John Hagel on "Invisible Innovation"

Posted by: Helen Walters on May 18, 2010

Some time Bloomberg Businessweek columnists John Hagel III and John Seely Brown have, with their colleague from Deloitte’s Center for the Edge, Lang Davison, written this year’s must-read book on innovation. Building on their work on The Shift Index, itself important reading for any executive looking to get to grips with innovation in the 21st century, the key to The Power of Pull is in its subtitle: “How Small Moves, Smartly Made, Can Set Big Things in Motion”. The book is a smart analysis of why executives need to broaden their thinking about innovation—and take action, now.

Recently, I caught up with John Hagel in New York City to discuss some of the book’s themes and examples, in particular the different approaches to innovation in different regions of the world. An edited transcript of our conversation follows. After the jump, a short video of Hagel and Seely Brown discussing the premise of the book.

How do you define the outlook for American innovation, which has had some, let’s say, “challenges” in recent times?
For most western executives, innovation is about breakthrough technology or innovation. If it’s not breakthrough, it’s not interesting, and it’s all about technology and products. We have a broader view, which is that innovation is about ways of creating and delivering more value to the marketplace. That could be through products and technology; it could be through processes, or it could be what we call institutional innovation. That’s rethinking at a fundamental level the rationale for the institution and the roles and relationships across institutions.

And where is that taking place?
Most of it is occurring in Asia, both in China and India, in different forms. It’s what I call invisible innovation to western executives. They look at China and India and focus on the products and the technologies and say ‘well, that’s not that impressive’. But if you step back and look at how they are organizing themselves, these networks they’ve created, that’s what’s different. They’ve created a way to scale these networks that goes far beyond what we in the west are doing. In fact, in the west we’ve been focused on narrowing down the number of participants we have in the supply chain and distribution channels in the name of efficiency.

We’ve become efficient beyond our wildest dreams.
Exactly. Oops!

Nonetheless, there an awful lot of talk about innovation. People are very focused on it—but it also seems there’s a lot of confusion around the discipline. How should executives think about it now?
It really is about small moves smartly made. One of the questions we ask is: look at any relationship you have today with a business partner and look ahead two years. If the relationship broke up at that point, would both of you be better off for having been in that relationship even though it’s ended? That’s a pretty high bar to drive towards. Most companies today don’t have those kinds of relationships. They have very short term, transactional relationships, buy low, sell high…

They’re not really relationships at all, in fact. No. It’s a series of transactions, where there’s typically very low trust and not a lot of good feeling on either side. This is about starting to rethink at a fundamental level: how do we get more from our partners, not by squeezing them out but by pulling out their learning and capabilities around challenging performance issues? How do we work together to solve them? And over time you expand the number of participants so you get a diversity of skill-sets and perspectives.

The challenge, of course, is how to build these networks efficiently. Who’s doing this well? Does it involve building proprietary networks?
The Chinese and Indian companies that are doing this well are doing it with very limited technology: telephone and fax machines is kind of the extent of it. What they’ve focused on is defining a very different way of managing business processes. Whereas in western companies we tightly specify every activity that has to be performed, and rigorously monitor to make sure each step was done in the appropriate manner, these companies take a much more modular approach to a business process. They divide up extended business processes into relatively large modules of activity. They say ‘we don’t care how you do it within the module. We’re not going to invest a lot of time and effort there. That’s where you can innovate and experiment and improvise.’

What’s a good example of this in action?
One that we talk about in the book in some detail is Li & Fung, in the apparel industry. They’ve been very successful in creating these modules. They have 10,000 business partners. So if Calvin Klein wants a high-end wool sweater or a company is ordering a low-end wool sweater, there’d be a completely different set of participants. Li & Fung’s focus is on defining the interface so that if they specify that the sweater needs to be red, there are standard semantics that everyone understands. So Li & Fung focuses on that and the quality management at the end point of each module.

And it’s working?
They’re around $15 billion in revenue. No one in the U.S. knows about them, but if you go into any large U.S. shopping mall, roughly 40% of all the apparel in the stores will have passed through Li & Fung. It’s a major global player.

People need to pay attention.
Yes. It’s interesting because in the past everybody contrasted Li & Fung’s modular, loosely coupled approach with Wal-Mart’s approach, which was much more tightly integrated and specified. Then earlier this year, Wal-Mart announced a joint venture with Li & Fung to source apparel through Li & Fung. That’s a statement that the Li & Fung approach has a lot more value. And think about the apparel industry: it’s intensely competitive, with very thin margins, time is of the essence and there’s huge uncertainty about demand. It’s not an industry in which you can do things very loosely. You have to be focused on performance and the fact they’re able to do that with a 10,000-partner network is pretty impressive.

Reader Comments

Phill Barufkin

May 20, 2010 10:21 AM

Beyond breakthrough innovation certainly is a topic that inspires new ways to think about creativity, ingenuity and applying insights to advance all areas of business. This is an interesting perspective for anyone involved in creating. Phill Barufkin

nick trendov

May 23, 2010 7:56 AM

Back to the future?

It appears Li&Fung are dis-intermediating the technology suppliers--process optimizers and their software counter parts--and setting targets to meet between the network nodes rather than micro-managing everything with SAP, SAP, CRM...

But why is going backwards innovative and more importantly who in the US has $15B in sales and can adopt those processes?

Consider the concept of fractal oscillation where if you optimize too much by tacking the 'fat' out of the system then you get higher and short boom bust cycles.

This observation is hundreds of years old and apparently unknown to the economists and politicians who blame the economic crisis on greed.

It is pure mechanics that is not possible with the Li&Fung approach as they don't optimize.

And for good reasons.

Cheers,
Nick
www.scenario2.com

PS
BING "Great Wave Kanagawa" for a great fractal image and "Fractals a Graphic Guide" for the boom to bust oscilation explanation.

Bill Wood

May 29, 2010 10:18 AM

I'm not sure I agree with an "innovation" premise that looks more like incremental continuous improvement.

There is nothing special about that, and it is part of nearly any mid to large sized organization's processes already.

===============

I have written an entire series on innovation in business, including differentiating what I have seen called "innovation" in my years as an SAP consultant.

The entire series, including the conclusion can be seen here:

Process Execution of Business and IT Innovation
http://www.r3now.com/process-execution-of-business-and-it-innovation

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What comes next? The Bloomberg Businessweek Innovation and Design blog chronicles new tools for creativity and collaboration, innovation case studies in both the corporate and social sectors, and the new ideas that have the power to change the way things have always been done.

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