To Master Innovation in Today’s Markets, Think Outside the Firm

As emerging technologies give rise to new industries and reshape the world around us, even innovation itself is changing. Once confined to internal R&D labs, companies now have to master innovation at an ecosystem-wide level or risk being left behind by the marketplace.

Saikat Chaudhuri and Harbir Singh stopped by to discuss this challenge with Leadership in Action hosts Mike Useem and Anne Greenhalgh. They spoke about innovation in everything from financial services to higher education to the manufacture of the Boeing 787, topics covered in the Mack Institute’s Spring Conference 2017: “Leveraging Ecosystems, Investments, and Acquisitions to Keep an Innovative Edge.” This podcast was originally broadcast on SiriusXM Channel 111, Business Radio Powered by The Wharton School.

Listen to their interview above (starting at 4:40) or read a lightly edited transcript below.

Using The Full Spectrum of Innovation

Mike Useem: Saikat and Harbir, welcome to the studio.

Saikat Chaudhuri and Harbir Singh

Saikat Chaudhuri: Thank you.

Harbir Singh: Thanks, great to be here.

Useem: Great to have you both. Saikat, maybe we’ll begin with you. If you could just tell us a little bit about your conference, so we have an appreciation for where some of these ideas are coming from.

Chaudhuri: Sure. Just to give a little bit of background, the Mack Institute’s mission is to promote thought leadership, but also apply it to practice, in the area of innovation management. And we like to bring together students, scholars, and industry as part of that mission. What we do twice a year based on what we see as being both relevant in practice but also in academia, we construct conferences that are industry-wide events with our partners. This particular one was held in San Francisco. We had heard a lot from our corporate partners but also from the research that we fund that people are no longer interested in just thinking about internal incubation and internal innovation , but they’re interested in the spectrum around acquisitions, alliances, ecosystems, outsourcing, and minority investments.

“People are no longer interested in just thinking about internal incubation and internal innovation, but they’re interested in the spectrum.” – Saikat Chaudhuri

Given that context, we thought, let’s do something on it because there were some open questions. Both sides had questions around “when do we use which mode of innovation, and how do we implement each of those?” And so we thought that we’d do a conference on it to bring academic insights and practical insights together.

Useem: [This topic is] great for listeners, Harbir… We all kind of know what the word “innovation” means, but in business, it probably has a bunch of very specific kind of connotations and corollary. So when you think about innovation in the private sector, are we talking services, are we talking product or process, what exactly is innovation in the corporate field?

Singh: That’s really a very good question. The way we think about innovation is beyond technology. Most people think technology, they think R&D, they think basic science. But at the Wharton School, we also think about business model innovation. We think about new processes that companies might use. We think about new markets that might be created — the intersection of economics, management, technology, and business. I think that intersection, and any disruptive change in any dimension of that, can create both opportunity and of course consequences for those who are established. The biggest problem is that as an established firm, how do you retain your lead? You are established because you did very well before, but innovation is still risky. So part of the conference was around that, how do you actually retain your lead?

Useem: You know, Harbir, I went out and tried to rent a videotape at a local store recently, and I couldn’t find one. So let’s see, let’s just take video recordings and the fact that Blockbuster was an enormous company, we all rented from them. Where do you think they went wrong, by way of illustration of how the failure to innovate [can impact] a company that was pretty much the top of the game at one point?

“No organization can keep innovating and staying ahead of the market. What that means is a company needs to anticipate where the market might go, and actually have an offering of that sort.” – Harbir Singh

Singh: One of the things that we have observed is that markets move faster than organizations, typically. That’s because markets move any time anybody innovates. No organization can keep innovating and staying ahead of the market. What that means is a company needs to anticipate where the market might go, and actually have an offering of that sort. So Netflix, to pick one that actually succeeded in this, was renting out these DVDs by mail but also developed a streaming service. Blockbuster kind of stayed very much with the most efficient possible delivery mechanism for DVDs and CDs, and that’s one reason why. To take that a step further, the question is, how much exploration are you doing? How much are you actually investing in the next generation? Even as you’re taking full advantage of what you’re doing today.

Useem: This is great. I’m going to turn to Anne, though, what’s just an editorial transition here. Just when we get our business model working, humming, successful, I can’t believe it, somebody turns the industry upside down, it’s so annoying.

Chaudhuri: Absolutely.

Anne Greenhalgh: Harbir, you just said one of the questions that you were addressing in the conference is how do you maintain your lead as an organization? When you say that, you make me think of organizations looking backwards over their shoulder rather than forwards and anticipating the future. Anticipating the future is a very difficult thing to do. So what sorts of recommendations came out of the conference so that organizations could do a better job of forecasting?

Singh: So it turns out, and Saikat referred to that early on, that in the conference we decided to focus on the full array of mechanisms to create new businesses. The idea really is that you have to have a presence in most of those modes of innovation. So you have internal innovation, most people do that, they have an R&D lab, they have some test marketing, but then do you have venture capital in firms that are in adjacent industries? Do you have partnerships with firms that may have complementary products or services? Do you have enough of a window into firms that may have a new technology that you might be able to negotiate in a merger and acquisition? We actually looked at companies like Comcast, and Comcast has very, very vibrant corporate venture capital activity. So venture capital these days is not just a classic venture capitalist who puts in some money with somebody who has a startup and hopes that that will be a fully functioning business. Fully one third of the dollars in venture capital today are contributed by corporations.

“Fully one third of the dollars in venture capital today are contributed by corporations.” – Harbir Singh

Greenhalgh: Oh, wow.

Singh: It’s very interesting. Comcast, Intel, Johnson & Johnson, all of them. And the point is, in fact, Joseph Schumpeter, one of the well known Austrian economists said long ago, “Nobody has a monopoly on innovation, innovation is distributed in the entire economy.” So you really have to hedge your bets but you have to be selective. You have to at least increase the probability of engaging in those relationships.

Chaudhuri: In some sense, we haven’t really seen a company that’s always been able to anticipate and place the bets correctly, right? I mean, what Harbir is really getting at is, you don’t necessarily have to always have a crystal ball because we don’t have a crystal ball. Instead, if we have the mechanisms in place, internally and externally, to be able to appropriately spot the changes and trends, and then capitalize on new resources and capabilities, and be able to approach those changes, that’s what distinguishes those who succeed. Let’s say the Apples or the 3Ms from the BlackBerrys and the Borders and so forth, who get ultimately disrupted out of the market.

Greenhalgh: Can you give an example then, of a company that has all four of these modes working?

Chaudhuri: Sure, Cisco is one example. In fact, Cisco’s an example that the Mack Institute’s been working with in a variety of capacities, whether case writing or research projects for more than a decade. And they’ve been a corporate partner of ours. Cisco leverages all modes, I mean, they have internal incubation, if you remember, TelePresence came out of their emerging technologies group. They are, of course, very well known for their acquisitions and aggressive acquisition strategy. But part of that group is also the investment and alliances team, who are very active, and Harbir has also written about this, and I’ve written about this as well. We had one of the executives at our conference who’s heading all these efforts. Now he’s in fact our alum. And he was talking about how they’re constantly trying to maintain a balance between these modes, that portfolio that Harbir was talking about, that’s perhaps the biggest challenge along with being able to implement them correctly.

Greenhalgh: And Harbir, just because I can’t resist, you’ve mentioned Borders, so how did Borders fall short on those four modes?

Chaudhuri: Borders along with Kodak is another classic example in this domain. There’s a problem that we observe called inertia, and it’s often due to internal processes which may work well under one set of conditions. But when conditions change, such as when things become digital or electronic, those very capabilities which once helped us become rigidities for us. It’s something that all of us know very well from our academic literature. Borders along with the Kodaks, their top management, for one, was rightfully protecting a lot of their existing business. Now, when your numbers are dependent on the existing businesses and you’ve got these small little challenges along the way in the form of digital (which was very poor quality at the time) it’s hard for you as a manager to say, “Oh, I’ll give that full attention.”

“When conditions change, such as when things become digital or electronic, those very capabilities which once helped us become rigidities.” – Saikat Chaudhuri

And so I don’t want this to seem like a process where companies are foolish or stupid, it’s too easy to say that. But it’s really hard to react and distinguish between the wheat and the chaff. So one was in recognizing the problem and the second was like Harbir was alluding to. There was never a portfolio approach in the first place, everything was one-sided: we do everything well, we hire the best talent, we do things internally. But if you don’t set up an organization from the beginning to have multiple modes, to be able to co-exist in some form, it’s very difficult to get those inputs, and then of course to react, which is stage two.

Singh: Let me also add about inertia, I think there’s an interesting issue there: that sometimes it’s not necessarily inertia but it appears like inertia, you are relying on what’s tried and true, that sounds very rational. “I’m sticking with my core competence,” that sounds very rational. But then I think the markets are now demanding that you also invest in the next generation technology. I think there’s a balance of exploring and exploiting that is really important: that I exploit what I’m good at, but I’m exploring even as I’m exploiting. This is where you almost have to have different parts of the organization doing different things, because you have to be world class in execution, but you still have to look for the next generation.

And just a quick example of which we’ve seen evidence for a while is Intel with its microprocessors. Whenever they introduced the next generation, whether it was a Pentium or a PRO, and so on, there was already a team working on the following generation, a different team. So they were in a sense internalizing the risk of the marketplace. [That process is] one way to…have a better chance of having the next generation as opposed to [predicting] where the future is, which of course nobody is necessarily better at than someone else.

Innovating Through the Ecosystem

Useem: Let me pick up and turn to a very well known example that everybody can probably personally relate to because they have flown in a Boeing 787, or they aspire to. Just to do a little bit of context: as I recall, the design of the 787 goes back to the early 2000s, probably ’01, ’02. Airbus is doubling down on the 380. Boeing takes a very different strategic direction, if you will, more point-to-point, less hub and spoke, in building the 787 composites. Yes, less subject to rust, therefore you can humidify, everybody loves that.

And with that being said, though, it did take Boeing several missteps in terms of timing to get that aircraft into the market. Now it’s, of course, very successful. So taking what you’ve said, Harbir and Saikat, and just weaving through some of those ideas which you’ve seen at Boeing, it sounds like they’re an innovator. They got a little bit stalled by some problems of pieces fitting together, but nonetheless, they probably took your admonition: rest on your laurels, make a lot of money from the 747s and 737s you got out there, but don’t stop innovating. What do you think?

Singh: You’ve raised a lot of important issues. The 787 was really a major innovation. The goal was 20% better fuel efficiency. It was also a change of materials, it was going to be a design that was much more advanced in terms of natural light and so on — with stronger materials, they could have bigger windows. So many specifications that they had, and the reason was quite frankly that…Airbus was starting to gain on them a lot in the 300 series aircraft. Boeing was dominant in 777 and 747, but Airbus was coming with the super 380.

“Innovation is a domain where you have to share both capital and technology. You have to partner and source ideas to jump ahead.” – Harbir Singh

What it illustrates really is innovation now is a domain where you have to share both capital and technology. You have to partner and source ideas to jump ahead. [Boeing] took what is probably a very risky approach which was to subcontract to a lot of major, major contractors. So for example, they gave most of the wing to Mitsubishi. It’s very hard to give the wing, which is one of critical components of an airplane…

Useem: You want to put it together at the end of the day.

Singh: …to a Japanese supplier. The fuselage, some of it was given to this Italian defense company. As a result of this extreme outsourcing, they changed the way you would partner, they changed it from what was called ‘build to print’ which was, “I give you all the specifications, you build it, and then of course it’s going to fit,” to, ‘build to performance.’ And build to performance was, “I’ll give you a performance goal, you innovate as best you can on that, I innovate as best I can on this, so now I crowdsource, in a way, better ideas.” But because there were so many players involved, there were delays in integration. And so it was actually over three years late, but a better aircraft.

Chaudhuri: Let me build on that. The task was very challenging. Airbus had overtaken Boeing and this was, as Harbir mentioned, product, process and business model innovation, right? So more point-to-point traffic away from the Airbus bet on hubs… You can have a good innovation strategy or a good strategy in general, but less-than-perfect process or leadership. This is a nice example of that. On the surface based on the outcome, you could interpret perhaps, “Oh, too much outsourcing, this is what it does and it has a negative outcome,” and given the politically charged atmosphere around that topic, many would buy that interpretation.

But I think where we come out on it is that the strategy itself was perhaps even necessary. Let’s remember that internal innovation also doesn’t have a very good success rate — somewhere between 10% and 15% if we believe the literature. And so the implementation was the issue. So how do you align incentives, how do you coordinate? This is not like a call center or an IT helpdesk which is well defined and codified, which you can put outside and say to a vendor, “Just, yeah, yeah, figure out how to do it, I’ll just pay you for it.” Instead, as Harbir was alluding to, this is something where innovation has to happen by the supplier, there’s a lot of tacit knowledge involved, you can’t just snap-fit an airplane so easily and make it work. There’s no room for error; this is an environment where you can’t have beta testing, right? So, in that context you expect problems. The coordination, for example: having more oversight on the ground, more Boeing engineers working with the actual Japanese engineers who worked on the battery, would have been useful. Not only to avoid the problems — because Boeing also didn’t have all the knowhow — but to be able to address them more quickly as well. So that’s one way of looking at it.

Singh: When they did this, because they had distributed the significant activity so globally, they had to build a delivery system for the subassemblies to come. So there was innovation in the actual integration process. As Saikat was saying, there’s a nice contrast of what might be a good business model, but then execution, this was the first time it’d been done, that’s where some of the hiccups may have been.

Useem: Harbir, just to pick up on the color, I recall seeing photo clips or maybe even video clips of gigantic aircraft bringing wings from Japan to Seattle. And it was always a little bit ironic: you’ve got wings on the outside and you got some huge wings on the inside, but to bring them over, that’s part of the innovation. They had to create different modes of transport to bring these gigantic pieces of equipment.

Greenhalgh: Yes, and when you say that, Mike, this is sounding like it could potentially have been very expensive and inefficient.

Singh: But it generated an aircraft that was superior enough that, in fact, it put Airbus back. So now Airbus needs to do something very similar. We gave this extreme example to point out that today innovation has to be done in ecosystems. You cannot just innovate individually. I mean, you can, but the success rate is going to be higher in the ecosystems.

“Today innovation has to be done in ecosystems. You cannot just innovate individually.” – Harbir Singh

Chaudhuri: And can I add one more thing on that. It’s not just about cost anymore. Co-creation is not just about lowering cost on the other end, and particularly outsourcing when people think about it; it’s about accessing expertise that I don’t have, right? One more example we talked about earlier is Apple. Apple’s really an integrator. IDEO came up with the design for the iPod and the iPhone and the iPad. It’s actually Corning who makes this wonderful touchscreen. I’m not talking about just the manufacturing, but who designed that touchscreen. Apple has that integrative knowledge that Harbir was mentioning, in order to put these things together in the overarching design, and so in many ways they’re an integrator or an orchestrator, or a firm that outsources a lot too. But in order to get the best possible engineering that they could get, so that their product is the best, costs are higher, coordination levels and expectations are higher. But hopefully, the quality of the product and the performance will ultimately be better than what they could have done on their own.

Greenhalgh: Very good, maybe just one follow-up. When you say the word ecosystem, are you talking about those four modes or are you talking about the partnerships and alliances?

Chaudhuri: The partnerships and the alliances. What we mean is you can have bilateral alliances but you can also have an array of different players along the value chain who work with you. One way to think about an ecosystem is, of course, the Apple or Android ecosystem. Another symbol, one that listeners may enjoy is Star Alliance or Oneworld.

Useem: We’re in a great discussion here with Saikat and Harbir about innovation. This is Business Radio Sirius XM 111. To anticipate where we’re going to go after the break, I’ll raise this question. I’d like you to help us appreciate a very famous phrase “The Innovator’s Dilemma.” Part of the connotation of that particular phrase is that incumbents that become well known and dominant often cannot innovate in time to survive. So many companies have gone the wrong way on that one. But I think you have a very optimistic view that with good counsel, good experience, and a whole range of innovative innovations, if you don’t mind my saying it, people can actually transcend the innovator’s dilemma.

“The Innovator’s Dilemma”

Useem: We’ve been having a very interesting discussion with Saikat Chaudhuri and Harbir Singh who direct Wharton’s Mack Institute for Innovation Management. It’s a research-focused but also outward-looking organization that pulls together great academic knowledge and research and tries to connect that with the real problems that people in industry and beyond are trying to solve.

And with that, Saikat and Harbir, I mentioned before the break that there is a phrase that floats around, I’d like you just to give us a couple more sentences to fill it out, and that is “the innovator’s dilemma.” Given that there is a well known dilemma that incumbents, although well-meaning, just can’t seem to break out of what they’re doing and do whatever the market’s changing toward. But as I’ve heard you talk about the first half an hour, you’re relatively optimistic that through thinking, examples, cases, research, teaching, people in industry or in services can indeed get around the innovator’s dilemma. Harbir, why don’t we start with you?

Singh: The original idea of the innovator’s dilemma was that companies get addicted to, or get so used to cash flow from their existing products that they keep improving those products, and they keep going to the same customers and asking them, “What do you want next?” But usually they’re variations of that same product, so they don’t rock the boat; they have cash flow. And the dilemma was that even when you’re doing that, the customer may switch to the next technology without even a second thought, and the company that is originally committed to this then has a problem. So they’re following the advice, “Follow the customer, be close to your customer.” That’s the dilemma: that that turns out to be wrong.

And so the ways one might deal with it is you really cannot innovate on the inside, you should have a separate unit with, you know, the “cool” people who are wearing cut offs and going out at 2:00 a.m., coming back at 1:00 p.m., or something like that.

Useem: Well, like the people around this table.

Singh: [Laughs.] Like the people around this table. And that’s what you need, but the office guys, you know, who come in at 8:00 and leave at 5:00, they’re the ones who are servicing the customers. And that seems to be sort of non-workable for most companies that there must be a gulf between these two. That’s what we’re talking about, to bridge that gulf, what you need is multiple modes of sourcing innovation.

“External modes are really necessary and the portfolio approach is necessary. We can’t predict the future. Experimentation is useful in trying to resolve this dilemma.” – Saikat Chaudhuri

Chaudhuri: The reason we’re optimistic that that can work is because we have examples of it, right? If you look at companies like Apple, perhaps even better, J&J, 3M, IBM, these are examples of firms that have withstood multiple challenges over time and have been able to transform themselves in order to adapt to those changes, whether it’s been technology or business model-wise like Harbir was talking about. In fact, our very solution or why we hosted this conference is because these external modes are really necessary and the portfolio approach is necessary. We can’t predict the future. Experimentation is useful in trying to resolve this dilemma.

Greenhalgh: Harbir, earlier you mentioned that we often think about innovation as having to do with technology. A quick thought might be that innovation is heavily concentrated in the tech field. But as I listened to you, Saikat, you mentioned J&J, and for example healthcare. Is it the case that we do tend to see more innovation in particular industries over others, and what are those industries if that’s the case?

Chaudhuri: That’s a great question. We see innovation everywhere. The auto industry is being challenged by autonomous driving and alternative sources. Of course, we see [innovation] in information technology, in aerospace, whether it’s the Hyperloop or the Dreamliner approaches and other technology-based sectors. I think innovation, personally, is everywhere. Of course, technology is an important driver of innovation, so we see it in technology-based sectors, and even in healthcare.

Look at finance today with different modes and approaches in that sense of dealing with how money is transferred. Blockchain is the technology solution, but also something like peer-to-peer payment systems. We’ve had social networking for a while now and people paying on WeChat or by Venmo and so forth — that’s challenging the industry. So we see it across the board. Of course, tech-based sectors take a lead in many ways.

Singh: But the question is, that there’s also innovation in consumer products, and one of our member companies with the Mack Institute for a long time was Procter & Gamble. And the person who was part of that community coming to our conferences often said that P&G is more a product development company than a marketing company. That they bet on the next generation product. As a result, its percentage of successful new product formulations is not unlike a tech company.

Greenhalgh: Very good. So for example if we were to look at the energy industry, would you say that the increasing supply of gas, partly by way of fracking and so on, has had an impact on the oil component of the industry? Would that be an illustration of innovation?

Singh: Yes, another disruptive innovation, but you have a completely different way of producing the next generation business model.

What Saikat was saying on payments, I think is fascinating that this is truly global. In fact, banks are already starting to struggle because, do you write checks anymore? You’re basically transferring online. Then again, cash has major, major challenges in terms of ease of use. And I think things are turning digital very, very fast. So that has barely started.

I want to return to Apple versus BlackBerry because that’s an interesting comparison. I was a big BlackBerry user and I still have this lost skill of typing with two thumbs which, unfortunately, has no application. But BlackBerry bet on the secure server with companies. All the banks were distributing BlackBerries. I won’t say they got complacent, but they felt they had something that would give them enduring advantage. And what happened really was that Apple had an ecosystem of software writers who were writing apps. As Saikat said, it’s a platform but the usability is dynamic.

“BlackBerry had a business-to-business sort of model…but Apple had a much more flexible model” – Harbir Singh

This is a classic case where on one hand BlackBerry had a business-to-business sort of model, so all the executives would use BlackBerry over a particular company. But Apple had a much more flexible model and it could also be a business phone. And that innovation was sourced through an ecosystem of software writers.

So this is where we are now, the world of partnerships and ecosystems and compensating people for their ideas. But they are in a system where they learn from each other, they’re in a community where they learn from each other.

Chaudhuri: We can take that example even further and illustrate the other side which is that Apple, despite its success, has not penetrated the corporate market fully. And so they’re partnering with IBM in order to get true access to the corporate customer. Right now it’s driven by individuals who want to use it at companies, but truly penetrating the corporate side, even Apple hasn’t been able to do yet.

Useem: So in doing that, they must have had to put their hand in front of their face, and kind of say, “We’re going to cooperate with the competitor?” But they did. And along those line are so many ironies. I want to bring out one that I think is pretty well known. As Apple developed the iPhone, it knew that apps were going to be vital for its functioning, and there was an internal debate, “Do we make all our apps proprietary, or do we throw it out to the world?” Well, we know the outcome of that. And that’s consistent with your basic line of argument here, that you can’t invent everything.

That was a fundamentally farsighted decision by Apple to open up app development to anybody. You have to keep in control, but…

Singh: It’s part of a broader trend of open innovation. That’s what a lot of companies have started using. The rise of the internet has also promoted that approach, where they’ll put out an idea and say, “If you want to work in this, submit proposals.” It’s not just the people they know; people they don’t know might write in and say, “I have a solution for this,” and then they can go further with that. That became another way in the chemical industry, in the pharmaceuticals, and in food products where they were essentially finding labs they had never worked with before that actually could do something. And then, of course, you have to wed them and so on, but you get new possible partners.

Chaudhuri: I’ll make a link to the Mack Institute because you may have heard of Procter & Gamble’s Connect & Develop Program, which was the idea that any scientist or, frankly, anyone around the world may be able to solve certain problems that they had, whether technical issues or otherwise related to, say, their detergent or other products. In fact, it was when Procter & Gamble was a member of the Mack institute that some of these early ideas for that program were developed through both conferences and workshops and some research that was done.

Useem: When people on the outside, individuals or maybe even small companies bring ideas to Procter & Gamble, it’s wonderful to see their idea on the shelf at a grocery store when they shop for it. I’ve always wondered, though, about the financial incentive to do that or maybe the absence of a financial incentive. I work with one large asset management company that put on its website, “If you have an idea where we might invest, and we take your idea, and we make money, you’re going to get a fraction of the upside of that.” Is that approach out there, or is that kind of a one-off example?

Singh: I think that’s a variation of the open innovation idea that, “We will give you an incentive to participate but also you know what things we’re working on and maybe there’s a mutuality of interest.” To some extent, the app writing [for Apple] is the same way. Any successful app gets a usage-based percentage and Apple (or Samsung or Android) becomes a more vital phone or instrument for communication. So fascinating, the world we live in today.

“Crowdsourcing is really powerful if you can channel it and structure it in particular ways.” – Saikat Chaudhuri

Chaudhuri: Crowdsourcing is really powerful if you can channel it and structure it in particular ways. One of the companies that spoke at our conference was TATA Communications, the large Indian conglomerate, but many people don’t know that they carry a large percentage of the world’s traffic. All those undersea cables across the Atlantic and Pacific, a large number of them belong to TATA, and they carry the traffic in part because some of those that went under in the early 2000s telecom bust, Flag Telecom and others, were bought up for pennies by the TATAs.

What they were presenting on was, “How do we use crowdsourcing in addition to investing in startups? How do we leverage our global centers of innovation internally? But also outsiders?” Their message was, “If you have a good idea, you could be in charge of that startup that we invest in internally or externally, so come with those ideas to us.”

Greenhalgh: Mike brought up the question of financing some of the ideas that come from outside, from crowdsourcing. What about issues of intellectual property? Harbir, do you know how those are typically handled?

Singh: Those are some of the challenges. Another one is leakage of contracts. We’ve talked about lots of reasons why these things work, so let’s talk about the hazards. One hazard is possible loss of intellectual property: people know something about your designs. Another one is lack of trust. The research, by the way, shows that contracting cannot squeeze out all opportunism; you still need to have a working relationship and level of trust. Again, you have to weed out those that for whatever reason you cannot partner with. The third is that you have to have a tolerance for failure. Innovation is hard. The success rate of partnerships in general is about 40%, so it’s less than 50%.

Tolerance of failure is very important. A lot of people give up, but fascinatingly (and Saikat mentioned this earlier) if I’m innovating internally on my own, my success rate is 10% to 15% if you count all the attempts. People don’t count all the attempts, so they report a higher number. Partnering is actually in some ways better.

Greenhalgh: You are hedging your bet.

Singh: Yes, you’re hedging your bet. One of the things to think about is, “I have to have to have a portfolio, I have to hedge my bets, but I need to use all the instruments,” and that’s part of what we find. The other last point I’ll make is that when some companies specialize in something, they say, “We just do internal innovation,” or, “We just do partnering.” That just limits the variety of what they’re doing. That’s one of the things we talk about in using the full array.

Chaudhuri: And just to add to what Harbir been saying, I think it’s very important to remember that there’s no magic bullet here, there’s no panacea which can solve everything. Being able to understand when to use which strategy and to execute each one is much more of a science than we make it out to be. I mean, just like companies develop capabilities in areas such as innovation or marketing, they need to develop capabilities. Harbir has done a lot of work in this area on how to partner, how to acquire, how to make these decisions about which mode to use. So it’s something which requires a lot of experience, but also investment to get good at.

Useem: We’ve been talking about how companies innovate in ways that are innovative. A lot of this didn’t happen 10 or 15 years ago, so it’s very creative. As our time grows short now, I have a practical question given the topic of this particular program, Leadership in Action. Say I’m a senior person at Procter & Gamble or Boeing or Unilever, the big European Procter & Gamble equivalent. I’m worried about innovative foods, innovative razorblades, innovative things coming from many quarters of the world. In light of what you’ve said, and in light of the research that you have sponsored and you’ve read so much of, what advice would you have for a senior manager who does not want to face the innovator’s dilemma?

“You need to have a culture where you are willing to embrace new business models where you know that not all attempts will work. And so you work towards experimentation.” – Harbir Singh

Singh: I think the first is to really invest in this range of options to diversify your efforts. Another thing we need to talk about is talent, and what kinds of talent work in which mode. You have to have diversity of talent so you can deploy them correctly. There’s also the question of corporate culture: you need to have a culture where you are willing to embrace new business models where you know that not all attempts will work. And so you work towards experimentation. But at the same time — and this is where the different kinds of talent come in — if we have a successful business model that emerges, we have to execute with real efficiency. So you need people who can develop an efficient business model but also people who can explore, and they may be different kinds of people.

Chaudhuri: I agree with those points and I want to emphasize that it’s about balance, ultimately. It’s about a balance, strategy, and an execution approach. Being able to explore and exploit like Harbir mentioned is very critical. Finding that balance is often what people struggle with. The good news though is, as an incumbent, we always talk about the negative things that come with established players, right? But there are many advantages: you have resources, you have capital, you have brand recognition, you have customers. In that sense, you do have a few advantages over the startups and others who will come and challenge you. You have a bit of time as well. So there’s no need to panic, but instead you can be quite systematic.

The key is to really read the signals and be able to distinguish the signals from the noise, and then react and use all your resources to go aggressively in various directions, whether it’s internal or one of the external options. That will help you to keep evolving and adapting, because that’s the name of the game nowadays.

Innovation in Higher Ed

Greenhalgh: We’ve talked about innovation in a whole variety of industries, and one that is dear to my heart, and I think yours too, is the academic industry. So I have wondered if MOOCs, Massive Open Online Courses, would be disruptors in the industry and cause academic institutions to be more aggressive about innovation. I’m just wondering what your thoughts are about that.

Singh: I have three points to make very quickly. The first one is that this alternative platform has to be something we invest in because you cannot wait for it to be perfected and say, “Well, now we’re ready to come in because now we know what it’s about.” We have to invest in this academic platform and revise and work on our ideas in this new mode of delivery. The second point is to also bring our faculty and our students along so that they can understand how the technology is still evolving, and understand what is best delivered in which mode. That requires experimentation and exploration.

“Ultimately, good delivery of innovative and futuristic and farsighted education is what it’s all about. So we have to participate in this, but we also recognize that the technology is still evolving.” – Harbir Singh

The third point, however, as Saikat was saying, is that as an institution that has some history and some momentum, we can sort of wait a little bit to make sure we vet the ideas, because ultimately, good delivery of innovative and futuristic and farsighted education is what it’s all about. So we have to participate in this, but we also recognize that the technology is still evolving. We don’t have, yet, the delivery platform of the future.

Chaudhuri: I agree, and we need to stay on top of it until we see a clear path forward. Right now there’s a lot of experimentation going on. You could argue whether we should be at the cutting edge and leading that experimentation or we should be a fast follower. Sometimes as an established player it’s better to be a fast follower than it is to be the leader.

From my perspective, undoubtedly the online platform is going to become important. If we look to education more broadly beyond the higher secondary schools and elite universities, if you will, to solve the world’s education problems (especially in emerging markets or in developing countries like in Africa, India, and so forth) traditional approaches like building schools aren’t going to cut it. We’re not going to be able to invest that way.

Just like we had mobile and wireless solve that problem for us in telecommunications, so we didn’t have to dig up all these different areas and do the wireline connected type of approach, we will have some change in education as well. What’s exciting to me there is this idea of on-demand learning. Sometimes when we teach things here, in the spirit of what Harbir was saying, sometimes even our own MBAs say, “You’re teaching us leadership or M&A in addition to finance and so forth, but we can’t use all these skills at once, we need some of them over the course of 10 or 15 years.”

So I think part of the opportunity is not just about what we do in the two years [of an MBA program], but how do we continually have this lifelong learning opportunity? And that’s what Harbir was talking about, segmenting and understanding where we can use which medium. I think the opportunities are there, it’s a bit of a threat, but we have some advantage in being a well-known institution. In our case, I think physical presence still matters; I would like to think there’s a benefit. But we need to stay on top of it, see what happens, and adapt.

Useem: I feel compelled to ask kind of a curiosity question about the Berries and everything you’ve said here. We all know that in technology, geography is vital. If you’re within 50 miles of Silicon Valley, you’re probably better off facing all the delimiters the innovators face. Some countries have a much better record for innovations, patents, and intellectual property development, and so do some companies. Last time I looked at the Chinese maker of hardware competing against Cisco, Huawei, they receive more patents annually than any other company in the world. Why is innovation in that sense skewed towards certain geographies, certain countries, and some companies? What do you think?

Singh: There’s actually a fair amount of research on this and I know you’re referring in part to that. The idea of clusters is an important one. There are clusters of universities, companies, graduates, suppliers, customers, and those clusters tend to be concentrated in particular areas. So that kind of maintains a historical success rate in particular geographies.

However, with the mobility of people with online communication, Saikat has done some work on high-end outsourcing where scientists are sitting in a different part of the world working seamlessly with people, let’s say, in Silicon Valley. What we’ll see in the future really is a virtualization of this phenomenon. The countries that have more scientists graduating today may well start doing a lot more new product development and new technology development because they have the resources. With the internet link, it’s possible to make those connections.

Chaudhuri: I agree with that and I think the very example you use is an example of how the classic ecosystems can be challenged. Huawei came and challenged Cisco, which has been dominating routers and switches and internet infrastructure for a couple of decades now. It can happen if the right ingredients, like Harbir said, are put together. That’s an example of an ecosystem, the kind of thing that we’ve been talking about, but of a different form.

Useem: All right, everybody. Hang on to your hats, there is a lot of innovation out there, and it’s maybe everywhere. I think that’s what I’ve got from the last point here: concentrated, historically, in places like Silicon Valley, south of San Francisco. But with the internet and everything else, it may be everywhere. Harbir and Saikat, we’re extremely grateful that you have spent some time with us, that you came into the studio. Thank you, and we wish you the very best on your research.

Singh: Thanks.

Chaudhuri: Thank you. Great to be here.

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