Innovation

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GLOBAL INVESTOR FOCUS Innovation — 24 Source: C. K. Prahalad/Stuart Hart, 2002 Purchasing power parity (in USD) Population (in millions) > 20,000 75 – 100 > 1,500 – 20,000 1,500 – 1,750 < 1,500 4,000 At the foot of the wealth pyramid The pyramid graphically illustrates the gap in wealth and income generation opportunities. The richest sit at the top of the pyramid, with numerous income generation opportunities at their disposal. More than four billion people occupy the foot of the pyramid – people who have to survive on less than USD 2 a day.
GLOBAL INVESTOR FOCUS Innovation — 25 A new way of thinking Innovation passes not only from rich societies and their multinationals to emerging economies. Ingenious ways of thinking and doing business are increasingly flowing the other way too. This reflects a wider, global trend of greater customer influence on corporate behavior. The mass-market model that fails to differentiate between individuals is past. In developing economies, this means understanding awareness, access, affordability and availability from the perspective of the poor. C. K. Prahalad, Professor of Corporate Strategy, University of Michigan Innovation lies at the heart of value creation. The process, focus and sources of innovation and value creation are changing. We need to focus on the key drivers of innovation. I think of the emergence of a new innovation and value creation model based upon three fundamental drivers: 1. The role of the firm and the consumer is changing dramatically. This is the substance of my co-authored book “The Future of Competition: Co-Creating Unique Value with Customers.” We have long assumed the firm will always dominate the consumer because it has more information and more resources. But what we are beginning to see is that the consumer has as much access to information as the firm. Moreover, consumers are connected. Over three billion people will be connected by cell phones and PCs. They form communities based on specific interests. We must therefore make a transition to a competitive landscape where the firm no longer necessarily dominates the consumer, and where the consumer can actually affect the firm. That is true whether we look at Google or eBay or Starbucks – we can see a wide variety of businesses in which the influence of consumer communities is quite significant in terms of product development, pricing, distribution, and a host of other key aspects impacting the economics of the business. 2. The interplay between the world’s rich and poor is fundamentally changing. We have always assumed the rich will dominate the poor. But what if the poor – five billion of them – started having influence on the rich? This is the thesis of my book, “Fortune at the Bottom of the Pyramid.” The evidence is now overwhelming. India alone is adding six million new wireless subscribers per month. Can Motorola, Nokia or Samsung really afford not to be there? And do they have to build new business models to serve those markets? For some of the world’s biggest firms, this has become a key issue. If India and China together have 500 –700 million subscribers, they will have considerable influence, even in setting standards and developing next-generation applications. 3. Innovations from the developing world are becoming critical to the developed world. We have always assumed that richer nations would dictate policies and conditions to emerging ones, but that is changing. For example, several years ago, no one would have predicted that the outsourcing of technology services to the developing world would influence how large companies are run. Today, IT and IT-enabled services are provided by outsourced operations in India and the Philippines, or increasingly in China and Poland. The question poses itself: is outsourcing just cost arbitrage, or is it increasingly innovation arbitrage? Outsourcing is increasingly cost-plus-innovation arbitrage. This trend is not confined to the IT industry. The same trend is visible in the pharmaceutical industry, where generics were seen as lowly imitators, and not a strategic concern for the large pharma companies like Pfizer, Novartis, Merck and GlaxoSmithKline. But because of the level of sophistication reached in reverse engineering and doing things at such low cost, Indian pharma efforts are becoming critical for established Western pharma firms. Is this trend just confined to the outsourcing of manufacturing? Or just to those drugs that are coming off patent? Or is this a precursor to a revolution – a new way
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Innovation

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