Innovation
Global Investor Focus, 02/2007 Credit Suisse
Global Investor Focus, 02/2007
Credit Suisse
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GLOBAL INVESTOR FOCUS <strong>Innovation</strong> — 25<br />
A new way of<br />
thinking<br />
<strong>Innovation</strong> passes not only from rich societies and their multinationals to emerging economies.<br />
Ingenious ways of thinking and doing business are increasingly flowing the other way too.<br />
This reflects a wider, global trend of greater customer influence on corporate behavior.<br />
The mass-market model that fails to differentiate between individuals is past. In developing<br />
economies, this means understanding awareness, access, affordability and availability<br />
from the perspective of the poor.<br />
C. K. Prahalad, Professor of Corporate Strategy, University of Michigan<br />
<strong>Innovation</strong> lies at the heart of value creation. The process, focus<br />
and sources of innovation and value creation are changing. We<br />
need to focus on the key drivers of innovation. I think of the emergence<br />
of a new innovation and value creation model based upon<br />
three fundamental drivers:<br />
1. The role of the firm and the consumer is changing dramatically.<br />
This is the substance of my co-authored book “The Future of<br />
Competition: Co-Creating Unique Value with Customers.” We have<br />
long assumed the firm will always dominate the consumer because<br />
it has more information and more resources. But what we are beginning<br />
to see is that the consumer has as much access to information<br />
as the firm. Moreover, consumers are connected. Over<br />
three billion people will be connected by cell phones and PCs. They<br />
form communities based on specific interests. We must therefore<br />
make a transition to a competitive landscape where the firm no<br />
longer necessarily dominates the consumer, and where the consumer<br />
can actually affect the firm. That is true whether we look at<br />
Google or eBay or Starbucks – we can see a wide variety of businesses<br />
in which the influence of consumer communities is quite<br />
significant in terms of product development, pricing, distribution,<br />
and a host of other key aspects impacting the economics of the<br />
business.<br />
2. The interplay between the world’s rich and poor is fundamentally<br />
changing. We have always assumed the rich will dominate<br />
the poor. But what if the poor – five billion of them – started having<br />
influence on the rich? This is the thesis of my book, “Fortune at the<br />
Bottom of the Pyramid.” The evidence is now overwhelming. India<br />
alone is adding six million new wireless subscribers per month. Can<br />
Motorola, Nokia or Samsung really afford not to be there? And do<br />
they have to build new business models to serve those markets?<br />
For some of the world’s biggest firms, this has become a key issue.<br />
If India and China together have 500 –700 million subscribers, they<br />
will have considerable influence, even in setting standards and developing<br />
next-generation applications.<br />
3. <strong>Innovation</strong>s from the developing world are becoming critical<br />
to the developed world. We have always assumed that richer nations<br />
would dictate policies and conditions to emerging ones, but<br />
that is changing. For example, several years ago, no one would<br />
have predicted that the outsourcing of technology services to the<br />
developing world would influence how large companies are run.<br />
Today, IT and IT-enabled services are provided by outsourced<br />
operations in India and the Philippines, or increasingly in China and<br />
Poland. The question poses itself: is outsourcing just cost arbitrage,<br />
or is it increasingly innovation arbitrage? Outsourcing is<br />
increasingly cost-plus-innovation arbitrage. This trend is not confined<br />
to the IT industry. The same trend is visible in the pharmaceutical<br />
industry, where generics were seen as lowly imitators, and<br />
not a strategic concern for the large pharma companies like Pfizer,<br />
Novartis, Merck and GlaxoSmithKline. But because of the level of<br />
sophistication reached in reverse engineering and doing things at<br />
such low cost, Indian pharma efforts are becoming critical for established<br />
Western pharma firms. Is this trend just confined to the<br />
outsourcing of manufacturing? Or just to those drugs that are coming<br />
off patent? Or is this a precursor to a revolution – a new way