The business world is being disrupted by the combined effects of growing emerging economies, shifts in global demographics, ubiquity of technology and accountability regulation. Infosys believes that to compete in the flat world, businesses must shift their operational priorities.

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February 16, 2008

Innovating in the Interstices

A market here, a market there.... could there be a market in between?!

Looking at several new products that have emerged in recent years, a new innovation theme can be discerned. It is what I call innovating in the interstices. Let me explain this theme by means of a highly topical innovation that all of us have heard about recently: the unveiling of the Nano ultra-low-priced car from the house of Tata.

What was the logic that drove the conception of this incredibly innovative product? In essence the logic was the following:

-the personal transportation needs of budget-conscious customers today are being met by 2-wheelers (scooters, motorcycles) and small cars.

- there is a large gap in between the 2-wheeler and the small-car markets, and in that gap a market may exist

-if we can create the right product, we may be able to serve that "in-between" market.

The above logic illustrates the general principle behind what I am calling innovating in the interstices. The principle is: pitch a new product in the interstice (gap) between two adjacent but distinct markets, on the premise that in that gap lies a market waiting to be served.

What distinguishes such "interstitial innovation" is the process of discovering a potential market segment that is unserved - looking at two adjacent markets and asking the question, could there be an untapped market in between?

A few illustrations and observations should help clarify what this innovation theme is about:

1. A company that "innovates in the interstices" is sometimes a company that is already serving one or both of these adjacent markets, but it does not have to be. Southwest Airlines* used precisely the above principle to discover a travel market "in between" driving and flying to one's destination. Southwest was not an existing airline but a completely new airline designed from the ground up to fit into this new market. Of course, most incumbent airlines entered this market segment as followers (much later, and in some cases too late).

2.The process of designingthe new product that will serve the interstitial market is likely to start with the product currently serving either of the adjacent markets, and adapt it to the needs of the interstitial market. In designing the Nano, the Tatas first tried starting from the 2-wheeler end: take a motorcycle and fit a roof and other parts onto it. They soon realized this was not the way to go, and so tackled the problem from the other end: take the smallest car currently available and figure out how to make it cheaper.

3. The new product created to serve such an 'interstitial' market is usually not a simple hybrid of products currently serving the adjacent, existing markets. In general it will have some features of at least one of those products, but also a few features that are unique. McDonald's introduced its innovative chicken snack wrap in 2006, designing it to meet the needs of consumers who wanted something heavier than a snack, but lighter than a meal. Although it included several ingredients found in a variety of snacks, it was a unique new product. Consumers have kept lovin' it, and the snack wrap has become one of the most successful product launches in the company's history.

4. Other examples of such interstitial innovation in action include

- the Sports Utility Vehicle (SUV), which was conceived to fit into the market between conventional passenger cars and rugged, off-road vehicles such as Jeeps.

- The Tatas have also used this principle before, in developing the hugely successful Ace, a sub-one tonne mini-truck. This innovative product was designed to fill the large gap that then existed between the smallest mini-truck (of about 2.5 tonne capacity), and three-wheeled vehicles that were of very low capacity. This gap turned out to constitute a huge market - the Ace sold over a 100,000 units well within two years of its launch.

The reason why interstices of the kind mentioned above offer a fertile ground for new product introduction is not far to seek - potential customers who lie in between two well-defined market segments are forced to choose between products serving those two markets. Thus, they are likely to be unhappy consumers, having to "stretch" their needs to fit into either of the existing products. Many may simply be unwilling to make the required stretch, and thus end up as non-consumers. In either case, this leads to pent-up demand being "bunched" in the interstices.

It is thus that, in the never-ending quest for innovation, these interstices afford a high payoff for discovering new, untapped markets.  

_______________________________________________________________________________________ * it may interest the reader to know that Southwest Airlines was not  the first low cost airline. Southwest Airlines, launched in 1971, used the first sophisticated low-cost airline model, but the raw low-cost airline concept had been pioneered by Pacific Southwest Airlines (unrelated to Southwest airlines) as far back as 1949.

February 4, 2008

Innovation is a Many-Splendored Thing...

..but it does have one big enemy: isolation

There can scarcely be any doubt that innovation is among the most top-of-mind issues facing the world of business today. The need to innovate manifests itself in manifold organizational activities, always with the goal of boosting some dimension of organizational performance.

There have been myriad approaches, prescriptions and mantras purporting to help organizations boost their innovative prowess. If you look at the most successful among these - Open Innovation, "Crowdsourcing", Co-creation, User-centric Innovation - you will find that they appear to have quite a lot in common with each other. And if you think about it a bit more, you will realize that this similarity is not a result of coincidence. It is because each has at its core the same idea: that of opening out, inviting fresh perspectives, admitting new participants, allowing new combinations - in short, dissolving conventional boundaries.

Thus, the success of the above approaches to innovation is hardly a matter of happenstance. They succeed precisely because they all hold forth a very solid prescription. This prescription is that the organization needs to blur its boundaries with the environment, allowing the judicious flow of information, ideas and insights across what would conventionally be watertight walls*. Of course, the above idea applies equally well to boundaries within the organization too.

Why is blurring or dissolving boundaries in the above manner so effective in spurring innovation?

One reason is that the simple problems have been solved long ago; the ones that really need innovative solutions are complex, having facets rooted in diverse disciplines, and typically need to be attacked with multi-disciplinary knowledge and skills that are not normally resident in any single organizational entity. Another reason is that such an opening out brings in new perspectives that help see things in a new light. Information, ideas and insights can thus combine in new ways. Very importantly, such an approach allows the risk so inherent to innovation to be shared by multiple entities. 

What common term can we use to collectively refer to the above-mentioned approaches to innovation? 'Open innovation' appears to be a good candidate, but the term has already been appropriated to refer to one of the specific approaches. And so, to collectively denote the above innovation approaches, I will use the term 'Unplugged Innovation', where the word 'unplugged' is used in the sense of 'to set free'.

Here then, are a few pointers that serve to help thrive in the new, unplugged innovation landscape. I will elaborate on some of these with examples in future posts.

Create 'multidimensional' teams.     Multidimensional teams embody competencies that span conventional disciplinary boundaries. Such teams are also ambidextrous, with the right balance of left-brain and right-brain skills. Assembling teams from diverse disciplines will not be easy, but has huge payoffs. Encourage individuals within the teams to become multidimensional too. And encourage the diversity of opinion inherent in such a set-up - it can be a valuable source of new knowledge.

Make walls porous.     Promote interaction externally with alliance partners, consumers, academia, and internally across functions. Facilitate that interaction with incentivization, technology support and process changes if need be.

Dont just look for new ideas, old ones are often just as good!      A concept considered mundane in one field is frequently novel in another. In fact this is one of the most powerful mechanisms by which unplugged innovation works, by allowing the transplantation of ideas from other disciplines. In the same vein, ideas don't have to be spectacular to lead to useful innovation - incremental or micro-innovations can translate into significant performance gains. Our research (some of which appears in this article) has shown how useful innovation often happens based on 'old' ideas or small incremental changes.

Networks are your resources.    Conventional resources such as capital and employees are of course important, but the unplugged approach opens up access to another kind of resource with immense potential: networks. Social networks between consumers / prospective consumers, alliances and relationships with academia, external experts, vendors, and other partner companies, are all valuable resources that can be drawn upon.

Accept failure (even encourage it!)     If all your efforts at innovation are succeeding, it probably means you are operating well within the zone of comfort. Innovation efforts that are bold and audacious will almost certainly fail at least some of the time. Failure can of course also be costly and traumatic and so the risk-sharing aspect of the unplugged innovation approach is greatly helpful in raising failure-tolerance, and hence the ability to innovate.

Go evolutionary rather than big bang.    It has come to be widely accepted that the best way to create a new product or service is by starting small and evolving toward completion, in interaction with users.  The unplugged approach, with its emphasis on greater involvement of users as well as other parties, strongly supports this iterative development.

Pool.    The unplugged approach by its very nature lends itself to pooling - of data, brainpower, patents,.... Do we have an integrated view of the customer and her need? This may need pooling of data from across multiple organizational units that touch the customer. Will our new product need to use some knowledge that is the intellectual property (IP) of someone else? Pooling of patents may be an answer.

Unplugged innovation brings with it several challenges - the boundaries that are sought to be blurred have been acquired over time, and often have good reasons for their existence. Managing and motivating teams formed from multiple groups or disciplines needs tact and maturity. Coming from different backgrounds, such teams may not communicate well, at least initially. When reaching out across external boundaries, IP, contractual and regulatory considerations can be vexing.

Nevertheless, if done well, unplugged innovation can lead to enormous dividends. The conventional, 'closed' approach to innovation is no longer as potent as it used to be.

The lonely innovator is a thing of the past. In the lexicon of modern-day business, innovation and isolation are firm opposites. 

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 * Barriers to information / knowledge flows are one kind of levee in business, a novel concept which our research has uncovered. Among other things, this line of thinking holds that removing or weakening such levees is a promising approach towards innovation.

 

February 1, 2008

Mind the Gaps – 500 executives share Flat World insights

Infosys recently released a survey of 500 business executives on the impact of, and responses to, global trends. The report was written in co-operation with Economist Intelligence Unit. In case you have not read it, check out here

Of particular interest to me was the opinion of the CXOs and the gaps between the perspectives of CXOs and other business executives. In this survey we had about 200 C-level executives participating. Only 23% of the CXOs were CIOs indicating a good mix of business CXOs. Nearly 70% of CXO respondents are from companies with annual revenues of over USD1billion and come from a wide spectrum of industries.

CXOs believe that Technology and Regulations are the top change drivers. About 71% of respondents mentioned them (each) as having a significant or very significant impact on their industry. Impact of demographic changes was next (63%), followed by changing business cycles (61%) and emerging economies (59%). The good news is that nearly 80% of respondents indicated that they are already preparing themselves to address changes. However, only 12% of these companies feel they are industry-leaders in terms of their preparedness.

As more CXOs see the role of information and technology as ‘very significant’, we can expect more business involvement in IT decisions and better business-IT alignment. I think this is a good thing for the industry. I am not surprised at regulations being a top change driver. Companies today need to comply with and manage multifaceted regulatory requirements across geographies and business units.

An interesting point to note is that different industries view impact of forces differently. For example, if you view the detailed report mentioned earlier, you will see that the impact of emerging economies is highest in high-tech OEM and manufacturing while least in energy and natural resources. Impact of demographic changes is highest in the consumer goods industry. The impact of technology and information is high regardless of the industry.

In my next post, I will talk about the 3-year strategies and one-year actions of these companies.