Research

Expanding the innovation horizon in the global marketplace

At the recent Compete Through Service Symposium sponsored by the W. P. Carey School's Center for Services Leadership, Michael E. Daniels, senior vice president of IBM Global Technology Services, presented a recap of the findings of IBM Global Business Services' 2006 CEO study, "Expanding the Innovation Horizon." The study based its conclusions on in-depth interviews conducted by IBM with 765 CEOs, business leaders, and public sector leaders from around the globe.

2006-11-22

Thomas Paine, observing that some of his fellow citizens were wavering in their dedication to the newly founded United States of America, exhorted them to "lead, follow, or get out of the way." Two centuries later, Paine's quote would become an almost-ubiquitous rallying cry for any number of motivational business speakers pushing CEOs and business managers to move their companies forward in the face of cutthroat competition.

The message Michael E. Daniels brought to executives and service professionals at the 17th Annual Compete Through Service Symposium was a retooling of Paine's message. His mantra for competitors in the new millennium's global marketplace: Innovate, emulate, or fall by the wayside.

Daniels, senior vice president of IBM Global Technology Services, presented "Innovation that Matters" — his recap of the findings of IBM Global Business Services' 2006 CEO study, "Expanding the Innovation Horizon," to attendees of the symposium, sponsored by the Center for Services Leadership in the W. P. Carey School of Business.

"Every leader I speak to has incredible pressures on him," Daniels said, including culture change, funding and globalization. "While each of these pain points may vary slightly all of us leaders need to think about innovation and how we can be the drivers of productivity, opportunity, job creation and competitive advantage." The CEO study based its conclusions on in-depth interviews conducted by IBM with 765 CEOs, business leaders, and public sector leaders from around the globe.

Innovation for the innovator's sake

The emergence of the global marketplace has made the front lines of the battle for market supremacy a bit nebulous. Your company's nemesis may evolve into a partner out of necessity. Words like "innovation" take on new shades and hues when laying out strategies to guide companies through the obstacle course of expanded competition. Globalization also upends the old wisdom.

Ralph Waldo Emerson is often quoted as saying "Build a better mousetrap and the world beats a path to your door." In the 21st century a better mission statement would be "Build the better mousetrap, then find the best way to take it directly to the world's doorstep." Complicating matters is the nature of competition in the global marketplace. Like the Gopher Game at a carnival, no sooner have you knocked one competitor back into its hole with your mallet, than out pops another to take its place.

The drill repeats ad infinitum. This is where innovation must become a CEO's priority. For the purpose of the Global CEO Study, IBM defined innovation as "using new ideas or applying current thinking in fundamentally different ways to effect significant change." Daniels explained that the study examines three types of innovation. Two concern the internal workings of the company: in its business model, where innovation would impact the structure and/or financial model of the business; or in operations, where innovation improves the effectiveness and efficiency of core processes and functions.

The third type impacts the firm's products, services or markets. Most people think of products or services when they think of innovation, but Daniels cautioned his audience not to confuse "innovation" with "invention." "It's not just about product innovation. It's much broader than that," said Daniels. Innovation, he claimed, "goes deeper than invention."

The perspective shifts from cost containment to innovation

The study determined that companies hit hard by globalization in the past 10 years tended to circle the wagons, looking within to cut costs in the face of mounting competitive pressure. The threat of commoditization — an economy of scale factor where what's better for the end consumer is not always best for company profit margins — adds another wrinkle. "Now, there's an equal pressure to grow the top line as well, and to grow the productivity," Daniels said.

This year, IBM reports that two-thirds of the CEOs in its study expect major changes within their organizations over the next two years, and innovation appears to be the only strategy that will help them stay ahead of the competition. Once business leaders realized that "innovation is key," they re-evaluated three preconceptions about innovation and came up with new doctrine:

• Business model innovation matters.
• External collaboration is indispensable.
• Innovation requires orchestration from the top.

Innovating the business model

Competitive pressure pushed the business model factor to the top of many CEOs' lists because innovating a business model provides a company with more durability over the long haul. This, Daniels said, is because business model innovations can't be as easily replicated or imitated as can a product or a service. Business model innovations could include shaking up the organization, forging strategic partnerships, or developing non-traditional financial investment vehicles to transform the way the business works.

"Successful businesses and CEOs are pursuing new business opportunities outside their comfort zones," Daniels said, "changing the whole nature of industries themselves." In effect, the companies are using innovation to evolve their business into completely new arenas of operation and competition.

Daniels cites how the telecommunications industry has been revolutionized by the technology Triple Play — global telephony, video/television, and broadband Internet data communications — thanks to the popularity of Voice over Internet Protocol (VoIP). Industry experts have predicted that 90 percent of all satellite-based Private Branch Exchange (PBX) phone services will be VoIP-based by 2010.

The technology leap has led to takeovers and mergers among network operators and telecommunications technology companies. The nature of competition in the global marketplace demands that companies move to innovate their operations. Daniels singled out IBM and Ericsson's 10-year, $750 million deal struck with Bharti Tele-Ventures Ltd. in March 2004 to outsource the New Delhi, India-based telecommunications services company's hardware, software and IT services.

The move enabled Bharti to hone its strategy to grow its customer base from an estimated pool of over 100 million potential accounts. "This business model freed up their investment capital by achieving a price point unmatched by anybody in the industry in that country," Daniels said. "[Bharti has] reconceptualized the phone company as a marketing and sales machine." Daniels emphasized that, of the CEOs surveyed, over half reported cost reduction and strategic flexibility as a result of adjusting their models to market realities.

They were able to specialize their operations and move quickly to seize business growth opportunities, bolstering their company's bottom lines and boosting stock values. The study indicated that companies employing business model innovation enjoyed significant operating margin growth, while companies that focused on operational and/or product/services/market innovation merely sustained their margins over time.

Collaboration is key

One of the study's most surprising findings, Daniels said, grew out of a question about collaboration. CEOs were asked to rank the significance of nine potential collaborative partners. The top choice was company employees. The next five were external to the company, including business partners, customers, and competitors. Internal sales/services and R&D ranked seventh and eighth, respectively. What does this say about the current state of collaboration?

Daniels said more than simple teamwork drives the collaborative engine. Collaboration, he said, "must be built on both industry standards and relaxing traditional restrictions on intellectual capital. As one CEO in our survey put it, 'Having a few beers together is not collaboration. Collaboration is a discipline.'"

Example: IBM's affiliation with Maersk Logistics. IBM served as a research and development collaborator to design a tamper-resistant, Global Positioning System-enabled shipping container sensor for Maersk, which is a supply chain, ocean and air freight specialist. The technology not only improved Maersk's conformance with post-September 11 security regulations, it improved the company's bottom line with improved inventory management and a significant reduction in loss due to theft.

The innovation starts and the buck stops here

Just as the collaborative environment needs external sources as much as company teamwork in order to flourish, the driving force behind innovation must come from the top echelons of the managerial and executive ranks. The IBM study stressed that skill and leadership were required to choose the best places to focus innovative attention, and to create the ideal environment to foster innovation. Technology has to be pervasive throughout that environment, said Daniels.

"We did a financial analysis that bears this out," he said. "Organizations that are effective at integrating business and technology deliver significantly better growth and operating margins." The study indicated that six of the 10 barriers to harnessing technology to enhance the business model originated not from external factors like government or legal restrictions, but from internal sources. Budget, people and process were major culprits, according to some CEOs.

When Circuit City revamped its business model, it prioritized use of business intelligence to steer its retail efforts. The personal electronics retailer soon discovered it could not efficiently mine its consumer databases because the information resided in a variety of databases that, in turn, were run by a variety of platforms.

"Properly analyzing the [consumer] data across the company was a difficult task, at best," Daniels said. Circuit City recognized the technological shortcomings and moved (with IBM's help) the entire enterprise from a customized proprietary point-of-sale system to one based on open standards. "They were able to adapt quickly to marketplace changes satisfying changing customer needs," he said.

Embrace the change

Daniels emphasized the need for flexibility throughout an organization, not simply at the top levels of the company. Key to this flexibility is the ability to leverage technology, keeping an open mind about unconventional strategies. "We're surrounded by possibilities and inspiration," Daniels said.

Survival depends on "the willingness to take risks, embrace change — internally and externally — to collaborate beyond your traditional partner set and realize the value of integrating business and information technology. We're at a turning point and there's bound to be some very big winners and some very big losers."

Bottom Line

IBM's recommendations for sharpening your innovation agenda:

• Think broadly, act personally and manage the innovation mix. Create and manage what best emphasizes business model change.
• Make your business model deeply different. How value is added to your current industry — or even a new one — depends on finding ways to substantially change the status quo.
• Ignite innovation through business and technology integration. Technology can be leveraged as a catalyst for change when combined with business and market insight.
• Defy collaboration limits. The global marketplace is ripe for the picking in terms of finding new sources of collaboration beyond internal contacts.
• Force an outside look every time. The organization must learn to welcome outside influence into the core functions, first as a systematic practice and, eventually, as an integral element of the corporate culture.

Management