Exactly one year ago, business was both an exhilarating and a bewildering affair. The Nasdaq had broken 5,000 for the first time, driven by brash dot-coms with seemingly boundless capacity to create wealth. The Internet had rewritten the rules of business, and long-standing tenets looked laughably quaint. Profits? A distraction. Bricks- and-mortar assets? Old Economy baggage. We stood on the brink of an economic transformation more profound than the Industrial Revolution. The Fords and RCAs of our time were being built before our eyes. Things could not be more dramatic, more surprising, could they?
They could. Since last March, the new truths have been knocked down right and left. Profits matter after all. The bricks-and-mortar crew has regained its perch atop the business hierarchy. The dot-coms--the Icaruses of our times--have plunged to earth, taking most of the tech market with them. Last year, tech icons such as Microsoft (MSFT
), Intel (INTC
), Lucent (LU
), and Dell (DELL
) led the BusinessWeek 50, accounting for more than half of the top 20 performers. This year, most of those names have dropped off the list, to be replaced by decidedly unglamorous oil and power companies. Talk about reversals! (For a BW Video Roundtable on the future of tech, click here.)
And yet, if you were hoping for a return to business as usual, forget it. The incredible period of experimentation and creativity of the past five years has changed the business environment irrevocably. The global, network-centric, and information-driven hallmarks of the dot-com revolution are here to stay. Upstarts such as Amazon.com Inc. (AMZN
), no matter how financially challenged, have raised consumer expectations for customer service. New business models unleashed by the Internet continue to evolve. Disruptive events like the music-swapping phenomenon called Napster Inc. will trip up other industries and shake, not just stir, the status quo. At the same time, once-docile consumers have awakened to their new powers, and social and environmental activists around the globe are challenging some of the institutions of capitalism. If you thought life in the New Economy was unpredictable, just wait for New Neo-Old Economy--or whatever silly name finally sticks. (For a video with Lord, Abbett & Co.'s Milton Ezrati on tech sectors to watch, click here.)
So what does matter in this topsy-turvy world, where there is no bedrock, no true north, and no preferred market wisdom? In a word: innovation. As the ground lurches beneath them, companies more than ever must look ahead and be ready to leap to new terrain. ``Innovation has moved from a good idea to an imperative,'' declares Paul Saffo, director of the Institute for the Future think tank in Menlo Park, Calif.
FLEETING EDGE. Innovation may seem like a flimsy lifeline for companies tossed about by forces of creative destruction. What's the point of another flavor of toothpaste, another feature crammed into Microsoft Word, or another gizmo on the dash of a Ford minivan? In addition to bringing about brain-numbing indifference in consumers, those sorts of improvements are quickly copied, providing just a fleeting competitive edge. Real innovation, in contrast, must encompass something deeper--a new mode of thought, a change in business processes, or even a rift in the structure of the organization. ``An individual innovation has value, but it doesn't make or break the company anymore,'' says Tom Kelley, general manager of IDEO Product Development, the famed design shop that helped create such breakthrough products as the Palm Pilot. ``That's why you need the culture of innovation.''
How to achieve that culture is becoming one of the defining debates of our time. On a macro level it's about what sort of society we want to create. When the world was awash in venture capital, tiny startups could compete with industry giants. Will that remain true as capital dries up? In the coming year, the outcomes of high-profile court cases--the U.S. government's antitrust case against Microsoft Corp., and the music industry's efforts to shut down Napster and its offspring--will affect how much room small companies have to innovate.
Innovation can be unsettling--and that is for the best. Creativity is fed by the specter of a new competitor toiling away in a garage on a revolutionary technology that could wipe out existing businesses. That threat has spawned the most paranoid generation of executives ever to inhabit the country's corner offices. Yet it is a rare company that is willing to change course, to cut loose its own successful products so that it can develop something more radical. Although commentator Clayton Christensen has popularized this imperative in his book, The Innovator's Dilemma, many old-line organizations still struggle to internalize his message. ``Innovation is the pirate ship sailing into the yacht club,'' says John Jordan, a principal at Cap Gemini Ernst & Young's Center for Business Innovation.
Innovation wasn't always a pirate ship. For an appreciation of how much things have changed, think back to AT&T Bell Labs circa 1950. The research arm of Ma Bell epitomized one model for innovation: genius-scientists locked away in a lab devising new materials, components, and software, which their employer would then patent and eventually use to improve products or create new ones. Trade secrets were tightly guarded, and the more patents a company churned out, the greater its bragging rights on innovation.
Today, innovation is not simply--or even mainly--about designing products. More often, it's about a new way of creating or delivering something customers don't even know that they want. Oil companies, for example, still make their money selling fuel. But where does it come from? Increasingly they're finding that precious crude by mining huge data archives. And in the end, what they sell to customers may look nothing like oil. In the case of Duke Energy Corp (DUK
) in Charlotte, N.C., the ``product'' may be savings on energy costs--savings that Duke shares with the customer after it upgrades its systems to conserve electricity. Green power advocate Amory Lovins goes yet one step further: He's promoting hydrogen-fueled ``hypercars,'' which will one day generate surplus power that can be sold back into the power grid. Implausible? No more so than Napster, which singlehandedly dragged the music industry into the 21st century. Nobody imagined this scheme for distributing digital music files back in the 1980s, when compact disks first brought digital music to the masses.
ROLE CHANGE. The quest for service innovation is both passionate and widespread. In digital industries, everything from business software to music and film will eventually be sold as subscriptions. That trend was a big motive behind the AOL-Time Warner (AOL
) merger, which married an Old Economy paragon with a New Economy pioneer. And similar business models are cropping up in unusual places. Consider General Electric Co.'s (GE
) jet engine business--as gritty an industrial operation as you can find. For one bundled fee, GE sells an airline a guaranteed level of engine uptime for the contracted period, including parts, repairs, replacement engines, financing--whatever it takes to make the plane fly. Instead of selling engines, you might say GE is in the business of selling ``thrust services'' and has a backlog in such multiyear contracts worth about $20 billion.
Traditional, Bell Labs-style innovation won't exactly fade away. Companies will continue to invent products and patent them. But as silicon brains and software grow more sophisticated, the very role that humans play in product innovation may be called into question. Already, at Human Genome Sciences (HGSI
), a closely watched biotech company in Rockville, Md., software has been optimized to identify genes that play a role in disease. The system generates patent applications on the order of 400 per month--faster than any team of scientists and lawyers could match. In Boston, an upstart called Invention Machine Corp. is helping companies automate the act of creation across a range of product categories.
Whether the creators are carbon- or silicon-based, the new Masters of Innovation must adopt extreme pragmatism, with a ruthless eye on results. Few companies will ever again try to emulate Ma Bell's iron grip on in-house R&D. Today, the best ideas are more likely to be hatched outside and acquired through a partnership or buyout.
The marketplace, in short, becomes an R&D lab. And in some cases, R&D becomes a marketplace. Exhibit A: new exchanges such as yet2.com and the Patent & License Exchange Inc. (pl-x.com). Sites like these seek to create whole new venues to buy, sell, and license ideas and intellectual property. Some of the early participants, such as Toshiba, Polaroid (PRD
), NEC (NIPNY
), and Motorola (MOT
), have traditionally been extremely protective of their patents.
This kind of give-and-take allows companies to focus on their areas of greatest expertise. And that trend will accelerate. In the case of pharmaceuticals, say, there's no reason one company should try to manage everything from drug discovery to clinical trials. Such vertical integration is giving way to specialization and collaboration on the model of the personal computer industry. One early instance: Forest Laboratories Inc. (FRX
) develops and markets drugs for other companies, rather than doing its own basic research. By concentrating on marketing, Forest was able to grab 15% of the market from Prozac last year with its new antidepressant, Celexa, helping it land the No. 14 spot on the BW 50.
Business may be imitating life as industries increasingly organize themselves into ecosystems. The ultimate form this evolution may take is the ``open source'' model of the software industry, in which communities of innovators contribute ideas and build on them beyond the boundaries of any corporate structure. This collaborative approach gave rise to the fast-growing Linux operating system, and it is quickly becoming an organizational model for other information industries, including biotech. ``The open source idea is powerful,'' says IDEO's Kelley. ``No matter how big, no one company can match the energy and creativity of all of those developers out there.'' Adds Chris Meyer, vice-president and director of the CGE&Y Center for Business Innovation: ``Companies must make their boundaries permeable. Innovation takes place in a broader system than a company.''
MUTATIONS. The human genome project, for example, has been largely a collaborative process, with researchers publishing their results on the Internet for others to build on. This approach will be necessary to tackle other complex biology problems that make gene mapping look like child's play. ``In life sciences, the value of information is what others can do with it,'' says Steven MacKay, vice-president and chief systems architect at Sun Microsystems Inc., which is promoting standards for the exchange of data.
When the heralded age of broadband networks finally arrives, collaboration could trigger further exotic mutations in industrial structure. Partha Ghosh, global practice leader of information-industrials at consulting firm Adventis, envisions Information Age assembly lines of bits and bytes that leverage worker brainpower, rather than brawn. Every product will have an information component, creating a hybrid category he calls ``information-industrials.'' Companies already collaborate over networks with their customers and partners. Broadband could carry it to a new level.
A case in point: A pharmaceutical company and a doctor might conference with a patient network to come up with a custom prescription. Instead of selling tablets, the pharmaceutical company would offer a service, much like GE's engine contracts, employing pricing mechanisms that don't even exist today. ``In the future, [companies] will no longer get paid based on weight or volume but on functions and performance,'' says Ghosh. ``Companies have to ask, `what is the product I'm selling?' Industrial companies have to think about `what could be the industrial services, and how do I lock the customer into a long-term experience?'''
One thing is clear: Technology prowess offers no guarantee of performance or growth. (Witness the drop-off in tech companies on this year's BW 50 list.) In the future, even tech warriors that survived this year's cut--like Oracle (ORCL
), Sun (SUNW
), EMC (EMC
), and Applied Materials (AMAT
)--will have to be at their most vigilant. As if things weren't already tumultuous, technological advances that are now crystal clear in the laboratory promise to wreak havoc with some of today's basic business premises. Thanks to ever-shrinking silicon technology and a new field called nano-technology, researchers are experimenting with building computers at the atomic level, creating tiny organic-inorganic hybrid machines that will be woven into the fabrics of our lives. The planet may be blanketed in a new species of chameleon semiconductor chips that can adapt themselves on the fly for different kinds of computing tasks. Virtually everything will have embedded intelligence. And optical computing will mean that even storage devices the size of a sugar cube could hold the equivalent of the Library of Congress.
Moreover, we've just scratched the surface in life sciences. Decoding the human genome will open new vistas for science, but even more life-altering discoveries are ahead. Proteomics, the study of the roughly one million proteins assembled by our genes out of a mere 20 amino acids, could mean new treatments for everything from Alzheimer's to mad cow disease. And a generation or two from now, so-called germline intervention will allow parents to thwart disease before their offspring are born--allowing them, for better or worse, to custom-design their progeny.
With so much at stake, can you afford not to be an innovator? |
Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
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