The Economist Innovation Special Report

The Economist magazine published a long special report on innovation in its October 11, 2007 edition.

“A crisis is a terrible thing to waste.”
Vinod Khosla to Larry Page

The report divides the process of innovation into an initial, "creative" phase and an "implementation" phase, suggesting that only a few percent of the process is creativity and that more than 90 percent of the process of commercially successful corporate innovation is implementation. It also suggests that keys to successful corporate innovation strategies are:

• investigating lots of creative ideas, but weeding out the less promising ones quickly;
• stopping doing what the corporation has done (successfully) in the past and adopting a new approach when a disruptive innovation is about to occur. (Polaroid failed to recognize that digital cameras would overtake the polaroid process, and went bankrupt when it failed to abandon its film based technology in a timely fashion.)

The report suggests that globalization and the Information Revolution are making innovation occur more rapidly than in the past, and that firms need to respond to the changing environment that they face by innovating more rapidly. Thus, corporations are moving to open innovation systems; big firms are depending more on other sources of creativity and implementation, and perhaps less on their R&D labs and in-house implementation.

The report also suggests that geographical clusters are becoming less important than they were, as geographically dispersed networks become more important in the innovation process. With the Internet, networks are no longer so geographically constrained as they were. The report also suggests that total reliance on cluster development by national planners is a form of magical thinking; Germany may have wasted $20 billion investing in a biotechnology cluster which may well fail to compete with those centered in the United States.

OECD economies are now largely service oriented, and the innovations that count are often new services, new business processes, or importantly, new business models. The traditional R&D lab was of course focused on new products and new manufacturing processes. These are obviously still important, and I suspect that the R&D labs will remain important in manufacturing industries. They may, however, more often be networked with labs in start-up high tech firms, in government and in academia.

An important fact recognized in the report is that the countries that reap the economic benefits from inventions are not necessarily the countries where the inventions take place. Too much a concentration on subsidies for R&D, and too little concentration on creating conditions conducive to firms implementing innovations is probably a recipe for commercial failure. On the other hand, The Economist seems to me too focused on the business of doing business, and inadequately focused on the social and economic climate that favors creativity and acceptance of the new and different in individuals.

While the report is very interesting and illuminating, I was concerned that it may not adequately recognize the differences among industries. Certainly the report suggests that, since the manufacture of cell phones and of automobiles now involves a lot of software and computer chips, firms in these industries are ripe for disruptive change. But I would suggest that the aircraft industry, the heavy equipment manufacturers, the pharmaceutical industry, and the software industry all have unique characteristics (reflected in their attitudes towards the protection of intellectual property) which call for different innovation strategies.

A couple of quotations suggest the changes that are coming:

The emergence of Asian world-beaters exemplifies the two forces driving innovation. Globalisation and the spread of information technology allow the creation of unexpected and disruptive business models, like the one used by Chongqing's motorcycle-makers. Other examples include the design networks established by Taiwanese contract-producers in the textile industry. Groups of innovative just-in-time suppliers abound in Asia, feeding Western fashion and consumer-goods companies. They are often managed by supply-chain experts, like Hong Kong's Li & Fung. Unlike Japan's keiretsu, which bound companies and their suppliers together with interlocking shareholdings, these firms are free to leave their alliances. They stay together only if they continue to learn and profit from the experience. In some ways they resemble the nimble networks of firms that underpinned Silicon Valley's success.

Low labour costs may have given such firms a head start, but that is a transitory advantage. India's software innovators were once sniffed at as merely low-cost offshoring and back-office operations. But firms like Infosys, Wipro and Tata Consultancy Services (TCS) have become world leaders in business-software services. S. Ramadorai, TCS's chief executive, says his firm sees “innovation as a key enabler of its productivity edge”. He points out that his firm has been investing in R&D for 25 years and holds several dozen patents and copyrights. Navi Radjou of Forrester Research, a technology consultancy, applauds TCS's “global innovation ecosystem” which brings together academic labs, start-ups, venture-capital firms, large independent software firms and some of its most important customers.

Innovation is also changing the pharmaceuticals industry. Small biotechnology firms, using networked approaches, are getting ahead of Big Pharma. This too opens the way for Asian competitors, like Ranbaxy and Dr Reddy's Laboratories. These firms were once copycats, trampling on Western patents to make cheap generic versions of drugs. But increasingly they are shifting to process innovation and even new drug discovery.

And:

OHN KAO is an innovation guru described as “Mr Creativity” by this newspaper a decade ago. Now he is concerned about America losing its global lead and becoming “the fat, complacent Detroit of nations”. In his new book, “Innovation Nation”, he points to warning signs, such as America's underinvestment in physical infrastructure, its slow start on broadband, its pitiful public schools and its frostiness toward immigrants since September 11th 2001—even though immigrants provided much of America's creativity. The rise of Asia's innovators is a “silent Sputnik”, he argues, invoking a cold war analogy. What America needs, he reckons, is a big push by federal government to promote innovation, akin to the Apollo space project that put a man on the moon.