Managing innovation

C&I Issue 22, 2007

The world has seen seismic shifts in manufacturing and production underpinned by the role of technology and innovation.  Rapid developments in communication technologies, the rise of global corporations and the emergence of new and developing economies, and in particular the BRIC countries - Brazil, Russia, India and China - have introduced the knowledge-based economy, superseding the era of industrial manufacturing in developed economies.

Whilst, for developed economies, technology and innovation have driven the growth of new giants such as Microsoft and Google, the emerging economies have been driven by the shift of manufacturing to the East. India and China, in particular, are dramatically increasing their manufacturing output driven by structural factors such as active government intervention and less regulation, but in particular the availability of a low-cost and well-educated workforce.  Indian companies such as Tata Chemicals and Reliance Industries are rapidly developing as major world class players, alongside established Western companies such as Akzo Nobel, BASF and Croda Chemicals.

With the extraordinary rates of economic growth that these countries are experiencing, there is a rapid emergence of a newly enriched middle class.  A recent report from the management consulting firm, McKinsey suggested that by 2025 consumer spending in India will quadruple and the middle-class grow from 50m to nearly 600m people.  McKinsey forecasts that within 20 years India will be the fifth largest consumer economy, with the very wealthiest sector of society numbering 24m people – significantly larger than the population of Australia.

This engine for growth has several effects. First, it provides a large domestic market, allowing local companies to grow and develop to world-class status – at the same time attracting multinationals to invest and take advantage of the developing market, further fuelling development. A similar effect can be seen with the recent emergence of South Korean players such as Hyundai/Kia, LG and Samsung onto the world stage. Secondly, in the longer run, it will lead to an increase in employment costs and an erosion of the core competitive advantage of India and China.

As with developed economies, emerging nations have developed from largely agrarian economies. The UK was the first nation to industrialise and this was made possible by developments in agricultural techniques, not least the Enclosure Acts of the 18th century, which improved the efficiency of production and released labour, albeit for a life of perhaps equal wretchedness, into the industrial towns. The ‘green revolution’ of the 1970s, based upon genetically improved plant varieties, turned India into a net exporter of food grains in little more than a decade.

Whilst poverty in India remains, it is nonetheless declining as the economic surge continues. Such rapid growth places strains on the infrastructure, not least in the provision of education, but nonetheless India produces 400,000 engineering graduates each year and China nearly 500,000.

The role of technology and innovation in both igniting and fuelling this rapid economic development is ubiquitous. The development of high-yielding wheat varieties also encouraged the development of fertilisers and agrochemicals, and communication technologies have allowed companies to manage and coordinate on a global basis. The innovation continues with the development not just of manufactured goods such as automotive components, speciality chemicals and electronics but also of knowledge and service-based products. Typically we might think of India, with its high standard of spoken English, as a centre for outsourced back-office operations, however, Bangalore is home to some of the best, most innovative and rapidly globalising software companies.

Whilst invention and the development of new technologies, and the application of those technologies to produce useful products by means of the innovation process, will continue to be fundamental to economic growth, there may also be factors that limit it. As these emerging economies develop, some interesting contrasts emerge.  On the one hand, the flight of manufacturing to India and China is based on relatively high skills but relatively low labour costs; the cost of energy and other raw materials is largely the same across the world. India in particular is also rapidly developing as an information economy.

This has a number of implications for the companies concerned.  In China, for example, companies are already reporting wage inflation particularly for staff with rare and/or more transferable skills.  Increasingly, therefore, companies will need to seek competitive advantage not just from their low cost base but also from the way that they manage their operations, sometimes referred to as the business model, and most significantly their people.

In developed economies there has been a rapid shift in the business model from functional specialisation to cross-functional processes and traditional buyer-supply relationships have evolved into networks of partnerships and alliances. This gives companies greater flexibility and allows them to be agile and responsive to changes in demand and to innovate more rapidly. This can be something of a paradox in terms of innovation where on the one hand high levels of creativity and new thinking are required, yet the process is more formalised in order to rapidly identify and bring new opportunities to market.  This ‘fail fast and learn’ approach requires a ‘fuzzy’ front-end acceptance of new ideas, but a ‘quick kill’ process to focus resources to those products that are going to be winners. In the knowledge economy, speed to market is a critical factor.

This also has implications for the people involved. The industrial economy model of lifelong employment, where the social contract between employer and employee was unwritten but nonetheless observed, has substantially disappeared.  Instead, employees seek to improve their employability and take their advanced skills to employers who may expect commitment, but not necessarily loyalty. The needs of employers have also changed.  Whilst every company needs good functional specialists – accountants, engineers, technologists etc, they now need more than that.  Employees need to have wider skills that enable them to work in fast moving, process driven, market responsive organisations. Those organisations in turn need to identify, nurture and retain the skills they need.

The wider suite of management skills that are needed include such soft areas as leadership and the ability to communicate and interact with a wide variety of people.  In the 24/7 world that we live in, where everybody is in touch constantly via mobile phone, e-mail or Blackberry. Managers do not have the luxury of time for consultation or reflection, but must be empowered and able to solve problems and make decisions on an almost continuous basis.

Organisations are increasingly less hierarchical, more cross-functional and decentralised in order to be more responsive.  In these circumstances, managers must increasingly ‘sell’ rather than ‘tell’, as knowledge-empowered colleagues argue for their own point of view. Interpersonal and motivation skills are capabilities that are increasingly required, and senior managers must work to develop a culture that encourages the free exchange of ideas and rewards innovation whilst accepting the occasional failure.

Innovation now is not just the perquisite of the white-coated R&D boffins, but extends to a much wider audience that often includes customers as part of a value co-creation network.  In the future, developing people and their management skills will be at least as critical as evolving and innovating new technologies. Investing in management development aids staff retention and develops the skills needed to achieve and retain competitive advantage.

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