The inevitable opening up of global corporates and industry

There is an urgent need to “open up” traditional companies and make them more attractive to innovative competence outside their traditional boundaries, and establish the necessary structures and platforms required to accelerate cooperation with external talent, innovators, entrepreneurs, subcontractors and the wider community.

In today’s hyper-competitive, über-connected globally integrated economy requires that companies develop and launch new products and services faster than you can say “silo-based research-and-development!” The innovation resources required to achieve this and successfully renew and adapt their businesses do not exist within the enterprise itself, but outside of the organisation.

If your corporate strategy for 2015 is to rationalise and streamline operations by decreasing costs in the traditional sense – you are on the wrong path and missing future opportunities.

In the majority of companies capital is tied up in property, equipment and staff in addition to investments in research and development – previously prerequisites for profit growth – these lumps of fixed capital are increasingly becoming obstacles for future growth and profitability. Effective allocation of precious resources in today’s rapidly changing environment means revisiting these priorities.

It is not only the case that large multi-national companies must find new strategies for opening up and learning to collaborate with a wider variety of organisations and entrepreneurs (by providing access to their established brands, distribution channels, subcontractor relations, CRM databases, premises, attorneys, and more) but they must also learn how to work as if they really are entrepreneurs themselves.

The Golden Age of Entrepreneurship
The new generation of labour and talent are increasingly dissatisfied with the rather dismal prospect of becoming just another employee in one of the classical multinationals. Largely because of the limits that this entails – limited freedom, zero ownership, partial opportunities for participation in strategy and little gain from in the added value they stand for. They simply demand more. Fortunately for big business startups crave what they don’t have in order to quickly scale up – financial strength, industry connections, distribution channels, strong brands and the administrative muscles needed for mass sales. This is where the combination of talent and resources can be truly successful and may well be the best option for the opening up the old “dinosaurs” and enable them to remain relevant.

Corporates are now beginning to wake up to this reality. The giant Unilever is leading example. More than half of all Unilever innovation and business development projects are currently based on open innovation and collaboration with external actors. Their goal is to raise this further to an impressive 70% by 2018.

The online community US Quirky has a network of over 40,000 innovators who in essence are an out-source-able innovation enterprise. General Electric, the world’s largest company, has signed a strategic partnership with Quirky to find the next generation innovators who can create best-selling white ware products. Looking to the east Chinese Haier has more than 650 000 innovators in their open innovation network! In the future, the cost of corporate innovation will be driven down and could even approach the zero bound.

The necessity of open innovation
In the near future it will not be a question of whether you will be working with open innovation, but rather how. Success on this path requires strategy, awareness and competence at C-level. Your company´s next CEO should not be employed on their cost-cutting merits, but on the basis of their track record with (open) innovation strategy and new innovation business models.

Further indicators that help put this approach into perspective abound. Take Volvo, this colossus was sold to Chinese Geely for 12 billion Swedish kronor while in September 2014 Microsoft bought the Stockholm-based gaming company Mojang (the young company that built Minecraft) for 18 billion kroner. It took Markus Persson, the entrepreneur behind Mojang, only 4 years to build a more valuable company than Volvo. The Swedish government’s tax revenue for the sale of Mojang is roughly equal to what the Swedish state invests yearly in innovation! Looking at Finland’s national income it is not traditional corporates that account for a quarter of Finland’s tax corporate revenue, it’s the game company Supercell. Supercell did not exist a decade ago and neither did the market in which it operates. More about the Finns later…

Since the industrial revolution, access to capital has been more important than knowledge and ideas. Those who could afford to build factories and retain the best engineers and laboratories could secure vast portions of the market. This balance is shifting – and more rapidly than many realise. In today’s economy, anyone (with the right talent) can build companies cheaply and in some markets efficiently reach consumers on a global scale without having the power or strength of the likes of Coca Cola.

Expensive all-encompassing proprietary R&D is no guarantee that companies can offer the market the best products and services they can produce. The fact is that linear investments with lifetimes of 10-20 years are no longer a necessary or prudent strategy. No one knows how the market, demand and competition are going to look like in 5 years, much less 10 or 20. Why employ on hundreds of costly engineers, laboratories and production facilities when truly agile competitors are popping up like mushrooms with better, cheaper products and services. Look out because this could happen before you have finished planning your meetings to set a working innovation strategy.

This is already the reality for industries such as radio, television, music, publishing, logistics, telephony, taxi, and hotel and retail. Knowledge intensive industries will not be immune – this is just the beginning and no industry will remain unaffected.

Nokia had “everything”, but died
The “traditional” companies often obsessively strive to reduce costs and save as much as possible, but are these old school director’s tricks the essential recipe for the organisations ability to survive? Naturally, companies from time to time ensure that they have an effective organization, but savings and rationalisation is not a long-term strategy. An examination of the companies like Nokia is revealing if you want to understand the dynamics of the new information internet-based economy.

Nokia could not muster the courage to take chances or any real risks, instead they opted for carefully calculated incremental development and no more. The worlds once largest mobile manufacturer – worth over 140 billion dollars five years ago – became complacent and far too confident that their market position would ensure them a solid future. When the competition got tougher and revenue decreased, they mechanical adjusted the expenditure and continued to focus on investing in physical infrastructure and proprietary solutions. The innovative development culture that created these platforms was gone. It has been said that the management of Nokia effectively stopped all projects that involved “too much” risk – no one was willing to take responsibility for a possible unsuccessful project. It seems that they believed they were fighting a battle of product specifications rather than evolution, adoption and change. Nokia was eventually delivered a knockout blow by new ecosystems from Google and Apple. So even if Nokia had the best phones, technically speaking, based on what they could produce and distribute efficiently when they died, they did not dare to take risks where the outcome was not known, and indirectly exposed themselves thus competition where the totality of services and products suddenly what counted, not excellence in every product in itself. Nokia spent more money on research and development than any other handset maker, the problem was simply that they chose the wrong development direction. They made outrageous investments in Symbian and Navteq and other infrastructure which seemed rational in an evolutionary perspective – reasonably sensible in the old economy but worthless in a new revolutionary marketplace! None of these initiatives were based on open development but focused on costly physical infrastructure (Nevteq) and closed solutions (Symbian).

Nokia had the required Startup Ecosystem… they just couldn’t use it.
In the wake of Nokia’s closure there were suddenly hundreds of skilled unemployed programmers in Helsinki who quickly became the base for the new rising creative industry. Ironically Nokia had the innovators behind the next billion dollar industry working for them but completely failed to take advantage of this position! We all know about the success of Angry Birds and Candy Crush.

It was creative destruction at work that resulted in the fall of Nokia and the phenomenon of companies like Supercell and Rovio. Mojang, Rovio and Supercell have said that they pay their taxes with joy. They know where they came from and, as they say, they intend “pay it forward” and help other local entrepreneurs.

We now see a new generation of entrepreneurs who, in a very short timescale, create value that traditional industry cannot match. Nevertheless, the government’s efforts are overwhelmingly focused on keeping the old industry alive through large low interest loans, subsidies and tax cuts. This is happening while governments are reaping the tax benefits of the new economy and arguably becoming defendant on these revenues.

Now is the time to foster and drive the creation of ecosystems that are favorable for Startup companies and entrepreneurs – so they can find each other, gain access to capital and exploit local and national synergies in cooperation with established businesses as well as the public sector.

What can your region learn from those who have had success in creating such Startup ecosystems in Stockholm and Helsinki? Can your region foster new valuable talent and establish the basis for the new economy fast enough? Can we replace the old school decision-making protocols before the opportunity window closes and we are left with short-term, cost-cutting-solves-everything attitudes?

Update:

(From HBR) Many organizations unknowingly stifle innovation by requiring ideas to move up through levels of management before getting any investment. This might control costs, but as research led by Wharton’s Jennifer Mueller suggests, many people have a subtle bias against innovative ideas. Mueller’s team found that people often claim to want new and creative ideas, but when presented with those ideas in an uncertain environment and asked to evaluate them, the more novel ideas often get a lesser rating. Further research also showed that managers and senior leaders especially tend to reject the very ideas customers want. In the follow-up study, Mueller’s team found that when both managers and customers rated the desirability of new product ideas, customers favored the most creative ideas while managers most often rated those ideas as less than desirable because they saw them as unfeasible or not profitable. Both studies shine light on the friction many employees feel when trying to get their ideas implemented.