Chapter 11. Globalizing Network-Centric Innovation: The Dragon and the Tiger
Perhaps no company has played a more important role in making the world a smaller place than the Boeing Company. Ever since the launch of the Boeing 707 long-haul commercial aircraft in 1958, followed by the legendary Boeing 747 in 1970, Boeing has enabled business travelers to crisscross the globe to conduct global business. Boeing has customers in 145 countries, and despite the recent gains made by Airbus, over 75% of the commercial aircraft in service today were manufactured by Boeing.
Paradoxically, while Boeing aircraft fly around the world, until recently, they were designed very close to Seattle. With the exception of a few selected Japanese and European partners, Boeing did much of the design and engineering for its aircraft in-house. Emerging economies hardly showed up on Boeing’s radar as sources of engineering and research talent. But this situation began to change when the airline industry went into a tailspin following the events of September 11, 2001. Boeing’s sales crashed, and it was forced to cut costs. To reduce development costs, Boeing began to move some low-level engineering tasks like validation, verification, and testing to low-cost geographic areas like India.
With the 787 Dreamliner project, Boeing has made dramatic strides in taking its innovation process global and tapping into talent from emerging economies. Boeing is now involving Indian IT firms in end-to-end system design work—from systems requirements definition, design, testing, certification, and support. In a landmark agreement signed in early 2005 with Boeing, HCL Technologies, an Indian IT and engineering services company, was selected to provide diverse technologies for the various 787 avionics systems including the Airborne Collision Avoidance system, display systems, crew alerting systems, proximity warning systems, ground-based software tools, and the auxiliary power unit. Boeing has also partnered with the Indian Institute of Science, Bangalore, to conduct research in aerospace materials, structures, and manufacturing technologies. These partnerships are not about cost-cutting and they do not involve low-skilled jobs. They are partnerships to drive innovation, and they demand very highly skilled engineers and aerospace scientists.
So far in this book, we have focused on the search for creativity outside the boundaries of the firm. But, as the Boeing example suggests, the Global Brain also transcends the boundaries of geography. In particular, there is vast untapped brain power in the emerging BRIC economies of Brazil, Russia, India, and China. As recently as a decade or so ago, geographical barriers prevented firms operating in the United States and Western Europe from reaching out to the global talent pool in countries such as India, China, and Russia. In recent years, advances in Internet and communications technologies have dramatically changed this picture. The Global Brain can now be accessed effortlessly over a wire halfway across the world.
In the words of Tom Friedman, the best-selling author and the leading chronicler of globalization, we now live in a “flat world”—an interconnected world where the competitive playing field is being leveled with the advances of information technology, bringing emerging economies like India and China onto the world stage.1 Although one can get carried away by the breathless hype of journalists and analysts about the rise of emerging economies, there is no doubt that network-centric innovation is rapidly becoming a global phenomenon. More importantly, companies in the emerging economies have the potential to play important roles in such global network-centric innovation initiatives.
What are the trends driving the globalization of innovation? What types of partners can firms tap into as they seek to globalize their innovation efforts? What are the opportunities for companies in countries such as India and China to participate in the various forms of global network-centric innovation? How should companies prepare for such global innovation opportunities? These are the questions that we consider in this chapter.
The Dragon and the Tiger: Rise of China and India
Almost 40% of the world’s population lives in China and India. This fact has two important implications for global commerce. On the demand side, these countries are swiftly becoming the most important markets in the world for a wide range of products and services. On the supply side, these countries have already become the most important source for technical and scientific talent. Let’s look at these trends in turn.
Consumerism in the Emerging Economies: The MASS Class
An important hallmark of any rapidly developing economy is its prodigious appetite for consumer products and services. Consumerism has taken on new dimensions in most of the emerging economies, particularly in India and China. Indeed, it has led to the emergence of a new class of consumer that has been termed the MASS class: “the hundreds of millions of global consumers who are now unified in their quest for the best deals on offer on a global scale in virtually each B2C category.”2 How big is this MASS class? Consider some statistics.
It is projected that by 2015 more than 800 million people in the BRIC countries will have an annual income that is above $3,000 and by 2025, approximately 200 million will have an annual income above $15,000. Such projections imply a massive surge in demand for all types of consumer products—basic goods such as refrigerators, air conditioners, cell phones, and TV sets as well as higher-priced branded and luxury products ranging from Mercedes cars to Armani clothes and gold jewelry.
This consumer demand is already evident. In 2006, India’s middle-income group was pegged at approximately 260 million, representing about 25% of the overall population. This number is expected to grow to 628 million by 2015. This middle class is largely responsible for the current $450 billion Indian consumer goods market (approximately 65% of the total GDP).
An important part of the Indian consumer class is the young and educated population—people less than 30 years of age and working in knowledge-intensive sectors such as information technology (IT) and business process outsourcing (BPO). These young and educated workers earning an average of $600 a month—a relatively high income in India—might form the driving force of consumerism in India. With around 2 million of these people spending more than a billion and half dollars every month, the demand for offerings ranging from designer jeans and cosmetics to computers and cars have increased exponentially.
This surging demand for consumer products in the emerging economies has created important market opportunities for foreign companies. One company that understands the implications of the expanding consumerism of the BRIC countries is Ikea, the Swedish furniture giant. The company has opened mega stores in countries such as China and Russia. In China itself, the company expects to have a total of 10 new stores by 2010—in Beijing, Guangdong, and Shanghai’s Pudong New District.
In many of these emerging economies, people are also hungry for information, creating new opportunities for Western media companies, too. For example, the Iowa-based media conglomerate Meredith Corp. launched an India edition of its best-selling women’s magazine, Better Homes and Gardens, in early 2007. Similarly, Conde Nast Publications Inc., the New York-based media giant, has decided to publish an Indian edition of Vogue magazine.
The emergence of the MASS class thus implies new market opportunities for multinational consumer companies, such as Ikea, P&G, and J&J—also calling for the creation of new innovative offerings tailored to these markets. However, this demand for innovation—driven by the consumerism of the BRIC countries—also has a flip side. The rapidly expanding base of quality- and trend-conscious consumers in India, China, and Russia also presents another opportunity for companies, one that is directly related to network-centric innovation. Specifically, the emerging MASS class represents a large and growing pool of innovators whose creativity and talent is waiting to be tapped.
Deep Technological and Scientific Talent
The emerging economies, particularly in India, China, and Russia, have also become a deep reservoir of technological and scientific expertise in fields such as computer science, mathematics, biotechnology, medicine, and environmental science.
Many of the Western economies are facing the effects of an older and shrinking workforce—a rapidly depleting pool of scientists and technologists. On the other hand, in countries such as India and China, the number of graduates in technical and engineering programs continues to expand exponentially.
Consider some numbers to put things in perspective. India has 270 universities and several world-class engineering and research institutions. In 2005, India produced 220,000 engineers with four-year degrees, and 195,000 engineers with three-year diplomas. In China, the annual output of engineering institutions is close to 640,000 graduates (of which approximately 350,000 are from bachelor-level degree programs and the remainder from associate-equivalent programs). By comparison, U.S. institutions graduate only about 70,000 engineering students annually and European Union institutions together graduate approximately 100,000 students.3,4
It is, thus, now widely acknowledged that the balance of the global labor supply has shifted to the emerging economies. In the future, this shift is likely to become even more skewed. For example, it has been projected that 97% of the 438 million people to be added to the global workforce by 2050 will come from developing countries.5 Consequently, the competition for such global talent has become more intense—as Western multinationals as well as indigenous companies in these emerging economies try to tap into these new sources of talent.
However, it is not just the run-of-the-mill engineering or scientific talent that these countries now possess. They are also becoming the source of more specialized technological and scientific expertise. For example, Russia has an abundance of rocket scientists who are capable of doing very high-end mathematics with wide ranging applications—in financial and securities industry, software industry, and biotechnology. Russia is becoming a rich source of talent in a niche area—complex mathematics and computing. Similarly, with a rapidly growing talent base for R&D in microprocessors, India has evolved into a global center for high-end microprocessor design.
The importance of this combination of both general and niche technological and scientific talent for Western multinationals is perhaps quite evident. For example, India is already home to R&D centers of more than 125 Fortune 500 companies. However, this vast talent base also poses important opportunities for companies in these very same countries—opportunities for assuming important roles in global network-centric innovation initiatives.
Non-Profit and Non-Governmental Organizations
A third trend evident in the BRIC countries is the rapid emergence of a new type of player capable of participating in the global innovation initiatives—non-profit and non-governmental organizations.
The market openness and the embracing of global capitalism in the BRIC countries has also been accompanied by the birth of a host of non-profit and non-governmental organizations (NGOs) to champion the interests of varied stakeholders in the society. Many of the NGOs were established over the years to protest skewed regional development plans or corporate policies that negatively impact certain sections of the society and to promote sustainable development policies and initiatives. For example, NGOs’ efforts have focused on liability in the case of oil spills, child labor, violation of human rights in certain industries, food quality standards, and so on.
Over the last several years, however, many of these same NGOs have evolved and adopted a more open agenda that includes partnership with corporate entities to promote or advance mutually beneficial social and economic goals.6
For example, consider the initiatives pursued by Hewlett Packard’s Emerging Market Solutions (EMS) unit.7 The EMS team launched HP’s i-community (inclusion community) program to develop and introduce IT solutions that are particularly relevant for emerging markets and directly support social and economic development. In India, the company partnered with NGOs to support the operation of a community information center (CIC) in the remote town of Kuppam in the state of Tamil Nadu. Similarly, in South Africa, the company partnered with the International Computer Driving License (ICDL) Foundation, an NGO, to establish a training and testing center for Open Source Software at the Mogalakwena HP i-community.
Similarly, Microsoft’s partnership with the Indian NGO Pratham to diffuse computer technology in Indian villages, Nestlé’s partnership with NGOs in Peru to distribute nutritionally fortified food products to the poor, and ABN AMRO’s partnership with NGO Accion International to pursue microfinance business in Latin America all indicate how the convergence of the goals and objectives of corporate organizations and NGOs can lead to unique opportunities for value creation in the emerging economies. As the number and the diversity of the NGOs in the emerging economies increase, companies are likely to find a wider range of such partnership opportunities—partnerships that extend to network-centric innovation initiatives, too.
Emerging Economies and Network-Centric Innovation Opportunities
These trends evident in the emerging economies tell us about the valuable roles companies in these countries can play in network-centric innovation. Let us explore some of these opportunities in more detail by going through the four models of network-centric innovation.
Opportunities Related to the Orchestra Model
As we discussed in Chapter 5, “The Orchestra Model,” companies can either play a leading role (for example, platform leader) or an adaptor role in the Orchestra model. Given the highly specialized expertise and competencies evident in the companies in the emerging economies, we believe the adapter role (complementor, innovator) promises the best opportunity for these companies to participate in network-centric innovation.
Companies can leverage their capabilities in niche technology areas to make unique value contributions as a complementor to a platform-based global innovation network. HCL Technologies, a leading India-based IT services company, provides a good illustration of this role.
HCL Technologies is part of HCL Enterprise, a $2.7 billion global technology behemoth founded in 1976 as one of India’s first IT garage startups. The company has a wide range of offerings, much of it relating to software-led IT solutions, business process outsourcing, and infrastructure management. A key part of its business focuses on R&D services, particularly in the semiconductors and the telecom sectors.
Over the years, the company has acquired considerable expertise on VLSI and hardware design by working on system design solutions for vertical industries such as consumer electronics and telecom. Drawing on its unique internal expertise, the company recently decided to focus on building add-on and complementary solutions for IBM’s Power Architecture. In 2005, the company opened a Power Architecture Design Center (the first such outside IBM’s own walls) that offers System-on-Chip (SoC) solutions on the Power platform for a wide range of original equipment manufacturers (OEMs). To do this, the company sublicenses IBM’s PowerPC 405 and PowerPC 440 embedded microprocessor cores, and then builds on them to create innovative offerings tailored for specific markets. Thus, in this initiative, HCL’s focus is to play the role of a complementor—by bringing its unique technological expertise in semiconductor design to expand the reach of IBM’s Power Architecture to areas such as consumer devices and wireless networking. Such an approach that involves channeling specialized expertise to advance the innovation agenda of a platform leader is one that would be of particular appeal to companies in the emerging economies.
Similarly, many companies in countries such as India, Russia, and China have expertise in niche areas that can be effectively deployed to play the role of an innovator in the Orchestra-Integrator model of network-centric innovation. For example, in the beginning of this chapter, we described how HCL Technologies plays such a role as an innovator in Boeing’s 787 Dreamliner project by contributing software technology components.
Wipro, an Indian technology services conglomerate, offers another example of the innovator role. The company has set up a 10,000-strong Product Engineering Solutions (PES) group that offers high-end R&D services in niche areas to clients in a wide range of industries—from semiconductor and consumer electronics to automotive and medical devices. Much of its offerings relate to playing the role of an innovator by putting to use its extended engineering capabilities. For example, recently a U.S.-based gaming device vendor wanted to develop a high-performance accelerator chip as part of its next-generation product. Instead of establishing an in-house hardware team, the company tapped into Wipro’s deep expertise in VLSI design and its EagleWision design methodology that aims to reduce iterations in the design of silicon chips. The client firm integrated Wipro’s capabilities with its own proprietary architecture to define the SoC, design it, and test it. Wipro’s engineers were able to produce a zero-defect chip sample in just 15 months, thereby helping the client firm to reduce the cycle time by four to five months.8
Still another example of such an adapter role is provided by the pharmaceutical industry. Clinical trials—testing new medications for safety and efficacy in human patients to gain the required approvals from government agencies—form an important, expensive, and time-consuming phase in the development of new drugs. The potential to leverage specialized capabilities and expertise resident in countries such as India in clinical trials have attracted a host of large pharma companies. For example, Wyeth Pharmaceuticals Inc. has partnered with Accenture’s Life Sciences Center in Bangalore to enhance its clinical trials.9 A comprehensive team of India-based Accenture life sciences experts—medical doctors, PhDs, pharmacists, statisticians, and so on—work on the design, development, execution, and the reporting of clinical trials for clients like Wyeth. Similarly, SIRO Clinpham is an Indian CRO (contract research organization), established in 1996, that offers a full-suite of specialist services in clinical trials to cater to global biotechnology and pharmaceutical companies.10 It leverages its strong capabilities in clinical trials to plug into the drug development projects of large pharma companies and help them accelerate the development process as well as reduce the development costs. In the case of Wyeth, its partnership with Accenture helped the company reduce the average time to prepare clinical trial reports from six months to a few weeks—each day saved translates into a savings of about $1 million in development cost.
Opportunities Related to the Creative Bazaar Model
Rapidly increasing consumerism in the emerging economies holds two implications for companies—one very obvious and the other less obvious. First, it is very evident that the MASS class is driving the demand for innovative products and services; that is, innovative offerings that are tailored to fit the needs of the emerging markets. Second, the increasing number of knowledgeable and articulate customers in these markets also indicates the considerable potential for companies to source innovative ideas from these very same markets. This second implication might be less obvious today, but may have far-reaching significance in the future. Cost-effective innovations created in emerging economies might find a home in the markets of the developed nations. Let us examine this implication in more detail and understand the opportunities that this presents to companies.
The MASS class in countries such as India and China has attracted a horde of Western companies to these markets. However, some of the early initiatives of these firms ended up as failures that on further analysis indicate a lack of understanding of the market needs. For example, consider Kellogg’s first foray into the Indian market in 1995 with its Corn Flakes product. Despite a well-known brand name and a reasonably priced product, the results were quite disappointing. Sales were less than 20% of the initial target. What went wrong? The company overlooked a simple fact. Indians prefer hot milk in their cereal and a product made for cold milk was not very appealing. It was only when it realized this and revamped its product that Kellogg found success in the Indian market.
These and other such examples (for example, McDonald’s introduction of “Maharaja Mac,” and so on) indicate the need for companies—both foreign and domestic—to carefully understand the unique needs of these emerging markets and to innovate before trying to push products and brands that have found success elsewhere. These examples also indicate the critical importance of the vast and diverse set of customer innovators in these markets whose ideas and insights can be tapped to create the new offerings. Further, ideas sourced from such customers (and amateur inventors) might even have wider appeal to other markets.
This opportunity has important implications for large companies that might play the role of an innovation portal. For example, in India, companies such as Hindustan Lever Limited (a Unilever subsidiary in India), the Tata Group, and Reliance Industries with long-term presence and well-developed brand image in the local markets are particularly well suited to pursue such opportunities. These companies have the capabilities and the infrastructure to seek out innovative ideas and technologies from independent inventors and commercialize them for local as well as global markets.
However, as we saw in Chapter 6, “The Creative Bazaar Model,” to be an effective innovation portal, large companies need the help of smaller companies that can play the role of innovation intermediaries. Intermediaries such as idea brokers and innovation capitalists can source innovative ideas from inventor networks, mediate the interactions with large companies, and add value to the innovation process. Unlike the North American context, in the emerging economies very few such entities exist, and as such, we believe this presents a promising opportunity for small companies to play a role in network-centric innovation.
Consider Ideawicket, a New Delhi-based innovation intermediary launched in early 2007. The young company focuses on playing the role of an idea broker—it allows independent inventors to post their innovative ideas on its Web portal and then provides companies (subscribers) access to those ideas. As the inventor networks established by companies such as Ideawicket expand, the opportunities for companies to tap into such consumer creativity in the emerging economies will also grow.
Small firms that already play complementary activities in this space—market research firms, innovation consulting firms, and so on—might also be uniquely positioned to assume such intermediary roles given their knowledge of the customers in these countries. They would need to develop deeper relationships with customer networks and with amateur inventors, and as we described in detail in Chapter 6, they can gain several insights from the experience of U.S.-based innovation intermediaries such as BIG, Evergreen IP, and Ignite IP.
The promise of sourcing innovation extends beyond the consumer product sector to technology-based products, too. For example, consider the software industry in Russia. With so many small software startups and highly sophisticated talent, there are bound to be a number of innovative product and technology ideas that have not progressed due to lack of commercialization expertise and resources. Innovation intermediaries that are able to seek out such ideas and bring them to the attention of global software vendors might be able to pursue a very useful and profitable business in IP placement. Such an opportunity is not, however, limited to the software industry. Technology-based industries ranging from environmental management, energy, and telecom to medical devices and aerospace are also prime contexts for launching such IP placement businesses.
Opportunities Related to the JAM Central Model
As we noted previously, one of the hallmarks of the emerging economies is the large number of technologists and scientists in varied fields. This vast scientific resource presents numerous opportunities for community-led innovation initiatives that are focused on solving problems unique to the emerging economies. In facilitating and supporting such community-led innovation initiatives, companies as well as non-profit organizations can play a very valuable role as innovation sponsors (for example, by providing access to varied resources including computing capacity, knowledge bases, innovation tools, infrastructure, and so on).
Many of the issues that countries such as India and China face relate to providing better infrastructure to their vast population—from drinking water to health care and education. Most such issues demand unique solutions—solutions that leverage local resources and capabilities in a cost-effective manner.
Many NGOs and other such agencies are involved in addressing these challenges. However, as these entities have realized, the critical factor in addressing such challenges is not just the availability of financial or technological resources but the ingenuity and innovativeness that can be harnessed from the “community” in order to come up with novel solutions. Thus, the key task is to fashion the right environment for the community to come together and contribute toward such innovative solutions.
C.K. Prahalad’s recent work focused on the partnerships between corporate organizations and NGOs in emerging economies to develop new businesses aimed at the markets at the “bottom of the pyramid.”11 We believe NGOs and companies can extend such partnerships to network-centric innovation initiatives by sponsoring and supporting such community innovation initiatives that might have both social and economic goals.
In assuming such a role as innovation sponsor, both NGOs as well as corporate entities would need to bring unique capabilities to advance the community-based innovation agenda. NGOs can bring their extensive reach into the community that faces the particular issue and is likely to benefit from the innovation. They can also bring significant credibility to the innovation initiative, thereby appealing to and attracting the community members who are likely to contribute to the innovation. On the other hand, corporate organizations can bring particular expertise and technologies to organize and facilitate the community interactions. They can also bring capabilities that would support the development and the implementation of the innovation.
Recall the Tropical Disease Initiative (TDI) discussed in Chapter 7, “The Jam Central Model.” One of the project ideas in the TDI relates to a disease called Chagas—a human tropical parasitic disease that plagues South America. Because it is a highly localized disease and one that doesn’t have the same visibility as, say, malaria, it doesn’t attract the attention and focus of researchers worldwide. This is a situation where NGOs and corporate organizations could step in to help sponsor or support the innovation activities. For example, NGOs in countries affected by this disease (for example, Venezuela) would be well positioned to reach out to the affected communities and help close the gap between the researchers participating in the TDI and these communities. Pharmaceutical companies, on the other hand, can sponsor or champion such research initiatives by providing access to related proprietary databases or making available particular research tools or technologies.
With a diverse set of issues and challenges being taken up by such community-led innovation initiatives in the emerging economies, the opportunities for companies and NGOs to assume the role of innovation sponsor and partner with one another are also likely to be equally diverse.
Opportunities Related to the MOD Station Model
Finally, technology and innovation platforms that have been “opened” up for community-based initiatives also present unique opportunities to small companies in the emerging economies to participate as innovators in the MOD Station model of network-centric innovation.
Many small companies in these countries possess valuable expertise in one or more niche areas that are related to such technology platforms and can contribute to the innovation initiatives. For example, as you saw in Chapter 8, “The MOD (“MODification”) Station Model,” some of the innovator participants in Sun’s OpenSPARC initiative are small companies based in Europe.
Similarly, consider SugarCRM—the California-based company that offers commercial and open source solutions in the customer relationship management area. Apart from the commercial (proprietary) version of its flagship CRM solution, the company also offers an open source version (Sugar OpenSource) that depends on the contributions of the global software development community. The Sugar CRM community has grown to more than 7,000 external contributors, many of them in the emerging economies. Community members can contribute to the core open source product itself or they can contribute to the add-on modules and other extensions to the open source product. Such add-on modules and extensions enhance the reach and capabilities of the core product—for example, porting the product to other platforms and languages. Small firms (as well as individuals) in the emerging economies have been instrumental in making translation of the Sugar CRM open source product into more than 40 different languages around the world, thereby facilitating easier use of the product in countries such as India, China, Russia, and Korea. In many cases, these contributors have not only gained visibility but also attracted additional consulting and service projects from companies using the SugarCRM solutions.
Such examples indicate the potential for technology firms in countries such as India and China to plug into such global “open” innovation networks and garner global visibility and exposure that might in turn lead to other innovation opportunities with more direct economic returns.
Global Innovation Networks with “Chindia” as a Hub
In discussing globalization of network-centric innovation, our primary focus has been on understanding the specific roles and network-centric innovation opportunities for companies in the emerging economies, such as India and China. However, there is something deeper and broader at work. We are witnessing a global restructuring of research and development activities in corporations, resulting in the creation of global innovation networks. No longer is R&D geographically confined to Redmond (in the case of Microsoft), Tokyo (in the case of Sony), or Munich (in the case of Siemens). Global corporations are creating “centers of excellence” within specific geographies that take advantage of innovation-related capabilities that can be sourced locally and be relevant to local markets. These geographically distributed centers of excellence, created in collaboration with a network of local partners, can then be stitched together to create a global network of innovation.
The computer industry offers an excellent example of these global networks in action. In the laptop computer market, name-brand manufacturers such as HP, IBM, and Apple have for some time relied on global innovation networks to design (yes, design!), develop, and manufacture their products. The case of Quanta Computer illustrates how such networks evolve and operate.
Quanta Computer is a Taipei-based company, established in 1988, that specializes in the design and development of laptop/notebook computers.12 The company has a 3,500-strong in-house design and engineering team that churns out fully functioning prototypes of new laptop/notebook computer models. The objective is not to design the next radical product. Instead, the focus is on designing and developing the next version of the laptop or the notebook computer. Client firms, which include large U.S. computer vendors, chose their models from these prototypes designed by Quanta. After the model is picked by a client firm, Quanta will also manage the manufacturing and logistics activities. The company doesn’t do the manufacturing itself. Instead, it parcels out the job to a network of manufacturers, most of them based in China. By leveraging its design capabilities and by establishing and coordinating such a global innovation network, Quanta has been able to become the world’s largest original design manufacturer (ODM) for notebook computers.
Increasingly this model is emerging in other industries, too—notably, in consumer electronics, pharmaceuticals, and the automotive industry. OfficeMax, the third-largest office products retailer in the United States with annual sales of $9 billion, is a good illustration of a global innovation network in action.13 OfficeMax has embarked on an aggressive private label strategy in an effort to differentiate itself from competitors like Staples and Office Depot. Private label products command much higher margins than national brands, because the retailer does not have to pay the brand premium for national brands. Traditionally, private label products are sold primarily on price and are labeled with the retailer’s brand. OfficeMax was no exception. Most of its private label products were imitations of national brands, most were sourced from overseas suppliers who serve the entire industry, and almost all of them were labeled with the OfficeMax store name. But OfficeMax wanted to do something different. It decided to create a new brand from the ground up, and to control the entire process from inception through design and production. The way OfficeMax went about this process illustrates the power of global innovation networks.
There were three actors in the project to create OfficeMax’s first design-based private label brand, TUL—a selection of new premium Modernist design–inspired pens and dry-erase markers. OfficeMax provided the expertise in merchandising and retailing. The second actor was Gravity Tank, a Chicago-based design consulting firm that OfficeMax hired to provide the expertise in customer insights, industrial design, and brand identity. Gravity Tank conducted ethnographic research observing a variety of external office workers, talking with office managers who bought stationery supplies in bulk, and speaking to store clerks and customers alike. This research led to the insight of creating a line of writing instruments that would serve the goal of “everyday premium”—instruments that would be an expression of personality and would create the personal attachment that people felt towards very expensive fountain pens to the lower-end roller ball pens. The third set of actors was the Chinese companies who were experts at low-cost high-quality manufacturing and logistics. OfficeMax and Gravity Tank communicated the unique design and identity of the TUL line to the suppliers, who would otherwise have created look-alike pens with identical parts that they sell to all retailers, with the only difference being the retailer’s logo emblazoned on the side.
A combination of the retailing skills of OfficeMax, the design skills of Gravity Tank and the manufacturing skills of Chinese suppliers allowed OfficeMax to create a proprietary brand that has become a strong differentiator for them, because it is designed and developed by the retailer, and is available exclusively at OfficeMax stores. This example shows the power of network-centric innovation in the global context. As the OfficeMax case shows, globalizing network-centric innovation not only takes advantage of the network partners’ differential innovation capabilities and talent (as in traditional NCI), but also of their lower cost structure due to the geographic location. In effect, the model illustrates the potential for “global resource arbitrage” in network-centric innovation. The benefits of resource arbitrage can either be millions of dollars in product development savings and/or weeks and months shaved from the product development time.
As the quality, diversity, and the sophistication of R&D services available from India and China rapidly increase, we are likely to see more and more global network-centric innovation initiatives centered on service offerings. For example, by the end of 2007, fully 31% of global R&D staff will be in India and China.14 Similarly, according to a recent study by Booz Allen Hamilton and NASSCOM (India’s software industry association), India could capture as much as 25% to 30% of the world’s engineering services market, which would mean $50 billion in services related to engineering, design, and R&D.15 And China is not far behind.
All of these examples point to the incorporation of India-China (or “Chindia”16) as an important hub in global innovation networks, as well as an increasing effort to integrate the complementary R&D and engineering services from these two countries to create innovative offerings rapidly and cost effectively for the global market.
Preparing for These Global Opportunities
Many of the trends and the related opportunities that we have discussed till now are unfolding right now in these economies. The interesting question then is, how should companies prepare for such global innovation opportunities?
In Chapter 9, “Deciding Where and How to Play,” and Chapter 10, “Preparing the Organization,” we discussed in detail the various issues related to organizational preparedness for network-centric innovation. All these issues assume relevance in the globalization context, too.
Companies first need to carefully examine and decide what specific innovation role they can play in such global networks given their unique resources and capabilities. We highlighted some of the more relevant roles for companies situated in the emerging economies. Managers need to examine the appropriateness of such roles and understand the underlying issues and challenges. For example, as we discussed in Chapter 9, companies that are exploring the potential to play adaptor roles need to examine two key issues. One is determining the nature of the connection between a company’s specialized capability (that is, its contribution) and the network (or the innovation platform). The second consideration in evaluating the adapter role should be the potential to acquire additional expertise from their interactions with other network members—in other words, what is the learning opportunity? This issue is particularly important for companies in the emerging economies as participation in global network-centric innovation initiatives might pave the way for the acquisition of new capabilities and diversification of offerings.
Plugging into the global network-centric innovation initiatives requires more than just technical or engineering expertise. It also requires organizational and management capabilities that enable the company to operate effectively in the network and to appropriate the value generated. In Chapter 10, we discussed the related issues ranging from organizational culture and structure to innovation processes and technologies/tools. These issues assume relevance here, too.
For example, consider relational skills. Many of the companies in the emerging economies possess limited collaborative experience, particularly with regard to participating in large innovation networks that cross national boundaries. Mismanaging the challenges related to regional cultural issues could impede a company’s success in participating in a network-centric innovation initiative. Thus, companies need to invest considerable time and resources to develop appropriate relationship management capabilities.
Similarly, many of the smaller companies might also lack formal internal innovation management systems and processes and might be faced with steep learning curves associated with participation in large-scale collaborative technology development projects. As we discussed in earlier chapters, harmonization of the innovation processes across the network members is important and assumes greater significance when such networks are global in scope. All of these issues indicate the need to carefully identify the requisite capabilities appropriate to the role (described in detail in Chapter 10) and to develop them.
Conclusion
Much has been written in recent years about the burgeoning impact of countries such as India and China on the world economy. For example, a 2004 Goldman Sachs report17 projected that the BRIC economies’ share of world growth would rise from 20% in 2003 to more than 40% in 2025. The same report also projected that their total weight in the world economy (expressed as a share of the global market capitalization) would rise from approximately 10% in 2004 to more than 20% in 2025. Such predictions help to underline the path of rapid growth and development that these countries are on. However, what is perhaps even more evident right now is the impact of these countries on global innovation.
In this chapter, we outlined the different ways in which global network-centric innovation initiatives could incorporate the capabilities and expertise resident in the emerging economies. The specific implementation of these different innovation roles might evolve over the years as companies experiment with different business models. However, one fact remains certain—emerging economies, led by India and China, will become central players in creating global networks of innovation in coming years.