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Best Business Books 2012: Innovation

Context Is King

(originally published by Booz & Company)

Ron Adner
The Wide Lens: A New Strategy for Innovation
(Portfolio/Penguin, 2012)

Vijay Govindarajan and Chris Trimble
Reverse Innovation: Create Far from Home, Win Everywhere (Harvard Business Review Press, 2012)

Thomas M. Koulopoulos
Cloud Surfing: A New Way to Think about Risk, Innovation, Scale, and Success
(Bibliomotion, 2012)

Twenty-five years ago, while working on the advanced manufacturing team for the space shuttle’s main engine, I watched a co-worker struggling to introduce a new technology. He was charged with developing a laser welding technique to replace the finicky electron beam technology that was destroying million-dollar parts. But his potentially superior approach was abandoned because the people on the shop floor resisted the change. It was the first time I saw an innovation effort fail because of context, and I never forgot it.

Since then, and especially while leading efforts to commercialize research at two universities, I’ve repeatedly seen how the complex systems of partners, resources, infrastructure, and cultural norms that surround most innovation efforts influence their outcomes. In today’s complex and rapidly changing world, innovators ignore this context at their peril. This year’s best business books on innovation help mitigate the risk by examining context from three different, but complementary, perspectives.

Innovation Ecosystems

Sony ignored context when it delivered the first truly viable electronic reading device without an easily accessible, fully stocked e-bookstore — and suffered the consequences. As Ron Adner, a professor of strategy at the Tuck School of Business at Dartmouth College, describes it, Amazon’s late-arriving, inferior Kindle quickly surpassed Sony’s e-reader and achieved market dominance because of Amazon’s partnerships with publishers and superior content platform.

Adner provides an approach and a tool kit for avoiding Sony’s fate in his book The Wide Lens: A New Strategy for Innovation. Written in a style and format similar to those of books like Geoffrey Moore’s Crossing the Chasm: Marketing and Selling Technology Products to Mainstream Customers (HarperBusiness, 1991) and Jim Collins’s Good to Great: Why Some Companies Make the Leap…and Others Don’t (HarperBusiness, 2001), its well-structured chapters are studded with numerous case studies designed to help readers think about their company from a fresh perspective — in this case, the ecosystem in which they innovate.

In Part I, the author describes two common contextual blind spots: the “co-innovation risk” of not considering the suppliers and other partners necessary to bringing a solution to market, and the “adoption chain risk” of not considering which players are needed to ensure that end-users can fully realize the value offered by the solution.

Parts II and III, the remainder of the book, are devoted to avoiding these blind spots, starting with what Adner calls a “value blueprint” of the innovation ecosystem. This blueprint identifies the end customer, the project deliverables, the suppliers needed to build the solution, the intermediaries and “complementors” needed to deliver it, and the vulnerabilities in the system.

Despite the allure of being the leader of an innovation ecosystem, Adner cautions companies about jumping onto this high-risk path too quickly. It typically involves a huge investment and delayed payoffs — not to mention the fact that many companies do not have the influence or platform needed to lead. Assuring us that the first-mover advantage is a myth, he suggests that the role of fast follower may make much more sense for many; he uses the often-cited Apple iPod as an example of a blockbuster product that was deliberately released years after the first competitor was on the market. (See “The Value of Being Second,” by Oded Shenkar, s+b, Author’s Choice, Sept. 28, 2012.)

In addition to familiar success stories like the Kindle and iPod, Adner includes lesser-known examples of creative solutions devised to overcome contextual obstacles. For example, high-quality digital cinema seemed like a no-brainer in the movie industry, especially for the studios that were spending US$3,000 per theater to print and ship film. But theater owners could not afford the new equipment required to screen digital films. This delayed digitization by 10 years, during which time the studios continued to pay unnecessary costs and moviegoers did not get the benefit of digital viewing. Eventually, the industry pulled together a “virtual print fee” program to address the logjam. This system introduced a new player to the ecosystem, the “digital theater integrator,” which purchased the new screening equipment and installed it in theaters on a lease-to-own basis. The studios shared the cost by paying the digital integrators a $1,000 virtual print fee for each film they sent to the theaters. This win-win-win solution cleared the way for digital cinema and created a platform for other innovations, such as 3-D movies.

The Wide Lens falls short in two areas. The first is the missing perspective of smaller companies within complex innovation ecosystems that will rarely get the opportunity to play the leadership role; the lessons that these companies will glean must come mainly through inference. The second is the lack of detailed guidance for mapping and aligning the innovation ecosystem within a company. Adner includes a short section on this topic at the end of Part I, but my experience suggests that the internal pitfalls of context warrant much more attention.

These minor shortcomings aside, it is clear that innovation ecosystems have broad implications across society. In healthcare, in particular, the frequently conflicting interests of regulatory agencies, insurers, doctors, and hospitals prevent the adoption of potentially lifesaving innovations. Adner offers up electronic health records (EHRs) as a case in point. A key component in streamlining and improving the quality and cost of healthcare, EHRs should have become commonplace years ago in the United States. But they didn’t — mainly because of the investment necessary to get them off the ground. They are only now starting to gain momentum because they are promoted by new incentives from the federal government.

Energy presents another area in which the benefits to ecosystem incumbents are not yet compelling enough to drive large-scale change. Although most books analyze innovations with 20/20 hindsight, Adner’s in-depth analysis of the still-nascent electric car industry and his willingness to offer ideas for kick-starting it are praiseworthy. Policymakers should take note.

Innovation Transplanted

In Reverse Innovation: Create Far from Home, Win Everywhere, Vijay Govindarajan and Chris Trimble make a compelling argument for companies to not just widen their lens, but shift it to a completely different context — that of developing economies. Companies are well aware of the opportunities in emerging markets, but they’ve also learned that what works in Chicago and Boston doesn’t always work in Shanghai and Bangalore.

This has led some executives to the erroneous conclusion that they should wait to enter emerging markets until these markets are more mature and ready for their companies’ offerings. But Govindarajan and Trimble, who, like Adner, teach at the Tuck School of Business, warn that this mind-set will cause many companies to miss valuable opportunities for growth. They may also run the even bigger risk of being leapfrogged in their home markets by innovations originating from the very markets they are ignoring.

The keystone of the authors’ thesis is that developing nations will be the genesis of innovation in the decades to come, and not because of the lower cost of labor. “The primary competitor is not the horse you’ve been racing against for years,” they caution readers, “it’s the horse you may never have heard of before.” They cite a growing list of companies based in emerging markets — Embraer in Brazil, Cemex in Mexico, and Mahindra & Mahindra in India, to name a few — that are rapidly making inroads in the developed world.

Fortunately, Govindarajan and Trimble don’t dwell too long on doomsday scenarios. Instead, they outline a pragmatic process that can enable companies in developed nations to capture the benefits of “reverse innovation” — that is, innovation that is developed first in an emerging economy, and then flows “uphill” to more mature markets.

The authors begin by describing five “needs gaps” that harbor opportunities for innovation within emerging markets: performance, infrastructure, sustainability, regulatory issues, and cultural preferences. For example, customers in emerging markets are often willing to sacrifice performance for affordability. A company can thus capture a compelling opportunity if it can offer a product with 50 percent lower performance at 15 percent of the current price of its products designed for developed markets. However, this cannot be accomplished by simply slimming down the existing product; it requires a clean-slate innovation effort.

And so reverse innovation begins: As companies work to bridge the five gaps in emerging markets, they create products that can ultimately disrupt developed markets, à la Clayton Christensen’s “innovator’s dilemma.” Witness how the One Laptop per Child initiative inspired the development of netbooks, and how GE Healthcare’s $500 MAC portable electrocardiogram developed in India for the Indian market enabled the company to create an affordable unit that U.S. physicians wanted for their offices.

Of course, working in a new culture can be daunting. Several years ago, the USC Stevens Center for Innovation sent student teams supported by the Deshpande Foundation to southern India with the goal of creating scalable solutions to social problems. But the moment the students landed, everything defied their expectations. The local residents were dealing with countless problems of agriculture, sanitation, education, and healthcare that were no longer considered relevant in the U.S., and they were doing so within a different cultural context.

Happily, however, the students were able to take advantage of a technological context that is far different from what it was decades ago. In emerging markets, aspiring innovators can now apply 21st-century technology to 20th-century problems, without being hampered by the legacy infrastructure of developed markets. This is how one student team was able to develop a text messaging system that immediately and inexpensively distributed public health information among healthcare workers across the region — and it’s also why I am likely to get better cell phone coverage in Sichuan or Sri Lanka than on Sand Hill Road in the middle of Silicon Valley. Thus, new market and technology contexts provide fertile soil for innovative leaps.

Govindarajan and Trimble acknowledge the difficulties of innovating in emerging economies and offer practical solutions for managing those difficulties, derived from their study of companies that have successfully achieved reverse innovation. For example, they suggest creating dedicated local growth teams (LGTs). An LGT, they write, is a “small, cross-functional entrepreneurial unit physically located in the emerging market.” Because an LGT’s job is experimentation, its results should be measured by the learning it produces rather than financial results. This can be a challenge for corporations accustomed to measuring the bottom line.

Given their legacy frameworks, multinational corporations may find it much more difficult to embrace and pursue reverse innovation than will small companies and startups. But the authors argue that whenever a large corporation’s experiment succeeds, its powerful networks will put the corporation in the best position to capitalize on it in developed markets.

Reverse Innovation is concisely written and clearly structured, but its concepts aren’t entirely new. Govindarajan and Trimble briefly mention some of the antecedents in an appendix, but not John Hagel III and John Seely Brown, who coined the term innovation blowback in 2005 to describe the likelihood of new innovations originating from the developing world. Despite this oversight, Reverse Innovation provides a compelling argument and a practical road map for companies that want to tap the context of developing countries as a valuable new resource for innovation.

In the Context of the Cloud

In contrast to The Wide Lens and Reverse Innovation, Thomas M. Koulopoulos’s latest book, Cloud Surfing: A New Way to Think about Risk, Innovation, Scale, and Success, is not really about innovation per se. Rather, it’s about a profound global shift affecting the context of innovation — the emergence of the digital cloud network. This is a fundamental change that we all must understand in order to innovate — and to survive technological change — in the coming years.

Koulopoulos, the CEO and founder of technology research and consulting firm Delphi Group, defines the cloud as “an evolving, intelligent, infinitely scalable, always available, real-time collection of technology, content, and human resources that can be accessed as and when needed.” It is best known for providing the computing infrastructure that enables fast-growing companies to scale almost instantly and without heavy up-front capital expenditures.

But, as the author explains it, cloud computing is only a small part of the story, and the full scope and impact of the cloud are still emerging. Koulopoulos explains how this network is expanding so quickly that soon it will provide any resource — not just computing, but content, partners, components, labor, data from 5 billion mobile devices, and so on — as responsively and efficiently as the power grid provides electricity at the flip of a switch.

Metcalfe’s Law tells us that the power of a network scales exponentially with the number of nodes. Today, the number of nodes in the cloud is approaching the number of connections in the human brain. What does this giant global brain mean for our future? Koulopoulos believes that the cloud will restructure information and society and will connect people and resources in entirely new ways. Indeed, it has already been instrumental in bringing us the Arab Spring, the lean startup, “big data,” and software as a service. And it has even bigger implications — in terms of governance, privacy and trust, cost structures and value chains, consumerism, intellectual property ownership, and the nature of work — that have yet to be fully understood.

One of the most interesting chapters in the book explores the effect of the cloud on commerce. The cloud enables value chains that are ever more intertwined and global. And Koulopoulos echoes Adner’s ecosystem thesis when he writes, “The survival of one company or industry is intimately tied to the survival of others.… Success is based on a level of collaboration and community we are just beginning to appreciate.” Unlike in the last century, for example, when corporations attained competitive advantage from vertically integrated and often proprietary supply chains, competitiveness now depends on speed and agility, and today’s companies can use the cloud to tap into a nearly limitless and flexible supply base. Trading platforms such as the E2open Business Network are emerging to not only supply components on demand, but also anticipate and adjust for global demand on the basis of intelligence derived from the cloud. The cloud is leading a shift from mass production to what Koulopoulos calls “mass innovation,” and it can empower all businesses, large and small, to play an increasingly important role in global commerce.

Cloud Surfing makes it clear that the cloud will transform many industries and create entirely new ones, but its chapter on innovation could have been more fully developed. It focuses primarily on new “cloudsourcing” approaches for finding solutions to problems, but does not explore the broader impacts of the cloud on key frontiers of discovery. For example, academic research has started to expand its focus from biology to big data in treating disease, and from solar energy to the smart grid in addressing our energy problems. The effects of the cloud on the forefront of research and development will shape our future.

Koulopoulos also could have more explicitly discussed how the cloud is enabling business model innovation. For example, he might have highlighted the emergence of a sharing economy that is giving rise to a whole new class of peer-to-peer markets for renting personal vehicles, borrowing personal goods, and accessing services on demand. The cloud is catalyzing numerous paradigm shifts such as this, opening up entrepreneurial opportunities that would be appropriate for a chapter on innovation.

Yet, on second thought, perhaps there is no reason at all to have a distinct chapter on innovation in Cloud Surfing: The entire book is about a new context for innovation that stimulates the imagination of the reader. This is why Cloud Surfing is my choice for the year’s best business book on innovation. Instead of a “how-to” book, it is a “what-if” book that sets out a bold vision for the future and provides the tinder needed to spark innovative ideas. It amplifies the implications of all of the year’s other business books and provides a better understanding of the seismic shifts being driven by today’s rapidly advancing technology.

The context in which innovation occurs is a theme of vital interest to companies and nations. Big innovation challenges abound in education, medicine, energy, and many other fields, and they require innovators who know how to negotiate complex and ever-changing contexts. This year’s best business books on innovation provide guidance for leaders seeking to use context to their advantage. 

Author profile:

  • Krisztina “Z” Holly is an engineer and entrepreneur. She most recently served as vice provost for innovation at the University of Southern California and founding executive director for the USC Stevens Center for Innovation. Previously, she was the founding executive director of the Deshpande Center for Technological Innovation at the Massachusetts Institute of Technology.


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