Innovation

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