-generation technologies and new product platforms at selected hot spots around the world.
Companies can no longer afford to rely solely on innovations originating within their own organisational boundaries. Given the transparency brought about by the internet, barriers to imitation and new entry are declining. As companies find themselves facing more intense competition, the penalties from internalising any activity that somebody else can do better, cheaper or faster have gone up. The trend towards disaggregation of value chains will continue. Companies will find that the features, quality, performance and price of their end products will depend increasingly on the decisions and actions of business partners on all sides of the value chain.
A second factor that makes collaborative innovation increasingly essential is the rapid integration of multiple technologies into almost every product, service or process.
Today's tablet computer is not just a computing and office-productivity device; it has also become a source of multimedia communication, information and entertainment. Today's cars have largely become computers on wheels. Today's books need to be published and made accessible not just in paper-based formats but also in many different types of digital format. And, it is not long before contact lenses may come embedded with medications so that you can not only see better but also become healthier.
As disparate technologies come together into a single product, service or process, companies will find that, no matter what their size, they simply do not have the mastery of all of the essential technological puzzles. Directly relevant innovation will increasingly take place outside the firm's boundaries or collaboratively at the interfaces between firms.
By frugal innovation, we mean innovation that strives to create products, services, processes and business models that are frugal on three counts: frugal use of raw materials, frugal impact on the environment and extremely low cost.
In 2000, motor vehicle production in China was barely 16 per cent of that in the US. By 2010, it was twice as large as the US. From 2006 to 2010, China added more square metres of urban floor space than the rest of the world combined. India is behind China by about 12 to 15 years, but following a similar path. As economic development in both countries spreads to the countryside, these trends are not likely to abate any time soon. No wonder the price of almost every commodity has risen sharply over the last decade and that China and India have become two of the biggest contributors to greenhouse gases into the air that we breathe.
It is unlikely that, for the sake of lifestyles in the developed world, China and India will decide to put brakes on their own growth. Instead, what we will witness is a rapid shift from products, services and processes that are not energy efficient, raw material efficient or environmentally efficient to those that are. Companies that take proactive leadership on these fronts are likely to grow their global market shares at the expense of those who spend their time lobbying governments to ease up.
Further, over the next 20 years, the bulk of the absolute growth in global market demand for most products and services will occur at the middle- and low-income levels in the big emerging markets. Winning these mega-markets will require that products and services also be ultra low-cost.
A passion for frugal innovation is becoming increasingly essential not just for companies that sell consumer products and services but also for those that are purely in business-to- business domains such as Nokia Siemens Networks (NSN), Ericsson and IBM.
Take, for example, Bharti Airtel, the world's lowest-cost provider and India's market leader in cellphone services. The ingenuity of Bharti Airtel lay in devising a new-for-the-industry business model for mobile telephony that relied heavily on outsourcing all network operations (to NSN and Ericsson) and all business support services (to IBM). However, for this business model to succeed, it was essential that all of the relevant players (NSN, Ericsson and IBM), not just Bharti Airtel, be committed to frugal innovation.
As the key behind the development of human civilisation, innovation is almost certainly one of the oldest ideas in the world. However, as the structure and dynamics of the world economy undergo rapid change, companies need to rethink how their approach to managing innovation must also change if they wish to stay global leaders in their respective industries 10 years from now.
Anil K. Gupta is the Michael D. Dingman chair in strategy and entrepreneurship at the Robert H. Smith School of Business, University of Maryland and a visiting professor in strategy at the INSEAD business school, which has campuses in France, Singapore and Abu Dhabi. Haiyan Wang is managing partner of the China India Institute.
The Chinese grocery sector's value, in US dollars, according to IGD research, at the end of 2011, surpassing the US market at US$913 billion