Business Digest magazine has profiled an idea on Polycentric Innovation put forward by one of the top players in the field. On the topic of globalization and innovation there’s no one more knowledgeable than Navi Radjou, executive director of the Centre for India & Global Business, Judge Business School, Cambridge University. The magazine also features two interviews with Xerox and Suzlon execs on how they are putting his idea into practice.
The article poses the question: What if emerging countries were more than just sources of low-cost labor and potential new markets for developed countries?
Navi Radjou invites companies to adopt “polycentric” schemes for innovation. This means creating networks from talent, capital, and ideas from wherever in the world they are found to build new levers for value creation.
How many companies have, like agricultural equipment manufacturer John Deere, re-imported products developed for emerging countries to satisfy unsuspected demands in Western countries (in this case, the low-cost 5003 tractor designed for the Indian market)? “Too few,” answers Navi Radjou, commenting that similarly, too few companies have taken advantage of the cross-innovation opportunities springing up around the world. “The centers of gravity for innovation are still New York, Tokyo, London, and Paris. But this is a serious mistake!” says Radjou. He urges companies to envision innovation polycentrically. “Break apart the innovation nerve centre (R&D laboratories, financial resources, responsibilities, etc.) and spread it into new areas of the world.”
The World is Changing...and So is Business
The OECD has predicted that developed countries’ share of global GDP will fall from 60% in 2003 to 43% in 2030. As a result, business will soon be conducted in a polycentric world where the United States, Europe and Japan are intimately connected with influential new growth centres in Asia, Africa, and Latin America. Companies will have to deal with an increasingly diverse and thus complex world. For example, by 2020, the Chinese middle class, which currently includes 250 million people, is expected to double, and a quarter of the world’s workers will be Indian.
Unprepared Business Managers
Business leaders seem to be aware of this phenomenon, for a 2010 IBM survey of 1,500 executives worldwide shows that 76% of them expect Western economic power to shift toward emerging markets. However, the same people substantially underestimate the effort required to cope with such a shift. Only 23% of respondents think globalization will have an impact on their company in the next five years. Even more disturbing, 98% support obsolete business models based on a monocentric world.
A Few Exceptions
A handful of business leaders have nonetheless felt and acted upon the changing wind. They include Cisco CEO John Chambers, who in 2007 opened the Globalization Centre East in Bangalore. More than a R&D laboratory, the centre was conceived from the start as a second Group headquarters.
Furthermore, Chambers put Cisco’s second in command, Wim Elfrink, in charge. “This sends an extremely strong signal,”
Radjou comments. “Appointing a high ranking, widely recognized person to head of this centre shows the strategic importance of the initiative and indicates that everyone should take it very seriously.” It is actually not surprising that Cisco is a pioneer of polycentric innovation. The forward-looking, Silicon Valley company has a reputation for taking interest in startups, and between 25 and 35% of new companies in the area are created by Indians or Chinese.
Characteristics Of A Polycentric Company
What kinds of companies get involved in polycentric innovation?
What are the advantages of adopting this approach?
Prerequisites: Openness, Networks, Flexibility
Radjou presents the main characteristics of companies conscious that the United States and Europe are no longer the centres of the economic world.
• Open-minded decision-makers. Senior management plays a key role when it comes to implementing polycentric innovation processes. “Change in mindsets comes from above,” says Radjou.
• Networked organization: Polycentric companies have broken down hierarchical strata and silos. They take good ideas from everywhere—the bottom of the organizational pyramid, suppliers, and customers alike.
• Adaptability: “Flexibility is critical for dynamic learning and success in extremely diverse environments.” Polycentric companies are not tied to a single (European or American) business model.
A Gradual Process
Companies rarely adopt polycentric innovation overnight. It is usually the final step in a process of R&D internationalization (see “Four Steps Toward Polycentrism” on the next page). 3 Advantages of the Polycentric Vision In a context of increasingly scarce resources (i.e. crisis-struck budgets, environmental issues leading to attempts to do more with less, etc.), good ideas must be tracked down beyond national borders.
• Frugality fosters creativity. Radjou explains this point with one word: “Juggad.” This Indian word refers to “the ability to improvise solutions despite constraints.”
• Process improvement. Radjou relates that Carlos Ghosn recently provided three engineering teams with technical specifications for a car and asked them how long it would take them to produce it. The Indian team produced a solution three times faster than the Japanese and European teams!
• Leverage spread out competencies. “1+1 = 11,” says Radjou. Pfizer has been struggling to find promising new molecules despite R&D investments of eight billion dollars a year.
In October 2010, the pharmaceutical company announced a 350-million-dollar partnership with Biocon, Asia’s leader in biotechnology.
What will motivate Western business leaders who are reluctant to watch their power shift to their counterparts in emerging countries to get involved in polycentric innovation?
Face Fears of Change
Initiatives to shift decision-making centres toward emerging countries are likely to encounter internal resistance. While engineers generally seek emulation and welcome the opportunity to confront their ideas with those of their counterparts in emerging countries, Radjou says that sales and marketing people are usually less enthusiastic. They tend to believe that innovations from emerging countries (often cheaper) will cannibalize Western products and services which are still selling well...at least for the time being. Business leaders have to get involved to foster discernment, pro-action, and innovation.
“They must demonstrate the strategic nature of polycentric The Five Steps of Polycentric Innovation Multinationals concentrate R&D in the West and only allocate marketing and sales to emerging countries. Companies begin to transfer part of their R&D to countries where labor is inexpensive (notably to India due to its well-educated engineers). But this approach reflects a logic of outsourcing (for example in IT services) and solutions are still developed for the West. Multinationals recognize the potential of emerging countries. They delegate more responsibility to local business units, which start to orient their R&D toward regional needs. Nevertheless, the people making decisions about product and service launches are still Westerners.
Companies begin to form R&D networks, where ideas (i.e. new products, business models, etc.) from emerging countries and Western divisions mutually nourish each other. Responsibility for important decisions progressively migrates toward business units in emerging countries. Innovations born in India, China, or Brazil are implemented in the West. In this final step, R&D is organized in hubs spread across the world. R&D units in emerging countries have an unlimited prerogative to define and launch new products and services. Strategic management positions are established in these countries. Fortune 500 companies concerned The Five Steps of Polycentric Innovation Multinationals concentrate R&D in the West and only allocate marketing and sales to emerging countries.
Companies begin to transfer part of their R&D to countries where labor is inexpensive (notably to India due to its well-educated engineers). But this approach reflects a logic of outsourcing (for example in IT services) and solutions are still developed for the West.
Multinationals recognize the potential of emerging countries. They delegate more responsibility to local business units, which start to orient their R&D toward regional needs. Nevertheless, the people making decisions about product and service launches are still Westerners.
Companies begin to form R&D networks, where ideas (i.e. new products, business models, etc.) from emerging countries and Western divisions mutually nourish each other. Responsibility for important decisions progressively migrates toward business units in emerging countries. Innovations born in India, China, or Brazil are implemented in the West.
In this final step, R&D is organized in hubs spread across the world. R&D units in emerging countries have an unlimited prerogative to define and launch new products and services. Strategic management positions are established in these countries.
Create a Sense of Urgency
Radjou recommends creating a sense of urgency to accelerate the transition toward a polycentric model of innovation. The speed of change is indeed increasing exponentially, so it will be much easier to proactively rethink your business model now than in five years. For example, Renault-Nissan very quickly perceived the threat of companies like Tata with its low-cost Nano car. In May 2008, Renault-Nissan consequently formed a partnership with India’s Bajaj Group to create its own low-cost car. The new car is to be launched in 2012 and should cost less than $3,000. Bajaj is handling car design, engineering, and production (with Renault-Nissan in a support role only), and Renault-Nissan will take care of sales and distribution.
Promote Good Ideas
Meritocracy implies giving knowledge from all around the world equal footing, and it is a decisive component of polycentric innovation policy. Hence the importance of developing cross-border collaboration tools. For almost a decade, IBM has organized a yearly online “innovation jam” that brings together minds and viewpoints from throughout the world to find new solutions to today’s major problems. Since 2001, over 300,000 people worldwide have taken part in this quest.
The 2006 session brought together 150,000 people from 104 countries and led to launch ten new IBM project launches for a total investment of $100 million. Further proof that the world is changing, at IBM, two thirds of the ideassubmitted uring these mass brainstorming sessions currently come from emerging countries.
Does the blossoming of good ideas around the world mean the end of the West? “The end of its hegemony, by the looks of it,” replies Radjou. “But this does not mean the United States and Europe have lost their power to innovate technologically.”
Their real challenge is to let go of their arrogance, open up to new sources of value creation, and capitalize on know-how from other places. They should look to Brazil for all things related to well-being, to China for cost innovation, to Russia for fundamental research (notably in mathematics), to India for biotechnology and renewable energy sources, and to the Middle East for financial innovation.
Copyright Speakers Corner 2016