Innovation from everywhere Business Trends 2014

Overview

Innovation has always been important to humanity—it’s the driver of increased prosperity and well-being. It has also been steadily increasing in importance to business in a fast-changing, opportunity-rich, and highly competitive world. The evidence is plain, for example, in MBA programs, where innovation courses for the next generation of managers are rapidly proliferating. Bill Gates expressed the point in stark terms: Companies must “innovate or die.”¹ So where does innovation come from?

For the last few centuries it came mainly from the West. Certain key ingredients necessary for innovation to flourish were in place in the societies and economies of the Western hemisphere far earlier than elsewhere. This advantage became such a powerful, self-reinforcing phenomenon that many in the West came to view their innovation advantage as something like a birthright, an intrinsic relative strength that could never be taken from them.

But in an enormously important trend for business, that is changing. Now, thanks to spreading economic growth, shifting national priorities and new “open” technologies, innovation comes from everywhere. Players based in emerging economies—and, in the West, many other players who lack the assets of large-scale firms—are becoming forces to reckon with in global innovation systems.

For those responsible for corporate innovation, this shift is challenging much of how they do their work. To keep evolving their offerings and ways of operating, companies are looking beyond their internal research and development functions and connecting with innovators at the fringes of their businesses. This will require different aptitudes and, perhaps harder to put in place, different attitudes. But if they can learn to embrace what is “not invented here,” organizations of all kinds can participate in an exciting new world of innovation possibilities.

What’s behind this trend?

If you think about what is required for innovation, it comes down to a few basic elements and conditions. Raw intellect is required to produce novel ideas. But ideas are only a small first step in the innovation process; there must also be incentives for inventors to turn those ideas into reality. Putting them into production and bringing them to market at scale requires substantial infrastructure. And since that requires investment far in advance of the hoped-for returns, there also need to be infusions of capital.

These came together in the West, both at the level of the economy and within the closed systems of firms. Corporations like Xerox and General Motors pulled together high-intellect groups in lab settings to cook up inventions, all kept tightly under wraps.² Governments put a priority on fundamental scientific research, and made it easy for commercial entities to capitalize on the publicly funded and “best-in-class” work of universities. Managers devised standard processes by which the most promising possibilities were selected and funded, and leveraged their infrastructure to get them engineered, manufactured, and marketed in a consistent, high-quality fashion. Firms were able to profit handsomely from the bets that paid off. With every subsequent successful innovation, a company’s infrastructure gained scale, improving the chances that the next one would be a success. With such self-reinforcing systems in place, some nations’ economies matured at faster rates than others’. It was hard to see how to break the lock that Western corporations had on innovation.

Hard, that is, until now.

A key change is in the infrastructure now required—or rather, not required—to bring a good idea to fruition. We are now decades into the revolution unleashed by information and communications technology, and the effect on industries has been a radical “de-verticalization” of the elements required to launch new offerings. Capabilities that were once exclusive to large businesses are now available on efficient open markets. Innovators no longer need to assemble large organizations, let alone make enormous capital outlays for plant and equipment, because infrastructure is available to them on an as-needed basis. Open platforms that enable collaboration are the new infrastructure of innovation.

Indeed, infrastructure these days could even be a liability—the millstone that limits agility. Players with the largest infrastructure in place could find themselves at an innovation disadvantage. We have already witnessed the phenomenon of “leapfrogging”—the upside of having essentially sat out an era of infrastructural investment and, unencumbered by legacy systems, being able to jump more quickly into the next era. This happened 20 years ago in emerging economies with respect to telephony, as their adoption of mobile phones far outpaced mature economies’, thanks to their lack of land lines.³ With new, potentially transformative technologies coming online every few years, from DNA sequencing to 3D manufacturing, there will surely be many other opportunities for seeming laggards to leapfrog leaders.

But infrastructure is not the whole story behind today’s more accessible and democratic innovation. Managers are now more generally knowledgeable about the processes by which ideas are transformed into profitable offerings. “Innovation is revealing its secrets,” as our colleague Larry Keeley, Deloitte Consulting LLP, puts it—among them, that the word innovation has been applied to what are actually multiple different ways and realms in which companies create new value.⁴ It is not simply about creating new products and services, but also involves systemic changes elsewhere—including financing and business models, new processes, and enhancement to delivery systems and client experience. And scores of tried and tested tactics to drive these changes have been identified and are now available to all.

Would-be innovators are also being fueled by new incentives as governments put new emphasis on innovation. The encouragement goes far beyond specific market interventions such as tax subsidies for pioneers in next-generation technologies like solar power. Particularly in emerging economies, where businesses have prospered by being “fast followers” or suppliers to Western firms, policymakers are encouraging homegrown innovation in numerous ways. See for example figure 1, showing how various countries’ investments in biomedical R&D have grown over time.

The strong resolve of Singapore, South Korea, and especially China could not be more evident.

Companies are sending the same signals to their employees. When Deloitte surveyed senior executives of global firms in 2013, roughly 60 percent or more of developed-market executives and emerging-market executives reported that company employees, external partners, and company R&D centers are extremely or very important sources of innovation and new ideas for their organizations.⁵

As for the infusion of capital into new ventures, the importance of that hasn’t gone away—even in an era of what Keeley calls “lightweight innovation.”⁶ New developments in this area also contribute to the shift we’re describing. Microfinance was a huge early development; it turned people in villages across the developing world into entrepreneurs. More recently, consider the advent of crowd-funding. Using a tool like Kickstarter, which essentially asks customers (or stakeholders) to pitch in small amounts that collectively enable the development of an idea, an innovator can get a project off the ground that, for whatever reason, isn’t a fit for conventional forms of funding such as venture capital. In 2012, the total raised across 308 global crowd-funding platforms was $2.7 billion, an 81 percent increase over 2011, suggesting that this model is still in the earliest stages of explosive growth. When the numbers come in on 2013, the crowdsourcing research firm Massolution expects them to show that some 600 global crowd-funding platforms raised over $5 billion.⁷

Of course, all the infrastructure, incentives, and infusions of capital in the world can’t achieve innovation if there aren’t good ideas to begin with. When it comes to intellect, no one would claim that the West ever had a monopoly; raw brainpower is evenly distributed in the world. Much of the trend we’re describing is about tapping historically underutilized pools of it. There are also new developments making these pools larger.

The developed world may not have had bigger brains, but it did have huge advantages in education. Note, however, that by 2030, China will have 200 million college graduates, a number that exceeds the entire US workforce. By 2020, India will be producing four times as many college graduates as the United States.⁸ This dynamic is also reflected in fundamental science: In the 1980s, Asia Pacific accounted for 14 percent of total world science publications; by 2011, the proportion had doubled to 28 percent.⁹ The most recent rankings from the OECD’s Programme for International Student Assessment (PISA) put Asian education systems on top, especially with regard to math and science. According to these rankings, the top seven regions of the world in math performance are all in Asia (with Shanghai taking first place.)¹⁰Moreover, as economic opportunities grow in emerging economies, talent is more likely to stay there, or return after periods of work or education overseas. The Chinese Ministry of Education tracks the numbers of these returning “sea turtles” and reports ever-rising figures.¹¹

Also propelling the talent shift is the rise of digital natives—a global cohort that, thanks to fundamental demographics, is increasingly dominant in the developing world.¹² This youthful source of strength will grow along with expanding Internet penetration. (Today, more than 60 percent of the world’s population still lacks reliable Internet access—but that is changing fast.)¹³ It is clear that emerging-market Millennials are attracted to innovative businesses: In a recent Deloitte survey, more than 86 percent of respondents from this cohort claimed that their employment choices were strongly influenced by a company’s reputation for innovation—a higher proportion than that reported by developed-economy Millennials.¹⁴As they attain positions of leadership, expect to see more creative exploitation of the opportunities inherent in 21st-century technology.

Together, these developments are likely to reshape the global business landscape, steadily undermining the historic advantages of incumbents while empowering new actors. As innovation thrives outside large firms, it will also escape its long-time association with the institution-rich economies of the West (figure 2). It will become ever more accessible and open as organizations around the world gain greater (and lower-cost) access to the elements that drive it. Larry Keeley calls it “the biggest revolution in innovation that I have seen in 30 years.”¹⁵ Innovation will now come from anywhere—and everywhere.

Implications

Managers will need to respond thoughtfully and strategically to this transformation of the innovation ecosystem. First, from a defensive standpoint, they should acknowledge that the threat of disruption—of their products, processes, and business models—is very real, and likely to come from an unexpected direction. More positively and proactively, they should find ways to make the unfolding developments work in their favor.

Make open innovation part of your innovation strategy

Business leaders today realize that the smartest people in the world don’t all work within their organizations. How are for-profit companies tapping into the ideas of broader swathes of consumers and idea-generators? Through a growing range of methods. For example, Innocentive, Kaggle, TopCoder, and Gigwalk all allow them to engage external talent to help research and solve problems at a fraction of what it would cost to employ full-time resources, and with many more options than would typically be suggested by expert advisors.¹⁶

[The] biggest obstacle to innovation is not the scarcity of ideas—rather, it is the lack of capabilities to engage far-flung and unusual sources of perspective on a regular and ongoing basis.

XPRIZE is in the business of innovation, and it aims big. Its mission: “To bring about radical breakthroughs for the benefits of humanity, thereby inspiring the formation of new industries and the revitalization of markets.”¹⁷ How does it do it? By announcing grand challenges with handsome prizes (funded through donations to its nonprofit organization), it has elicited thousands of entries globally to solve complex technological challenges from private space flight to environmental cleanup. These entries have come from major research and traditional innovation hubs, but also from rank amateurs and dilettantes.¹⁸

But being “open” is more than issuing challenges to all comers. It calls for a broader intellectual curiosity that involves listening in and observing as creative people address the problems they consider important and interesting. Companies should consider, for example, connecting with the “hackers” in its space. The “maker movement” around the world consists of a vibrant community pushing each other’s skills and ambitions in small-scale fabrication, and some claim that it could form the basis for the next industrial revolution. We know of Western entrepreneurs who have spent months in Shenzhen, the capital of the hacker culture, immersing themselves in the flow of all the component parts of manufactured goods and the know-how of masters in manipulating them.¹⁹

Serve as a platform

Apple’s and Android’s success in pursuing “platform” strategies has been widely observed.²⁰ They provide a foundation on which many external parties can build by designing applications that will run on it. This makes it easy for these parties to create and capture value, and as they do so, the platform itself will become more valuable and its creator more profitable. But to date, relatively few leaders have seriously explored how their own companies could potentially emulate this model.

Platforms, after all, can come in many forms. Take Quirky, a company that was envisioned from its inception to be a platform for independent inventors. Would-be entrepreneurs submit ideas for useful new consumer products, which Quirky engages a crowd to evaluate. For the three product innovations it launches per week, it provides full support from engineering to marketing, and splits any profits between itself, the inventor, and the voting crowd. At the time of writing this article, Quirky has developed over 420 products in this fashion.²¹

A valuable platform in a more familiar industry context can be found in Chongqing, China, the epicenter of the world’s biggest and most dynamic region engaged in the production of motorcycles.²² One of the largest manufacturers there, Dachangjiang, found itself short of high-quality local suppliers. Rather than try to build a single, verticalized channel of suppliers, however, it broke its design into several modules and, for each, awarded two to three suppliers the responsibility for developing parts.²³ The suppliers worked under common, tight timeframes, but were given great latitude to fashion the different modules, and assurance that Dachangjiang would support innovative designs with investments in the appropriate equipment and processes to build them. The suppliers responsible for each module found modes of collaboration that worked for them, and they varied; there were vertically integrated state-owned enterprises, traditional joint ventures, and more loosely coupled arrangements.²⁴ Interestingly, these collaborations didn’t end with participation on Dachangjiang’s platform. Some of them parlayed their new expertise into growth in adjacent markets, such as automotive.²⁵ Thus, not only was Dachangjiang’s need for a vibrant supplier network met, but the network proved capable of far more innovation than would have occurred had it been directed and controlled by a single entity.

In each of these cases, the platform offers standardized interfaces and a plug-in architecture that can be leveraged by third-party innovators. Most of the costs of doing business are already embedded in that infrastructure, making it easier for smaller entrants to participate, either by targeting niche or emerging opportunities, or by offering something better to the platform’s core market. And in each case, the platform thrives because everyone participating in it has a stake in its success. It’s an arrangement that looks increasingly sensible as it becomes harder for individual firms to assemble and own the complete set of capabilities and knowledge required to sense and respond to market opportunities. Platforms are the bases of “business ecosystems,” and a key dimension of future approaches to innovation.

Focus less on stocks of innovation than on flows

These dynamics point toward a similar conclusion: Leaders today might do well to reprioritize mastering “flows” of innovation over owning “stocks” of intellectual property. Economists have long recognized the important distinction between stocks and flows in terms of capital. But intellectual capital features both, as well. Traditionally, most businesses have focused on the stock—the patents a company owns, for example, and how to protect them. As John Hagel has observed, however, the dynamics of today’s innovation advantages suggest greater focus on the flows—figuring out how to ensure a steady influx of new ideas and a process by which they will rapidly yield value.²⁶ Recall the motorcycle industry example cited above. Dachangjiang prospered more by facilitating flows than it would have by protecting and exploiting existing stocks of industry-relevant knowledge.²⁷

Looking ahead

Various technology executives claim that by the end of this decade, everyone on earth will be connected.²⁸ We can therefore expect further acceleration of the tremendous changes already underway, with a continued rebalancing of the contributions to global innovation from emerging economies. The vectors, velocity, and variety of innovation can be altered fundamentally and permanently.

Today, awareness of the power and potential of this shift is limited. After all, it challenges more than a hundred years of history, and undermines deeply embedded assumptions. But the business world is adapting, and can, in the years ahead, rapidly adjust to the new reality. It will become an increasingly important agenda item for organizations to track, sense, and act upon. Businesses will likely work to develop more accurate sensing mechanisms in order to discover the innovations brewing around the world, and will embrace new models and innovation systems themselves.

The conventional wisdom around keeping a tight hold of ideas could become a drag on organizations that are too slow to let go of it. But as they necessarily engage in new forms of collaboration, many more will discover greater returns from facilitating flows of innovation through open networks. And they will come to recognize that their biggest obstacle to innovation is not the scarcity of ideas—rather it is the lack of capabilities to engage far-flung and unusual sources of perspective on a regular and ongoing basis. And successful innovation will continue to become far less mysterious, as what was once seen as “lightning in a bottle” is increasingly parsed, researched, codified, and turned into reliable (if never foolproof) methods.

My take

By J. P. Rangaswami, chief scientist, Salesforce.com

Innovation is being democratized away from the insulated confines of the corporate lab and outwards toward the edges of social and market value webs. This transformation is being driven by three factors: the golden age of the platform, rivers of data being shared between connected consumers, and a growing awareness that the final value of things often expands tremendously when users are free to customize, collaborate, and recreate.

The golden age of the platform can be thought of as one of many small operating systems loosely connected. These coupled ecosystems are being developed in ways that allow for individual components to be constantly monitored, tested, altered, swapped out, or shut down. The resulting architectures are cohesive without being deterministic, allowing for rapid innovation at lower cost and without interruption. Success over these platforms is not dependent on accumulated knowledge or embedded infrastructure, so much as on the ability to swarm emerging problems and solutions quickly. Distributed networks of innovators are enabled by the very platforms that they now have the ability to change and improve. And those self-forming bands of problem solvers are essentially location-free.

Increasingly, we live within the so-called Internet of Things, a world in which everyone and everything is connected, with data being the essential lubricant. “Big data” and “analytics” have been buzzwords in the technology and corporate worlds for some time now, but the measurable impact and potential of this data is now starting to become clear. The truly stunning thing about big data is not how much of it there is, but its breadth of distribution. Current sensing, pulsing, and polling devices built into our digital worlds allow us to see one another, both as individuals and collectively, with the clarity that makes smart, data-driven, innovation possible practically everywhere.

As these ecosystems have developed, and as the amount and quality of data has improved, an enormous opportunity zone has opened. Salesforce has over 1 million developers, most of whom are not on our payroll, who customize the Salesforce platform at the point of usage to unlock value which often remains hidden to us at the hub. Rather than fight that, we run the company to magnify the innovation quotient at those distant transactional edges. End users might now find themselves delighted by the contributions of the whole ecosystem—customers, partners, and ISVs—augmenting the innovation they’re used to, delivered by the folks at Salesforce.com.