What Matters: Using technology to turbocharge innovation in a downturn

22 April 2010

Social enterprise: It takes a network

By Raj Kumar

In Social Entrepreneurs

22 April 2010

Teaching the world to change

By Dan Viederman

In Social Entrepreneurs

22 April 2010

Innovating at scale in the social sector

By Jonathan Bays and Marla Capozzi

In Social Entrepreneurs

13 April 2010

The economics of social progress

By Iqbal Z. Quadir

In Social Entrepreneurs

Previous: Asia and the elements of innovation

Next: Optimizing for innovation

Using technology to turbocharge innovation in a downturn

By Jacques Bughin, Angela Hung Byers, and Michael Chui

6 August 2009

Amidst the pain of an economic downturn, comes an overlooked competitive opportunity for companies: during recessions, only major innovations pass the test of success. These are the kinds of innovations that can sweep away older business models, creating a foundation for major growth that will endure long after the downturn has passed and a New Normal has taken hold . ¹

The history of recession is also the story of technology advances that overturned the existing competitive order. Digital computers were born during the Great Depression, the Ethernet during the 1970s oil crisis, the IBM personal computer in the early 1980s recession, and the World Wide Web, which emerged from the recession of the early 1990s. And it was during the last recession, in the early 2000s, that innovative companies began staking out new leadership positions via the Internet. Apple, for instance, changed the business model in the music industry when it launched its popular iPod music player, synched to its online iTunes music store. Amazon.com pioneered commercial “cloud computing” by selling Web services that tapped its huge in-house base of servers and other IT infrastructure. Google, meanwhile, became an online industry leader by linking its search engine to advertising.

Though companies are tempted during a downturn to manage for survival, recessions in fact reveal periods when the competitive pecking order changes dramatically. Research by our colleagues shows that nearly 40 percent of leading US industrial companies tumbled from the top quartile of their sectors during the 2000–01 recession, as did a third of leading US banks. In many cases, these stark reversals of fortune result from disruptive innovations as companies adopt new ways of doing business. ²

In the here and now, new technologies and technology adoption is setting the stage for novel business models that portend disruptions as great as those of past downturns. While the internet was at the heart of the dot.com bubble and the ensuing recession earlier this decade, this time around it is giving rise to innovations that will set the stage for a new era of growth. Among these are the expansion of broadband data networks and of social applications—both wired and wireless—which have become nearly ubiquitous; the development of tiny, embedded sensors that are built into products and that help create sources of new data across these expanding networks; and a breadth of powerful analytic software that is creating new business opportunities from these vast streams of information.

The network of all

We see two broad areas of innovation taking form as a result of these advances. The first of these is in what we call the “Internet of People.” Broadband technology is linking individuals across the globe as never before. Many of the interactions in which these people participate are for enjoyment. However, a significant and growing number use this technology to connect professionally with other individuals, share knowledge, and collaborate on work projects. At the same time, new digital platforms are multiplying throughout this digital firmament, establishing new locales for this online collaboration. Think of them as “digital workplaces”—or even “factories”—where individuals and organizations can gather to co-create content, products, and services. It’s also important to note that while these new workspaces can be extensive and complex, they can also be highly efficient, providing a virtual marketplace that matches specific individual effort to the discrete tasks at hand. (a specialist, for example, signing on to create a challenging software component) As a result, they increase the possibility of radically reducing the cost of innovation and allowing much more talent to be brought to bear in creative work.

One place to see the application of these advances in action is in the mobile phone market, where manufacturers and service providers are tapping creative capabilities to increase their competitive firepower. In this case, the platforms are new applications stores. In these virtual labor markets, software developers—mostly third parties—create programs, or “apps,” which cell phone users can download directly to their smart phones. They allow users to play games, locate nearby restaurants or friends, identify songs, and access countless sources of specific information, as well as a wealth of other activities, limited, it seems, only by the imagination of the application developers. During the current downturn, highly skilled and sometimes underemployed individuals, among others, are earning money by designing these programs. They are also enhancing their reputations and future marketability in the broader programming community. And, as the applications become more popular, these application stores attract even more developers, who in turn create better applications, creating even more benefits from the Internet business model.

The attention and interests of digital communities can be channeled in other ways as well. Many companies now invite their customers to rate products and recommend improvements. Not only is this a good way to keep customers engaged with the brand, but these streams of data also give companies powerful new insights on how to position products, create new ones and decide on pricing strategies.

This new connectivity is expanding at an ever faster pace and on an ever broader scale. New devices, some of them cheaper, from stripped down netbooks to smart phones, are expanding the ranks of the connected. And even cheaper connectivity may be in store thanks to disruptive models in emerging markets. India’s Novatium, for example, is a startup that uses low-cost hardware and a bare-bones subscription software model. It provides the Net connections and the experience of a standard PC at 60 percent less than what it could cost in the developed world.

When objects become smart

The second innovation nexus is what we call the “Internet of Things,” which arises from the tiny sensors, computers, and other microdevices that can be built into physical objects and connected through wireless networks. The results are objects that become “smarter” and more interactive, with the potential to transform traditional business models. Goods and services that self-monitor can be sold in much finer slices and much more efficiently. Rather than buy a product outright, or sign a long-term service contract, sensors can track actual usage, enabling customers to pay only for what they consume or even the value they receive. In some cases, what was once a weighty capital expenditure is transformed into a lighter-weight operating expense, when products are transformed into services.

The new logic of paying for value is creating an array of novel business models. Take aircraft engines, where manufacturers are selling “thrust” as a service—rather than engines as a product—since they now are able to track the usage and performance of their engines electronically. At the same time, airplane manufacturers are offering contracts that guarantee “uptime” of their products, using embedded sensors in airframes that are able to determine when preventative maintenance is needed. Similarly, auto insurance companies now are experimenting with networked sensors installed in cars that allow them to price insurance based on actual driving behaviors (such as distance, speed, and where the car is driven) rather than blunter demographic characteristics (such as age or where a customer resides).
_________________________________________________________________

Many of these technology building blocks also are helping companies navigate
through the current downturn: video conferencing is reducing travel costs, the Web is furthering collaborative efforts and increasing the effectiveness of workers, and many companies are mining and analyzing their unused data to find new customers and better serve existing ones. To be sure, these are critical survival tools for tough times. But it is by thinking through the recession that business leaders will discover how technology will once again enable the successful business models of tomorrow.

¹ Ian Davis, The New Normal, McKinsey Quarterly, March 2009.

² See Richard Dobbs, Tomas Karakolev and Rishi Rai, Preparing for the next downturn, McKinsey Quarterly, April 2007.

Comment [32]

Agree? Disagree? Let us know what you think. Please include your full name with your comment. Comments may be edited.

Seems to me that the reason why real brilliant ideas and huge innovations often come out in downtowns is because recessions really give people and companies the chance to think seriously and think long term – think what customers really need and will. Downturns also often prove that growths based on certain models don’t always work. That’s why people want changes which they couldn’t have had time or the courage to think of and exercise in good times.

Posted 7 August 2009, 03:09 by Ran R
Most “innovations” in my view tend to be trivial or irrelevant when compared to the true needs of a society, or the world. “There’s an app” for a hundred inconsequential things, but not a single app that ensures that democratic voting can take place with six sigma reliability in the most technologically “advanced” country in human history. Where’s the innovation that brings people with integrity and competence into government, instead of mendacious, warmongering incompetents and corporate whores? Have we solved world hunger yet with innovation? What about human slavery, which is larger now than ever in human history? Most “innovation” is hyped up far beyond its true importance, in part to distract us from the fact that governments and corporations aren’t really dedicated to, or competent in advancing, our true wellbeing. Short-term profit requirements of corporations drive us to define innovation in stupidly gee-whiz expectations, like Moore’s law, creating fantasies of exponential growth in profits, market share, and inflated stockholder demands for ROI, as we witnessed in the most recent, “disruptive” innovation: leveraged securitizing of non-existent real estate value that, under the innovative finance leadership of the technologically best and the brightest, has brought the world to the edge of economic catastrophe, and ruined the lives of millions. Most innovations I see are profoundly irrelevant distractions, or even worse, are put to use to advance militarism, invasion of privacy, enrichment of the already rich, and impoverishing exploitation of the poor, despoliation of the environment and the climate, political deception and manipulation, and creation of a public culture of shallow, consumption-fevered idiots who know more about twittering, baseball scores and downloading songs than they do about the looming fate of a world going insane with techno-addicted “growth” fantasies.

Posted 6 August 2009, 23:50 by Fred Hosea
I agree. During downturn, people flex their innovative muscles to come out mess they were in. The uncertainity one faces, makes them to use all available resouces in applying and using them effectively. This not only brings out innovation – cost cutting, optimum use of resources, effective utilisation of available funds and resources.
Companies become lean and active.
Once in a while, a recession helps management gurus to look beyond routine formulae. Employees work on new intiatives be the front runners.
Recession gives scope to prove one’s innovative skills.

Posted 6 August 2009, 23:33 by EMANI VENAKTA RAMA KRISHNA
Insurance charging is an interested topic which is also expanded into motor vehicle tracking and values for leasing. For example, an older owner driver who garages the car and only travels in a particular area can receive customised insurance, and also be left with a higher residual value in a lease vehicle because of the nature/way it has been driven. this insurance leasing profile can differ from an owner who, parks the car on the street overnight, often travels long distances at speed , and possibly also goes to areas known for high criminal activity / interference
with vehicles. Such a profile would lead to higher insurance and obviously less residual motor vehicle value due to the nature of the driving history

Yes I agree, sensors and the ability to have live data to profile activity will becme more pervasive, and possibly in the eyes of some, more invasive

Posted 6 August 2009, 17:19 by Marcel van Dijck
This article misses the whole point of what innovation is. The essential topic of this article is related more to the evolution of products and services within an economy than real innovation.

Innovation is something that can significantly enhance the workplace or the world we live in. Something that is truly innovative meets one of the following criteria; it improves the quality of life; substantially increases productivity; or significantly impacts for the better the way we go about interacting with others in our daily life. Things like the transistor, the computer, robotics, the space program, and the internet are all excellent examples of innovation that meets that criteria.
To cite Apple’s iPod and iTunes store as an example of innovation is ludicrous. The iPod was an evolutionary product spawned by Sony’s Walkman product and the iTunes store was nothing more than a legalizing of Napster, Kazaa and a few other illegal peer-to-peer file sharing systems.

It would be nice if business really did reach out during recessionary times to develop a large amount of innovation but the reality is that sadly, in the US anyway, that does not often occur.

Posted 6 August 2009, 15:29 by Pat O'Connell
Jacques, Angela and Michael

Here is my take:

For an innovation to be successful, it needs three things: 1) the innovation itself or the special sauce that is different and valuable, 2) low cost manufacturing to bring the innovation to a free market where the consumer is able to buy it and 3) an infrastructure of regulatory, cultural and physical environments that allow the consumer to take advantage of the different and valuable nature of the innovation. An innovation by definition brings some form of change. However, an infrastructure will resist change. Therefore, it is the infrastructure that is the most critical in predicting product success and also the most ignored or forgotten element of innovation.

Apple may be the best real world example. The iPod was invented as an MP3/AAC music player not very different from others on the market and much more expensive. What Apple did that was innovative, was to build the infrastructure of iTunes. Before iTunes, the options for loading an MP3 player included ripping CDs to MP3 files or illegally downloading music. iTunes allowed a user to download music, song by song, legally. This revolutionized the music industry and propelled the iPod to innovation stardom.

What if we came up with a new innovation? How should we structure a business model to ensure its success in the market? Think of the movie “The Fly” and the invention of teleportation. On the surface it would appear that teleporting a human should be a successful innovation. But how would you manufacture this in high quality and at low cost to allow these machines to be purchased by a government, company or individual? What regulatory issues and cultural issues would the inventor face? Would you require a new electrical or communications grid? These questions are just as critical to the innovation’s success as the the innovation itself.

The power of a recession is evident in its ability to motivate regulatory and cultural infrastructure change. It is not the innovations themselves that change but rather the ability for a consumer to take advantage of them. When the status quo is unacceptable to the population, the natural reluctance to shift the environment is less.

This is my model of driving successful innovation. Please try it out and let me know what you think!!

Posted 6 August 2009, 14:00 by Michael Rogerson
This paper’s thesis is strongly driven by several reasoning errors common in analyzing cause-effect and time shift issues. The writers have selected historically well known process and manufacturing advances by filtering periods of economic distress in search of such breakthroughs. There is no argument presented to show a relative paucity of such advances being similarly introduced during periods of prosperity. Thus, the coincident timing link between distress and innovation is not at all proven. In addition, antecedence, while necessary, is not sufficient to demonstrate causality.

Ironically, there is a clue early in the paper to an alternative, and perhaps more useful, explanation of the timing of the development, introduction, acceptance and integration of major technological change. The authors write, “Research by our colleagues shows that nearly 40 percent of leading US industrial companies tumbled from the top quartile of their sectors during the 2000–01 recession, as did a third of leading US banks.” The very mention of a 40 percent change in a large inertial industry should cause one to suspect the inclusion of volatile financial market pricing as a component of the ranking metric and, not surprisingly, the measurement was based on returns on invested capital and market-to-book ratios, the latter being directly dependent on equity market pricing. Each major period of significant equity market decline, and the concomitant periods of economic distress highlighted in the paper as times of major technological change, typically and obviously followed a time of equity market froth and economic prosperity. Surely, during the boom times, both corporate investment and venture capital were much more than usually abundantly available to support long lead time basic technology research, the fruits of which would then be being harvested just as the markets and economic declines set in. Thus, the coincidence that recessionary periods exhibit technological advances is an artifact of the time shift of research breakthroughs from good times making possible new applied products and processes in bad times.

As a venture investor, designer and manager of semiconductor, computer communications and medical electronics technology during the 1960’s, 1970’s and 1980’s, I can attest to the fact that it was the optimism of good times that allowed for the research and development of breakthrough technology which, as it turned out, took hold during the intervening recessionary eras. To model research investment as understandably driven by risk insensitive cheap capital seems a lot more Occam-sensible than to expect venture investors to set aside their risk aversion during periods of economic turmoil. Perhaps the point of the article should have been to recommend that technology managers should press ahead during recessions when most others won’t fund new technologies.

Posted 6 August 2009, 13:46 by Leeam Lowin
I believe this article touches the topic of innovation in a very tangential way, instead of in a evolutionary/sistemic one. What I mean is that innovation or disruptive innovation seldom “appears” as the result of some “gotcha” insight, or as the result of executive common sense thinking, but it comes in waves, in which the end product/solution around that innovation takes a serious beating and improvement before it actually disrupts a market or creates new demand – this opinion of mine is very much in line – I suppose – with the overall dynamics of marketing/launching innovation proposed by Harvard MBA professor Clayton Christensen.
What I do believe is that this may be the moment for “to be” innovators to boost their efforts to make their innovative ideas “market-ready” in an accelerated way, while consumers are ready and willing to experiment with new ideas (simpler, more cost-effective and more efficient) that “do the job” they need to get done.

Posted 6 August 2009, 13:41 by Cesar Ferrari
Completely agree! Regardless of their motive, there is a desire in people to rise to the challenge. Voids will be filled, traditional business models will be killed and creativity will come to the forefront. It’s times like these where people are forced to think and try new ideas, to use that awesome brain-power. You are right on the money here and I look forward to participating in this new era.

Posted 6 August 2009, 13:01 by Joe Barnes
Very fathoming!

I was missing such a deep “food for thought”. thanks for that.

We might be able to construe a “New Society” structure wherein we could think in “layers”:

1. The first Layer it’s the “Network” as transport for all “things” that could inhabit the digital realm.

2. Going up one layer you might find the the “Internet of Things”: A huge slew of interconnected gadgets (imagine our vehicles talking to their maintenance computers or locating other – may be loved ones’ – vehicles and showing it up on the screen for us).

3. A third layer would be the “Internet of People” at the hem of this “Digital Universe”, directing, coordinating and “driving” things for service…

4. A fourth layer, though not necessarily, above in function, might be the “Business Network”.

5. A fifth layer might be “The Network of Things and People”, an advanced interconnected “Digital Space” wherein you could do everything from “Shopping” to “Booking” a vacation, hotel or anything.

This “Network of Things & People” would be the seed for emergent Business Models…

Thanks for the “Food For Thought”…really inspired me!

Posted 6 August 2009, 12:26 by Jose Payano

Commenting is closed for this article.

Previous: Asia and the elements of innovation

Next: Optimizing for innovation

Send an e-mail to let us know how we can make our site better.

Will Asia become the center for innovation in the 21st century?

Comment on the debate

Where innovation creates value
Is the United States on the verge of being pummeled by a technological hurricane? Professor Amar Bhidé says no and explains why the US is able to stay ahead.