Where Innovation Runs Deep

There is no more exciting subject in management today than innovation. How do companies generate new ideas? How do they turn those ideas into products? And how do they do this not just once but a dozen times? These are the questions that keep management thinkers up at night.

One reason for this interest in innovation is obvious. Companies that can out-innovate their competitors can delight their customers and conquer new markets. The other reason is more subtle. Innovation is itself being innovated. The old model of innovation is being turned upside down. The most interesting new ideas on innovation are coming from the most unexpected places.

The old model of innovation was based on four assumptions. The first is that innovation is a Western prerogative. Western companies cook up new ideas in their laboratories at home and then export them to the developing world. The second is that innovation is primarily a matter of technological breakthroughs — blue-sky ideas that are embodied in revolutionary new products. The third is that innovation is the business of the private sector rather than the public sector or the voluntary sector: private industry thinks up new ideas and everybody else simply imitates them. The fourth assumption is that innovation is a matter of inspiration rather than perspiration: the primary business of innovators is to allow a thousand flowers to bloom.

It would be too much to claim that a new model of innovation is emerging — we are witnessing the emergence of dozens of competing models rather than a single new paradigm. But every one of the basic tenets has been vigorously challenged in recent years.

1. Innovation is coming from the rest as well as the West. Western multinationals are increasingly willing to do research and development in emerging markets. Developing-world multinationals are moving up the value chain and becoming innovators in their own right; there is no reason to think that the next big information technology breakthrough will come from I.B.M. rather than Infosys Technologies of India.

2. Innovation is no longer focused on technological breakthroughs. The cutting edge of innovation at the moment is frugal innovation. The emphasis is on reducing costs radically by stripping out nonessential functions — making products “thinner” rather than “fatter.”

3. The nonprofit sector is coming up with valuable ideas about how to improve business models. It is also pioneering new ideas in motivating workers (particularly younger workers) and doing more with less. Even the public sector is coming up with new ideas, thanks to the imperative of budget cuts.

4. Management gurus are paying more attention to the perspiration side of the equation. This is reintroducing a set of characters that were almost written out of the innovation script during what might be called the Google era of innovation: old-fashioned big companies.

In brief, innovation is becoming polycentric. Not so long ago, anybody who was interested in innovation focused on Silicon Valley. Gary Hamel wrote about building “Silicon Valley inside.” A dozen management books tried to divine the secrets of Google’s success. Today, the new frontiers of innovation are being staked out in lots of different places and lots of different forms — in Shanghai as well as San Jose, Calif., in the Red Cross as well as Google, in Mercedes-Benz USA as well as the latest computer startup.

The Globalization of Innovation

American and European politicians should all be given a compulsory tour of Electronic City on the outskirts of Bangalore, India, in order to have complacency beaten out of them. Electronic City contains a vast array of corporate buildings — some bearing the logos of familiar giants, such as General Electric and I.B.M., and others bearing the logos of emerging world giants, such as Wipro IT Business and Infosys. Bangalore’s Electronic City is one of hundreds of electronics cities that have sprung up across the developing world. These hundreds of electronics cities contain thousands upon thousands of researchers who are all trying to come up with the next great innovation.

The emerging world has gone into the business of producing global companies. There are now 14,000 multinationals based in the emerging world, according to the United Nations Conference on Trade and Development’s World Investment Report. The best of these companies — such as Infosys and Embraer in Brazil — are becoming global giants. They are snapping up Western companies: in 2007-8 Tata Steel purchased Corus Group, an Anglo-Dutch company, for $12 billion; Hindalco Industries bought Novelis, a Canadian aluminium maker, for $6 billion; and Tata Motors bought Jaguar Land Rover from the Ford Motor Company for $2 billion. And these companies are becoming leaders in innovation as well as cost reduction. They are no longer content to let Western companies define the future. Instead, they are investing in research and development and pioneering new ideas. Huawei Technologies, a Chinese telecommunications giant, is currently the fourth largest patent applicant in the world.

Western multinationals are also moving some of their most sophisticated work to emerging markets. Companies on the Fortune 500 Global list have established 98 research and development facilities in China and 63 in India. GE Healthcare has spent more than $500 million in the past few years building a 55,000 square foot research and development center in Bangalore, the biggest it has anywhere in the world. Cisco Systems is spending more than $1 billion to establish a second global headquarters —Cisco Globalisation Centre East — in Bangalore. Microsoft’s research and development center in Beijing is the company’s largest outside of its headquarters in Redmond, Wash. I.B.M. now employs more people in India than in America, and Accenture has a quarter of its work force in India.

The emerging world is rapidly catching up with the developed world in terms of classic innovation. The developed world’s share of global research and development spending shrank from 83 percent in 2002 to 76 percent in 2007, according to a recent Unesco report on research and development. The proportion of researchers in developing countries increased from 30 percent in 2002 to 38 percent in 2007. And the proportion of scientific papers published in the developing world increased from 16 percent to 25 percent. China is on the verge of overtaking Europe and the United States as home to the world’s largest number of scientific researchers.

Dramatic as all this may be, something even more interesting is going on: The emerging world is catching up with the developed world in terms of management innovations as well as research and development. Companies that are based in the developing world are producing innovative solutions to local problems such as weak institutions and primitive infrastructure. They are creatively taking advantage of local opportunities, such as the abundance of young workers and the richness of indigenous culture. And they are grappling with the management problems created by breakneck growth.

They are reinventing classic business models. Some companies have taken outsourcing to new lengths. Bharti Airtel, an Indian mobile company that charges some of the lowest fees in the business but is worth $30 billion, has contracted out everything but its core business of selling phone calls, handing over network operations to Ericsson, business support to I.B.M. and the management of its transmission towers to a third independent company. Natura Cosméticos, a Brazilian cosmetics giant, has come up with the idea of “lean R&D.” The company releases about 150 new products a year. About 40 percent of the company’s revenues are derived from products that were introduced within the past two years. But the company only has about 150 staff members in its research and development department. By comparison, L’Oréal has 3,000. Natura Cosméticos’s trick is to form numerous partnerships with universities in the United States and France and to scour the world for products that it can license.

Some companies have applied classic business models to new problems. Infosys, a giant in information technology, has applied mass production techniques to education and training. The company has grown from about 10,000 employees in 2000 to more than 100,000 today. It has also become such a legend in India that it attracts more than one million applicants a year. The company has responded to this by introducing a mixture of mass production and just-in-time techniques to recruiting. It sifts through its million applicants for people who are educable rather than people who are well trained. But it also sends its workers to regular training courses in order to upgrade their skills. Devi Shetty, founder of the Narayana Hrudayalaya hospital in Bangalore, happily boasts that he is the Henry Ford of heart surgery. He believes that a combination of economies of scale and specialization can radically reduce the cost of heart surgery. He breaks down work into its component parts, gives as much as possible to assistants and makes sure that heart surgeons concentrate only on their core expertise. His flagship hospital has 1,000 beds (versus an average of 160 beds in American heart hospitals), and Dr. Shetty and his team of 40-odd cardiologists perform about 600 operations per week.

Some companies are turning classic business nostrums on their head. Vineet Nayar, the CEO of HCL Technologies, a software company in India, has made the phrase “employees first, customers second” his mantra. He believes that HCL’s future lies in providing highly customized solutions for clients rather than identikit solutions. To do so, he has focused on attracting high-quality workers and giving them as much autonomy as possible. Employees can submit electronic “tickets” on what needs to be fixed with the company (even if what needs to be fixed is their bonuses). He has introduced 360-degree feedback for the entire senior management team, even going so far as to post his own evaluation on the Web. He argues that his mission in life is to “destroy the office of the CEO.” In his view, the classic corporate hierarchy should point downward to the frontline workers (who do the real business with clients) rather than upward to the boss.

The emerging world has also come up with a radically new form of innovation that has variously been called “reverse,” “frugal” or “Gandhian” innovation. The makers of “Mad Men,” a hit television show about life in Madison Avenue’s advertising industry in the 1960s, go to extraordinary lengths to make sure that every prop that they use — every cocktail glass and every kitchen appliance — is completely in keeping with the period. In so doing, they have produced an interesting essay on innovation. These props usually have one thing in common: They are based on the idea that more is better. The cars have elaborate tail fins. The kitchen appliances have an embarrassment of buttons. Makeup cases contain a hundred different shades of lipstick.

For decades, product innovation was about the art of addition. Companies competed to add functions to their gadgets (e.g., cameras to phones or scanners to copiers) or flourishes to their designs. In the emerging world, product innovation is increasingly about subtraction. Companies are competing to produce the simplest product for the lowest price, preserving the essential value of a product, but removing all the unnecessary bells and whistles.

The best-known example of frugal innovation is the Nano, Tata Motors’ $3,000 car. But there are a growing number of other examples. General Electric has produced a $400 electrocardiogram. Tata Consultancy Services and Tata Chemicals have cooperated on a $30 water purification device. Godrej & Boyce, one of India’s oldest industrial groups, has developed a $70 refrigerator, called “the little cool,” that runs on batteries. FirstEnergy, a startup also in India, has invented a wood-burning stove that consumes less energy and produces less smoke than regular stoves. Anurag Gupta, a telecommunications entrepreneur, has reduced a bank branch to its essence — a smartphone and a fingerprint scanner — so that banks can take ATM’s to rural customers.

The most eye-catching feature of these devices is their price. But reverse innovation is more than a matter of cost. GE’s electrocardiogram is a masterpiece of simplification and compression. All those confusing buttons on conventional ECG machines have been reduced to just four. The fancy printer has been replaced by a tiny printer of the kind that bus conductors use to issue tickets. The device is robust enough to use in challenging environments. It’s also simple enough for people with rudimentary medical training to use.

Frugal innovation involves more than just redesigning products. It involves redesigning entire production processes and business models in order to squeeze out costs. Companies are using new technology in imaginative new ways. Dozens of Indian companies are using mobile phones to bring sophisticated services to rural Indians. Companies are also shifting their emphasis from price to volume. Frugal products thus lead to a cascade of business innovations. The more you can squeeze out costs, the more you can reach cash-strapped consumers. And the more cash-strapped consumers you can reach, the more you can justify your paper-thin profit margins.

High-end and low-end innovations frequently go hand in hand. Companies that are based in the emerging world are now producing a growing number of classic breakthrough innovations. Kenya is a world leader in mobile money — using mobile phones to make payments. Asia leads the world in video games. Microsoft’s research laboratory in Beijing has produced clever programs that allow computers to recognize handwriting or morph photographs into cartoons.

The Pupil Becomes Teacher

In his later years, Peter Drucker was increasingly vocal about the lessons that the nonprofit sector could teach the commercial sector. Nonprofits had become enthusiastic students of profit-making businesses, sending their most important figures to business schools and employing CEOs from the private sector. But Drucker believed that the traffic should not be one way. Nonprofit organizations, such as the Girl Scouts (with which he had a particularly close relationship), had plenty to teach profit-making organizations about everything from generating a sense of common purpose to attracting and motivating workers. “Managing the knowledge worker for productivity is the challenge ahead for American management,” Drucker said. “The nonprofits are showing us how to do that.”

For years Drucker was, in this area at least, a prophet without honor. But today, his wisdom is becoming ever more apparent. Nonprofits are becoming ever more innovative, even down to their recent habit of calling themselves “social enterprises.” At the same time, profit-making businesses are becoming ever more focused on areas that nonprofits have made their own. How do you turn companies into communities of meaning as well as units of production? How do you motivate members of Generation X? And how do you keep people happy when it is becoming harder to give them material rewards?

Business schools have discovered the wisdom of nonprofits: Harvard Business School teaches case studies on Willow Creek Community Church, an evangelical church near Chicago, as well as on several other nonprofits. And a new generation of social entrepreneurs is producing general management lessons from the nonprofit sector: “The Power of Unreasonable People” by John Elkington and Pamela Hartigan, and “Zilch” by Nancy Lublin are cases in point.

Social entrepreneurs have produced innovative ideas in several areas. The most obvious is in doing more with less. Habitat for Humanity International, which builds cheap homes, and Make-A-Wish Foundation of America, which helps fulfill the dreams of terminally ill people, have turned themselves into global brand names without spending any money on advertising. Wikipedia is one of the world’s best known brands despite having an annual budget of only $5 million. Lublin herself built Dress for Success Worldwide with an unexpected inheritance of $5,000. Nonprofits are experts at eliminating unnecessary levels of management; nonprofit bosses almost always eschew the trappings of power, get their hands dirty along with the lowest-level workers and lead by example.

But there are plenty of other areas where they excel. They are experts at motivation. Some social enterprises, such as Wikipedia and Mozilla, do not pay their work forces anything. Most only pay a pittance. They are better than anyone in the private sector at motivating members of Generation X, who account for a disproportionately large share of their workers. They are experts at building relationships — at creating the elusive stickiness that profit-making companies crave. Social enterprises say, “Thank you,” not once but a dozen times; they transform brief meetings into long-term relationships; and they keep their supporters updated with newsletters and get-togethers.

Nonprofits are also producing a new business form — hybrids that combine elements of nonprofits and profit-making organizations. And the more nonprofits move into profit-making enterprises’ territory, the more profit-making enterprises are forming alliances with nonprofits. Uniliver has struck an alliance with the World Health Organization in the developing world to teach people the importance of washing their hands, for example.

Even the public sector is climbing onto the innovation bandwagon. Politicians have long paid lip service to the idea of transforming the public sector: remember former U.S. Vice President Al Gore’s drive to “reinvent government” or former British Prime Minister Tony Blair’s fascination with applying private-sector management techniques to the public sector. But the reinventing government movement has been kicked into a much higher gear by the simple fact that governments, particularly in the West, are running out of money.

Cash-strapped governments are thinking the unthinkable, redesigning welfare systems that were formed in the very different circumstances of the 1940s. The new British coalition government is proving particularly creative. David Cameron, the prime minister, has argued forcefully that the best way to solve Britain’s problems in an age of austerity is for “big society” entrepreneurs to take over many of the functions of government. He has urged public-sector workers to establish self-governing co-ops, on the model of John Lewis, a successful department store that is owned by its employees, to provide everything from probation services to tax collection. Michael Gove, the secretary of state for education, is trying to deregulate the schools, allowing parents to create publicly funded schools, on the model of Swedish free schools. Iain Duncan Smith, secretary of state for work and pensions, is trying to reform a welfare state that makes it more sensible for millions of Britons to claim unemployment assistance than to work, thanks to a tangle of means-tested tax credits, housing benefits and entitlements. (For the past 10 years, 1.4 million Britons have been unemployed, despite the fact that more than 5 million jobs were created during that period.) Duncan Smith plans to roll many existing welfare payments into a single universal credit while changing the rate at which benefits are withdrawn from people who find a job. Britain under Cameron is set to become a model for government innovation, just as it did under Margaret Thatcher 30 years ago.

From Inspiration to Perspiration

The final change in innovation is a change in focus — from inspiration to perspiration, or from ideas to execution. Innovation gurus have tended to focus on the supply side of innovation. This approach comes with the seal of approval of some of the world’s most creative companies. 3M, the maker of Post-It notes, expects its workers to spend 15 percent of their time on their own projects. Google expects its work force to spend 20 percent of its time on individual projects. This strategy is also attractively democratic: Giving people a chance to be innovators makes them feel special.

But this approach can lead to a great deal of waste. It results in the overproduction of ideas that never have a chance of being implemented. It also spreads resources thinly and indiscriminately. Companies dissolve into a thousand small initiatives rather than focusing on a few big problems. The result is a new fashion for focusing as much on perspiration as innovation.

Vijay Govindarajan and Christopher R. Trimble, faculty members at the Tuck School of Business at Dartmouth College, have long argued that companies should think harder about execution. As two of the prophets of frugal innovation, they wrote a pathbreaking article on the subject with Jeffrey R. Immelt, CEO of General Electric. Now, Govindarajan and Trimble have produced a book on the subject, “The Other Side of Innovation: Solving the Execution Challenge,” (Harvard Business School Publishing, 2010).

Govindarajan and Trimble argue that companies need to start by recognizing that innovation is unnatural. Established businesses are based on the principles of efficiency and predictability. But efficiency and predictability are incompatible with innovation. The authors say that companies need to build dedicated innovation machines that are free to recruit people from outside. This is necessary to counter the fact that big companies tend to attract people who are prone to adopt a company’s culture rather than be rule breakers. These innovation hubs also need to be free from some of the metrics that prevail in the rest of the company. But they must avoid becoming isolated. They need to be carefully integrated with the rest of the company: They must share some staff from the outset, for example, and they must tap into the wider company’s resources as they turn ideas into products. And they need to be tightly managed according to customized rather than generic rules.

Govindarajan’s and Trimble’s work is of particular interest because of its focus on big companies. The authors do not simply argue that big companies are just as capable of innovation as smaller ones if they are properly managed. They also say that big companies may be more capable because they bring extraordinary resources to the table. They can devote more resources to producing new products, and they can put more marketing muscle behind these products. The authors provide examples of striking innovations from some of the world’s biggest companies over the past decade: Harley-Davidson USA, which learned how to market to nonbikers; BMW, which learned how to design braking systems for electric cars; and Allstate, which made insurance more consumer friendly.

Following Multiple Paths

These ideas do not add up to a new paradigm. Sometimes they fit together nicely — GE is one of the masters of frugal innovation in India and China. Sometimes they do not fit together at all — it will be a long time before GE can instill the spirit of a voluntary organization in its work force. Nor do these new ideas mean that old ones are discredited: Silicon Valley will continue to account for a disproportionately large share of innovations. But innovation has undoubtedly put on lots of new faces in recent years. This is surely a wonderful development. Linus Pauling once said, “The best way to have a good idea is to have lots of ideas.” Those intent on nurturing breakthroughs should consider this corollary: The best way to have a successful innovation strategy is to have lots of them.

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Adrian Wooldridge is co-author of several books and is the management editor for The Economist. He is based in London.