Globalization, IT, and Innovation

Stephen DeAngelis

October 23, 2007

In a Special Report on innovation, the Economist looked at “how globalization and information technology are spurring faster innovation.” [“Revving up,” 13-19 October 2007 print edition]. The article began by discussing motorcycles manufactured in China.

“China now makes half the world’s motorcycles. But more important than the numbers produced is the way these motorcycles are made—especially the way designers, suppliers and manufacturers have organised themselves into a dynamic and entrepreneurial network. Unlike state-run firms, the city’s private-sector upstarts, such as Longxin and Zongshen, do not have big foreign partners like Honda or Suzuki with deep pockets and proven designs. So they came up with a different business model, one that was simpler and more flexible. Instead of dictating every detail of the parts they want from their suppliers, the motorcycle-makers specify only the important features, like size and weight, and let outside designers improvise. This so-called ‘localised modularisation’ approach has been very successful and delivered big cost reductions and quality improvements, says John Seely Brown, an innovation expert who used to head the legendary Xerox PARC research centre. It is one example of the sort of business-model innovation which he insists is far more radical than conventional product or process innovation.”

China’s President Hu Jintao has openly announced his intentions to make China a leader in innovation not just manufacturing. According the Economist article, China may be well on its way.

“Examples of these business-model innovations are now bubbling up from developing economies to threaten the established global giants. In a report with John Hagel, of Deloitte, a consultancy, Mr Seely Brown argues that the activity of private entrepreneurs means ‘China is rapidly emerging as the global centre of management innovation, pioneering management techniques that most US companies are struggling to understand.’ 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.”

The key, according to the article, is taking advantage of the flexibility provided by nimble supply chains and loose alliances that are made possible by new information technologies. These innovations are happening all over Asia.

“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.”

As a result of these innovative practices and processes, emerging market companies are moving up the corporate food chain. Once defined by an abundance of cheap labor, successful emerging market countries like China and India are moving beyond the “low cost country” label and rapidly becoming mainstream suppliers of innovative products and services.

“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.”

I have frequently argued, as has my colleague Tom Barnett, that connectivity makes surprising, and mostly positive, things happen. In our Development-in-a-Box™ work, we look to connect local businesses with suppliers and customers and we ensure that those connections are welcomed by stakeholders in the global economy by embedding international standards and best practices within the connection processes. The power of networks is being discovered and taken advantage of in most market sectors.

For example, “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.”

Plato noted, “A need or problem encourages creative efforts to meet the need or solve the problem.” We more often hear, “Necessity is the mother of invention.” The same is true for innovation.

“Innovation can arise out of necessity. Entrepreneurs in China must compete with privileged state firms with access to cheap credit as well as the local arms of multinationals. That makes China’s ‘third sector’, as Messrs Seely Brown and Hagel call it, extraordinarily resourceful in trying to reach global markets.”

The article points out that in India the initial drive to connect was not external but internal.

“India has been less integrated into the world economy, so many of its innovative firms have initially concentrated on reaching ‘bottom of the pyramid’ consumers. For instance, Selco, an Indian solar-energy pioneer, found that because many of its customers were living in remote areas, it had to set up local networks of trained technicians to sell, install and repair its products, and provide customers with small loans.”

In many ways, connecting internally in poor countries is more difficult than connecting externally. Networks between organizations and people are not the only networks changing the face of manufacturing. For years, for example, new aircraft have been flying networks — so called “fly by wire” airplanes. Lots of companies and their products are becoming “fly by wire” entities according to the Economist.

“The effects of the growing knowledge-component of innovation have become increasingly clear in heavy engineering. Reinhold Achatz, of Siemens, claims the German giant has undergone a hidden electronics revolution. ‘We have more software developers than Oracle or SAP, but you don’t see this because it is embedded in our trains, machine tools and factory automation,’ he says. Mr Achatz calculates that as much as 60% of his firm’s sales now involve software. Some 90% of the development in machine tools is in electronics and related hardware, and the figure is similar for cars. A BMW, he says, is ‘now actually a network of computers.’ That may seem like an exaggeration until you step into the sleek new Hydrogen 7 BMW saloon. Push the pedal to the metal on the autobahn and the car responds as every BMW should; cylinders growling enthusiastically as the ultimate driving machine races past slower vehicles. But this car is not like any other made by BMW. Press a button on the steering wheel and it seamlessly switches from burning petrol to hydrogen. The key to this advance, says Ulrich Weinmann, of BMW, is smart software. Electronics have been in cars for decades, but those were isolated ‘dumb systems’, he adds. Now cars are crammed full of networks of computers with smart software controlling and monitoring things. New BMWs can even synchronise with Apple’s iPhone, and download maps and directions from Google while you drive.”

The article concludes that the center of innovation may well move from the West to the East.

“Robert Lutz, GM‘s head of product development, says investment in and enthusiasm for clean technologies in Asia is so great that cars powered by fuel cells (squeaky-clean devices that use hydrogen to make electricity) are likely to take off in China before they do in the United States. There is reason to believe he might be right. Just as villagers in Africa and Bangladesh have gone straight from no phones to mobile phones, developing countries could leapfrog with other innovations. Developing countries already have higher levels of ‘early stage’ entrepreneurship, with more people engaged in things such as starting new ventures—often because the necessity for doing so is greater. Tim Jones of Innovaro, a European innovation consultancy, points out that Africa is about to take the lead in using mobile phones for payments and remittances, thanks to the introduction of schemes like the M-PESA money-transfer service introduced by Vodafone and Citigroup in Kenya. These allow people to send money using text messages. Some people reckon that, as the nature of innovation changes, so it is speeding up. … Many executives feel the heat is on and that they must innovate faster just to stand still. One reason is that product cycles are undeniably getting shorter. … Perhaps managers at firms everywhere should be both far-sighted and paranoid in equal measure as they scan the horizon for unexpected competitive threats. Some companies are trying to organise themselves with management techniques to face just such a disruptive future.”

As I’ve visited places that I describe as the Edges of Globalization, I have felt the vibrations of the entrepreneurial spirit thriving there. The Economist article simply confirms that opportunities exist everywhere, but in order to exploit them people and companies need to connect.