History reminds us that at every moment of economic upheaval and transformation, this nation has responded with bold action and big ideas.” As President Barack Obama addressed a joint session of Congress on Tuesday, Feb. 24, he took a moment to look back, pointing to the innovations that have arisen from times of difficulty: the railroad tracks, laid across the country in the midst of the civil war; the public high school system that emerged from the Industrial Revolution; the GI Bill that sent a generation to college. Obama’s theme was clear: Times of economic difficulty can inspire extraordinary innovation. And now, even as the markets continue their roller-coaster ride, he described a time “to put in place tough, new common-sense rules of the road so that our financial market rewards drive and innovation and punishes shortcuts and abuse.”
After talking with several trend-watchers and futurists about the kind of innovations they expect to come from this recession. Along with Obama, they focused on themes of energy and health care, with technology and computing rounding out their wish lists. All saw the opportunity to reframe problems to come up with radically new solutions. “There’s a reason why they call them market corrections,” says author and futurist David Zach. “Things that don’t work, are inefficient, out of date, or bloated often need to be bypassed.” He sees this scenario developing in realms such as the Web, with access to high-speed Internet overcoming geographical barriers to allow ever greater marketplace participation.
On the energy front, the big advances will be in biofuels and renewable sources. Giant turbines will harness the power of ocean currents. Biofuels that won’t drive up global food prices are being made. Technology will repurpose the energy from the human body to recharge our cell phones and music players. Super-charged batteries that hold more juice and require fewer charges will power electric cars and laptops.
Innovations in Health Care
In health care, self-diagnostic technologies that can be used at home will replace costly doctor visits. Heavy, unwieldy medical equipment that until now has been laboriously wheeled around hospital floors is being transformed into portable machinery that can be used at home or in a remote village. New nanotech and biotech drugs will cure decimating diseases. And the health-care system itself will be overhauled, with digitization of patient records cutting costs and increasing transparency and reliability of care. Glen Hiemstra, author and founder of Futurist.com, wants to see universal coverage, while allowing folks to purchase insurance privately. “Health care is at the center of almost all business-labor issues. Moving away from employer-provided health care will free us like almost nothing else I can think of,” he says.
Given the subprime debacle, the ensuing economic meltdown, and the current ups and downs of the markets, it’s perhaps not surprising that many of the experts are predicting drastic changes in the world’s financial systems. “I think we’re going to see the creation of new instruments and tools to value, trade, and share wealth and currency,” says trend-spotter and journalist Josh Spear.
Of course, longed-for innovations don’t always make it to the market. Radically new ideas for transportation were on most of the futurists’ wish lists, but the chances of a high-speed cross-country train within the U.S. still seem slim . But, as vehicle sharing and trackable, more reliable, and eco-powered buses gain popularity, chances are that better urban transit will become a reality.
Looking into the future is uncertain, messy work, but if businesses view the current economic crisis as an opportunity to innovate, we may still be marveling at these breakthroughs decades from now.
The emergence of Open Innovation means, among other things, that innovation management will become more collaborative and that business model innovation will become as important as technological innovation. This author, who coined the term Open Innovation and literally wrote the book on it, has excellent advice for readers.
Those who study innovation often can be overwhelmed by the variety and speed at which clever new products and services come into the market. But it is helpful to take a step back from these myriad innovations to reflect on the evolution not only of the technologies themselves but also the processes used to create, develop and manage them. While the latest technologies of the recent past (think of Facebook, Twitter, Android, iPod/iTunes/iPhone/iPad, just to name a few) get most of our attention, it is often the processes that led to the creation of these technologies that may prove more enduring. These also are being innovated.
Let’s look back in time at previous management innovations to gain some perspective. In the 1960s, a significant management innovation that fostered the development of many technologies of that era was the concept of Systems Analysis that Robert McNamara and his colleagues brought into the U.S. government, particularly in the defense sector. This was a comprehensive way to assign priorities and allocate resources to competing projects, based on their total costs and benefits.
In the 1970s, the success of the Apollo missions to the moon spurred a management innovation in project management. Program Evaluation Research Techniques (PERT) were developed to map sequences and dependencies in complex projects, so that the critical path that determined the date at which a project could be completed could be identified. PERT charts also helped companies assess trade-offs when activities on the critical path began to fall behind schedule.
The 1980s saw the rise of Total Quality Management in the U.S., as the principles of Deming and Juran, which had been so influential in Japan in the 1970s, finally found acceptance in their home country. Related processes like Six Sigma became widespread, as the U.S. struggled to compete with higher quality products from Japan in many technology-based industries, as well as autos.
The 1990s witnessed the spread of supply chain management, as companies invested in sophisticated software and other tools to link themselves more and more closely with their key suppliers. Data were shared extensively with suppliers, as companies streamlined inventories and took more costs out of their supply chains. The rise of the Internet allowed companies to link their supply chains closely to customer demand, as companies like Dell and Amazon took orders first, then organized the fulfillment of the customer’s order through their network of suppliers. This greatly facilitated the globalization of these supply chains.
What about the most recent decade just ended? While there hasn’t been much time yet to assess the many possible management innovations over the past decade, one plausible suggestion is that this past decade has been the decade of Open Innovation. In this decade, companies started to open up their research and development processes, involving customers, suppliers, universities, third parties and individuals in the innovation process. The old “Not Invented Here” syndrome that restricted the use of external ideas has been largely rejected now in most industries. We also see more companies allowing their unused internal ideas and technologies to go outside for others to use in their business. With Open Innovation, companies are innovating more with fewer internal resources, saving time, reducing risk, and identifying new markets.
One set of facts to support the rise of Open Innovation in this past decade comes from a Google search of the term “open innovation.” Henry did such a search back in 2003 when he first published the book, Open Innovation. At that time, Google returned about 200 page links, mostly of the variety “company X opened its innovation center at location Y.” In the summer of 2010, that same search yielded 13 million links, with the vast majority reflecting a new model of industrial innovation.
MANAGEMENT INNOVATIONS IN THE NEAR FUTURE
Armed with this perspective, where might management innovation go from here? Henry offer three short predictions:
First, innovation management will become more collaborative. Opening up the innovation process will not stop with the accessing of external ideas and the sharing of internal ideas. Rather, it will evolve into a more iterative, interactive process across the boundaries of companies, as communities of interested participants work together to create new innovations. Organizations like Syndicom, for example, have already established a community of spinal surgeons who meet up virtually to share effective protocols for screening patients for new therapies, and new methods and techniques to achieve better patient outcomes for those new therapies. Companies will increasingly compete on the breadth, depth, and quality of their communities that surround their activities. New technologies like agile software development will help companies interact more intensively – and more productively – with current and potential customers, elevating them to full partners in the innovation process.
Second, business model innovation will become as important as technological innovation. The business model is the predominant way a business creates value for its customers and captures some piece of that value for itself. It is generally accepted that a better business model can often beat a better technology. Yet companies that spend many millions of dollars on R&D seldom invest much money or time in exploring alternative business models to commercialize those discoveries. Not all business models are created equal, and we will learn how to design and improve business models in the coming decade.
There is an irony here. Companies that spend millions of dollars on developing new ideas and technologies often lack any process for exploring alternative business models to commercialize those new ideas and technologies. This is a situation that cannot stand indefinitely. Through devices like the business-model canvas of Alex Osterwalder, organizations are learning techniques to visualize both their current business model as well as possible alternative models.
A further imperative driving business-model innovation is the rebalancing of the global economy, with the bulk of economic growth over the next few years coming from the so-called emerging economies. Companies wishing to expand their business to the rising emerging economies will find that the business models that succeeded in the already-developed economies will not succeed in these new markets. In turn, the rise of multinational companies from the BRIC economies that successfully enter the advanced economy markets in the West with new and different business models will further advance this trend. Companies will need to learn how to manage multiple, sometimes even conflicting, business models at the same time in different parts of the world.
Third, we will need to master the art and science of innovating in services-led economies. Most of what we know about managing innovation comes from the study of products and technologies. Yet the world’s top 40 advanced economies today derive most of their GDP from services rather than products or agriculture. In order to preserve prosperity and high-wage employment in the advanced economies, we will have to learn how innovation works in services, which is likely to differ from how it works in products. If we incorporate the above two predictions as well, one can predict that the winning formula for managing innovation in the next decade will be an open-services innovation approach.
It is worth expanding upon this last prediction, which is the subject of Henry latest book, Open Services Innovation. The first step toward successful services innovation is recognizing that the customer is at the heart of service innovation. A service is an intangible – something that has value that you can’t drop on your foot. The value is the experience of the customer who receives it. Since experience is subjective by its very nature, two people may perceive the same service quite differently. Therefore, innovating in services requires different tactics than innovating products. For example, inviting the customer to participate as a co-innovator is a powerful method for business leaders to harness this subjectivity and differentiate their companies from competitors, all the while creating more value for customers. Lego reached an entirely new market of teachers when it allowed its customers to modify its Mindstorms software to manipulate its robotics for kids, and the teachers realized they could use the service to construct a curriculum to teach robotics to middle school students.
Business leaders also need to realize that since service businesses often are people-intensive, growing one profitably will require focusing on core strengths on the one hand, while providing a wide variety of choice to customers on the other. Focus and variety are often at odds with one another. The only way to do both profitably is to open up the business, turning it into a platform for others to work alongside or build on top of. Opening up the business to others allows companies to provide one-stop shopping to customers, while leveraging their core activities that comprise the structure of the platform. Amazon allows merchants to use its internal tools to build web pages on Amazon to offer merchandise to Amazon customers, who cannot tell whether the item they purchase is from Amazon (such as books) or somewhere else (such as jewelry). So Amazon focuses on its core strengths in Internet retailing, and provides a structure for many third parties to sell a wide variety of merchandise to Amazon customers, without taking on the inventory and merchandising risks of that expanded set of products.
Finally, focusing on service innovation, making customers central to the process, and opening up to other companies require embracing a good deal of internal change for most companies. This means that opening service innovation will change your business model. Open service innovation will require companies to charge customers in new ways, use different mechanisms for payment, and perhaps find additional revenue streams to support the business. Opening up to outsiders will often require sharing financial risks and rewards with them. Traditional competitors may become customers or partners in the new business model, and there may be multiple and sometimes conflicting distribution channels for one’s offerings to reach the market.
Companies that undertake services innovation are learning to tackle these challenges. IBM’s Global Services business supports competitors’ products at its customer locations, and shares technical information with competitors who support its products as well. Its services business now accounts for well over 50 percent of its revenues, and is also growing IBM’s profits. Xerox now offers to manage all of its customers’ copiers and printers, regardless of who made them. Its services business is also growing rapidly, accounting for more than 25 percent of its sales. The company recently acquired Affiliated Computer Services for $6.4 billion, which will further expand its services activities.
Innovation is constantly changing, as is the process by which new ideas and technologies get to market. Companies who rest on their laurels may do well for the moment, but it is safe to bet that the innovation process is changing, whether the company realizes it or not. The best approach is to embrace the idea that innovation will continue to change, and that organizations that seek to profit from innovation must take on the challenge of changing with it.
CASSANDRA has every reason to fear innovation. A particularly nifty piece of Greek engineering once brought doom to her family in the shape of a horse. By contrast, Henry Chesbrough, faculty director of the Garwood Centre for Corporate Innovation at Berkeley’s Haas School of Business, embraces new ideas.
His three predictions for 2014 concern areas from research and education to venture capital and Asia’s service industry, as seen below.
1. Universities will be increasingly disrupted by both new technologies and society’s demands. The advent of MOOCs (massive open online courses) will continue to challenge the fundamental architecture of the university, which bundles teaching and research into a single organisational entity. Because world class instructors are available to anyone, via the internet, pressure on the teaching portion of the university will not ease in 2014. Meanwhile, the research mission of the university will compete with the work of other providers. For example, the European Union’s Horizon 2020 funds (for research and innovation programmes) will shift from supporting basic scientific inquiry to more applied endeavours. This will seek to make a commercial or industrial impact in society. While it will take years, a major rethink of the role and structure of the university is in order.
2. Corporations will increase their presence in the venture capital world. Traditionally viewed as “dumb money” by seasoned venture capitalists, corporate venture capital (CVC) is making a surprising, sustained comeback. In certain sectors, such as renewable energy or the life sciences, CVC accounts for nearly half of the venture money being invested. This is due in part to CVC’s ability to wait patiently for startup ventures to build their businesses, and also partially because corporations are often the most likely exit for most of these ventures. Even the most skeptical private venture capital firms are seeking to partner with CVCs as a result.
3. Services innovation is coming to Asia. Whether it is Japan, looking to translate its technological prowess into new growth, China, looking to increase domestic consumption, or Korea, looking to escape the commodity trap, many leading Asian companies are starting to invest time and money in enhancing their service offerings. Even traditional manufacturing companies are finding that services provide a welcome nudge to profits, and increase customers’ satisfaction with their products as well. However, the business culture in leading Asian economies is very engineering-focused, and it will be a challenge to promote executives with deep service experience to the top levels of leading firms.
Customer-based innovation is about finding new and more profound ways to engage with customers and develop deeper relationships with them. This is the most important concept of all in terms of investment priority for the coming years. Customer-based innovation is driven strongly by the convergence of three key trends:
Total customer experience: Driven by a desire to build a deeper relationship with the customer, what used to be a business model for B2B businesses with only a limited customer base is quickly developing within other spheres. Japanese and German vehicle manufacturers (for example Lexus, Infiniti and BMW) continue to explore ways of designing an „ownership experience‟ rather than just a car, designing service and support at all touch points with the same care as they design the cars. Such skills will serve them well as we move towards electric cars and need to manage customer acceptance issues around batteries and their replacement.
Design-in emotional aspects: The second trend emerging in this space is the realization that, as technology allows manufacturers to deliver as much and often more functionality than the typical consumer can use, the bases of competition will change. Rather than compete on yet more features and functions we will see manufacturers compete even more on style, design and emotional connection, with approaches used in the luxury and fashion markets being increasingly adopted in more traditional sectors.
Social networking: The third converging trend is closely linked – the use of social networks to underpin companies‟ propositions and relationships with their customers. Increasingly this will span B2B as well as B2C: for example in recent work for a financial institution we explored how they might develop tools to allow banks to build relationships and communities within and between the finance directors of large corporate.
PROACTIVE BUSINESS MODEL INNOVATION
A business model defines how to create and capture value within a value chain, considering both operations and strategy. Business model innovation as a concept is certainly nothing new, but there is still much to be done to develop a convincing innovation management approach that is sufficiently systematic and repeatable to generate new, innovative business models.
We expect to see three key trends in successful business model innovation in the future.
Deliver “thick value”: First and foremost, consumers and stakeholders will require companies to target more the creation of “thick value”. Today business still often focuses on the creation of “thin value”, i.e. purely profit driven transactions between the organization and its stakeholders, as opposed to “thick value” which considers more lasting stakeholder value, for example increasing the resilience of stakeholders in the face of global societal and economic pressures such as climate change, demographics or energy security. As part of the business model innovation process, organizations will need to identify new types of thick value – purpose-driven stakeholder transactions – to fill un articulated needs both meaningfully and profitably
A good example is the “closed loop” approach taken by some chemical and cleantech companies:
AkzoNobel takes back “used chlorine” from its customers; Umicore helps mobile phone and car manufacturers to include the recycling of products into the overall value proposition to B2B and B2C customers. Often this leads to new business concepts, for example leasing instead of purchase.
Use modular approaches to cope with complexity: The need to be global and act local greatly increases the complexity of managing the business. We expect that companies will increasingly need to take a modular approach to business models – innovating such that different modules can be used as building blocks in a range of market environments, each supporting the overall strategy of the company.
One simple example of this is Unilever who employ the “Unilever Ladies” to distribute Unilever products to small villages.
Adapt business models to new markets: Dealing with globalization requires a more significant effort than just “copy-pasting” the existing business model in a new market. Exporting an existing business model to a new market may not be successful. There is an important need for companies to find better ways to generate innovative business models proactively to meet the needs of new markets, or to respond to new developing world competitors, such as the developing “middle segment” of China and India.
FRUGAL INNOVATION / REVERSE INNOVATION
Frugal Innovation, sometimes referred to almost interchangeably as „Reverse Innovation‟, is all about originating and developing innovations in lower-income, emerging markets, taking the needs of poor consumers as a starting point, then transferring, adapting, applying and distributing them in developed markets. This is the opposite of the traditional innovation approach, which has been to develop innovations in the higher value “knowledge economies” of the developed world, to use the emerging markets as a low-cost manufacturing resource, and sometimes to strip the product or service of unnecessary cost and functionality to enable it to compete in the emerging markets.
A good example of frugal product innovation is the hand-held electrocardiogram (ECG) machine that was invented in GE‟s Bangalore laboratory. It‟s portable, light, battery- or mains-operated, reliable, cheap (40% of a conventional ECG). ECG test costs have gone down to a level (about $1 per ECG)that many people in industrializing countries can afford. Interestingly, after India and China, the product is now also launched in the US.
Frugal innovation brings about a rethinking of the nature of innovation. Instead of “more” it is often striving for “less”, using clever technology to create masterpieces of simplification in mobile phones, computers, cars and financial services. Frugal innovation clearly is not just about innovating products, often changes in the whole supply chain are involved.
Frugal Innovation has major implications for companies:
Innovation systems rapidly have to implemented globally – you have to be where the
shifting action is
“Frugality” has to become a facet of the innovation mindset of every company (Philips‟
“Sense and Simplicity” concept is an interesting example)
More flexible and open-minded innovation approaches are needed as the “affordability”
orientation becomes more important
4. HIGH SPEED / LOW RISK INNOVATION
The drive to reduce time to market and selectively increase the speed of product cycles shows no sign of slowing over the next 10 years. One aspect that is set to become increasingly critical is the importance of getting to market not just fast, but also accurately and with no flaws. Due to the rise in global brands and the arrival of vivid, uncontrolled, ubiquitous mass communication, there is the potential for immense destruction of shareholder value from any flaw in product or service. We therefore expect to see further development of approaches and tools to drive fast, de-risked product and service innovation.
Here are some examples:
Trial and experiment: We expect to see ever-increasing use of the trial and the experiment, starting already in the functional specification phase. At the „fuzzy front end‟ this will be through increasing use of virtual prototyping and immersive 3-D visualization software to develop both products and services. Lead customers will become ever more involved. Simultaneously we will see „open innovation‟ become more sophisticated as lead customers become accepted as part of service and product delivery. Google and Microsoft are but two examples of organisations that have already embraced this.Global 24/7 product/service development: Simultaneously we will see the maturation of a trend
towards truly global innovation management teams. This will be supported by the continuing development of product design, management and prototyping tools. Global teams with virtual organisations will allow 24/7 development in pursuit of speed. More importantly they will allow a wider range of cultures and perspectives to be brought to bear in product creation. This will be vital as global platform products are customized for local success, marking the shift of the locus of power from developed economies to the emerging economies.
Gradual product rollouts: We expect to see less dramatic big launches and more of a continuing roll-out when new products and services are released to their markets. Microsoft‟s gradual launch of Office 2010 which progressed through beta trials and early versions that could be later upgraded to full versions was an example of this in practice. The approach reduces risk, both for the manufacturer and the user and will become crucial as systems become ever more complex and interrelated. Integrated Innovation is all about taking innovation approaches that were once the domain of New Product Development (NPD) only – such as idea management, stage gates and portfolio optimization – and applying them consistently as an integral part of business strategy to achieve not only growth but also competitiveness.
We expect this to be a key focus over the next decade: our survey revealed that the proportion of CTO/CIOs who rate “integration of innovation into business strategy” and “seamless cross-functional innovation processes” High or Very High went up from some 30% over the last decade to around 90% for the coming decade, one of the highest increases in the survey.
There are several factors driving this integration. First, companies are increasingly adopting team-based approaches to combine resources across
traditional functional divisions such as Marketing, R&D and Manufacturing. This enables them to respond better to the ongoing blurring of product and service, ever closer customer involvement and the need for ever faster responsiveness.
Second, we expect that businesses will increasingly need to look towards more radical innovation in order to stay ahead of the pack: for example in our survey, CTOs expected the proportion of innovative new products in adjacent and new business areas to be nearly 3x as big as it was in the last decade:Such an increase would have fundamental consequences for the nature of innovation management, for example in the way that companies organize themselves to manage and assimilate such a rapidly growing portfolio of new products, services and businesses, often in untried markets and exposed to much greater risk.
Third, there is great scope for improvement in the application of formal innovation management approaches outside the realm of NPD. Business leaders are getting better at understanding innovation tools and techniques. Innovation, like other disciplines, is going through a maturity cycle. Approaches that were the realm of the specialist 10 years ago, such as idea management or strategic portfolio management, have become mainstream. The new challenges lie in how to apply these approaches effectively across the rest of the business.
In summary we see the following aspects of Integrated Innovation as being important for the future: Innovation integral to business strategy: Many companies already claim innovation as being integral to business strategy, but struggle to explain exactly how this happens – more post-event justification than reality. As innovation tools, including especially radical innovation tools, become more embedded throughout the organization, we expect that leading companies will become much better at applying them more purposefully and effectively in a corporate strategy context
Systematic non-NPD innovation: This means greater and more consistent application of formal innovation tools and approaches to improve the effectiveness of proactive innovation in non-NPD areas such as management processes, manufacturing operations, business models, supply chain and sustainability. This will also include greater application of innovation management tools for cost reduction and competitiveness improvement: for example in our survey, in the next 10 years CTO/CIOs expected innovation to yield nearly double the equivalent reduction in unit costs achieved in the last 10 years.
Embedded innovation process ownership: We expect to see ownership of the innovation process shifting increasingly outside the Technology and R&D functions, ultimately becoming fully embedded in other business functions. We expect to see innovation performance being measured more explicitly across these functions, somewhat analogous to the way Quality management has evolved.
Radical/disruptive innovation: There will be a need for increasing proficiency and effectiveness in applying techniques to focus especially on radical innovation and new growth opportunities in adjacent or completely new business areas. This will entail finding ways to integrate innovation disciplines even further into business strategy.The next decade is set to be even tougher than the last in terms of the need for innovation, something the vast majority of global executives recognise. To stay competitive companies are going to have to up their game, especially in terms of innovation in adjacent/new business areas, and in managing the complexity of truly global, decentralized innovation resources:New technology-based business development and venturing: This will take an ever-increasing proportion of their efforts, as companies strive to grow and maintain competitiveness through building products and services in adjacent and new business areas
Innovation process management: Companies will need to find new ways to manage their innovation process. The new processes will need to connect much more intimately with customers, to enable application of innovation holistically across the whole of the business, to increase speed to market, to enable development of new business models and to encourage new dimensions such as frugal innovation across a global innovation network
Knowledge management: Complexity, integration, speed and globalization all mean that excellence in knowledge management, including sources external to the company, is going to be more crucial than ever in the next decade.
Orchestrating decentralized competence centres: Companies‟ investments in Innovation are becoming more and more global, primarily for companies in developed countries. Asia has seen by far the largest inflow of R&D investments from 13% in 2002 to 19% in 2007 of total world R&D expenditure, according to the UNESCO institute for statistics.