Predictions for the future of innovation in 2005:

1) Private Equity Investment will accelerate the pace of inn­ovation
in
every industry it touches.
2) Innovation Outsourcing will become the norm for all compa­nies
serious about growth.
3) The Innovation Arms Race will be red-hot in some industri­es in
2005,
and will spread to almost all industry segments by 2007.
4) The Asian Super-Economies of China and India will become ­just as
innovative as their American and European competitors...and
­acquisition
of those competitors will be one of their main tools to clos­e the
existing gaps.

Private Equity Investment - from Mark Turrell (contributor to Corporate
Innovation)

It is interesting following private capital and innovation. At the most
basic level I see a pattern emerging:

- BigCo wants to divest slow moving parts of the business, low growth
areas, areas that require too much capital, sometimes too much
'innovation', or divest less interesting brands after a merger or
strategic review
- BigCo sells off the group to a private equity firm
- the private equity firm needs acquisitions like this as they have a
lot of money to spend (interest rates are too low, so banks and
insurance companies need some boost to their returns) and they need a
2X - 5X return in 3 - 5 years
- the divested company starts off with new management - or invigorated
managers who now own a stake in their business
- the divested company starts by reducing costs and making themselves
more efficient... but this does not provide the growth path that is
needed to justify an ultimate 2X - 5X return
- the divested company needs to 'innovate' to come up with new things,
new growth areas, new markets, etc and starts to invest in innovation
capacity
- eventually the focus on innovation starts to yield dividends for the
divested company...
- ... and demonstrates to a potential acquirer or the stock market that
this company is really a growth firm

- and while this is going on, the divested firm's actions in the
industry start to force their competitors to start innovating as
well... and thus the Innovation Arms Race goes on

So, who is impacted by this. Right now the chemicals industry has
experienced a surge of private equity investment. The next wave will be
larger manufacturers and consumer product companies, in my opinion.
What is clear for me is that the wall of private money - which needs
its huge return - is going to drive innovation wherever it hits.

Yours,

Mark Turrell
mark_turr...@imaginatik.com
www.imaginatik.com

On point number four, I will have to agree that China and India will
become just as innovative as American and European competitors, but I
disagree with the idea that they will become so through acquisition.
The benefit that the United States has had in emerging as a leader on
invention and innovation is that it is driven to do so on the success
of its own economy.  As a matter of fact, what we consider innovative
is seen through a lens based on our values as reflected in purchasing
behavior.  The circumstances that we create for free market competition
(laws, institutions, education, cultural folkways) shape how and what
we innovate.  We have been the leaders in innovation because we have
had the power to shape that within our own market, the largest consumer
market in the world.
China and India will soon become the largest consumer markets in the
world.  The circumstances surrounding their consumption are unique to
that of the United States.  Their innovations will arise to meet needs
within those circumstances and will ultimately drive how innovations
are adopted throughout not only their economies but other economies
constrained by similar circumstances.
For example, take the desktop computer.  For nonconsumers (low and
middle class) to be willing to purchase a desktop computer in China,
not only does it have to be reasonably priced, but it will also have to
fit their needs.  The reason we call it a desktop computer in the
United States is because just about every worker and every student has
a desktop.  How will Chinese prefer to interface with the function of a
computer and what functions will they value over others?  Will they
stand to use a keyboard that is designed for latin based languages?  Is
the innovation to meet their needs going to be bought from and American
or European company?

Mark

I'm afraid I have a much more jaundiced view of the role the private equity
plays in innovation. Most leveraged buyout (whether by management or outside
PE investors) look for undervalued companies in mature markets. These
companies are typically undervalued due to operatinoal inefficiencies -
either due to poor manageemtn or a corporate parent that has neglegted the
business. The investors usually look to process improvements for increasing
the value of the business. This typically involves one of three areas:

1) If the problem lies in the cost structure, then the focus is on
eliminating waste and reduing overhead.
2) If the company has a high CoQ and/or is loosing market share due to poor
quality, the focus is on improving quality.
3) If the company has a poor customer service performance, then the focus is
on improving reducing leadtimes, improving on-time delivery and increasing
customer support.

In a very few cases, the invwestors will buy a company because of synergies
that might exist between different businesses. Private equity investors are
value investors, and as value investors they know that acquisitions made on
the basis of some synergies that make the whole worth more than the sum of
the part rarely materialize. They know that in the long run, they will make
more money focusing on improving the bottom line, rather than identifying
new markets or products that create completely new top line revenue. That is
a real crap shoot, and they are no better at getting it right than anyone
else in the industry. Why trow good money at risky innovation when they can
stick to their proverbial knitting, take their newly realized gain, and
invest in other undervalued companies.

Peter Flentov
20/20 Innovation LLC
We help you create the future!

Hi Peter

You might be interested in reading <a
href="http://www.cio.com/archive/011505/outsourcing.html "> this
article </a>- that I covered in the <a
href="http://www.imaginatikresearch.blogspot.com/"> Corporate
Innovation Blog </a> recently. In it, the author looks at how US
companies (technology in particular) are outsourcing not just their
manufacturing functions, but are starting to also outsource their R&D
capabilities too!

What does that leave of the US company? Not much more than a Sales and
Marketing organisation - a brand if you will. Already some of these
Asian companies that have previously served as outsourced manufacturing
and R&D are taking the next obvious step - full competition against
their previous clients. BenQ now sell products under their own brand
for example. What happens when the Asian companies realise that they
can simply purchase the last remenants of their previous clients and
aquire the brands that will allow them to sell as "HP" and "IBM"?...
IBM recently sold off their computing division to an Asian company...
It might already be too late for some companies in the US...

A very precient comment - one of the articles I'm working on looks at this
very issue. I recall in the 1980's when American manufacturing was no longer
competitive with Japanese lean manufacturing, there was a vigorous debate
about outsourcing. A small number of companies back then - and they really
were in the minority - decided that if they couldn't compete, then the best
approach would be to outsource manufacutring to someone who could match the
quality, productivey and on-time peformance of Japanese competitors. I
recall many companies argueing strongly against this strategy -
manufacturing was a "core competency" that just sould not be outsourced if
the company was to remain competitive. The "enlightened" companies that were
willing to outsource manufacturing pointed out that engineering was the true
core competency. The implication was that while you could readily outsource
manufacturring, you had to keep product/solution development
in-house.

When I was on the management team of a Bosotn-based product development
firm, I was approach at least once a month by some India-based outsourced
engineering firm that offered CAD/engineering services at 1/10 our rate. We
tried a pilot with one of these firms, and the quality of the detailing they
did was comparable with that produced by our staff. An this was one case
where the time difference actually worked in our favor. Our senior engineers
would work on a design, mark up changes, and send it off to India at the end
of our day. The updated drawings would be waiting for them when they got in
the next morning.

I realized that ultimately we were no longer competing with peers such as
IDEO, Design Continuum, HLB or Insight, we were competing with highly
competent and motivated offshore resources. It is just a matter of time
before more and more engineering work gets outsourced to low cost countries
such as India, China and Russia. Process are increasingly becoming
comodities in and of themselves. Companies are outsourcing engineering,
finance, human resources, ,logistics, supply chain management, even sales
and marketing. So, the US company doesn't even have to be a "Sales and
Maketing" orgnaization. At the end of the day there are 3 1/2 core
competencies that are the "heart and soul" of the company:

- the brand experience that the company deleivers to cutomers. Companies
such a Levi's, Nike and Coke have tremendous brand equity that is an
integral part of their value. Other companies have very weak brand equity,
that can quickly erode. Too many branding initiative are push rather than
pull - the company decides what it's brand postion and identity should be
with little consideration to the brand personality and vlaues that are
important to the target consumer.
- the strong relationships that companies have with their di8stribution
channels and other business partners. This is one of P&G core competencies,
for example. It is easy to replicate P&G's supply chain processes, it is
extremely difficult to copy the relationships in its distribution channels.
At the end of the day this is possibly the strongest "core competency" that
most companies have.
- the ability to innovate and create new value is the third core competency
- or at least should be. I bleieve most companies THINK they are innovating
because they're constantly introducing new products. These products add
little new value to the customers, and worse, the entire industry is
introducing similar products. I believe that the writing is on the wall -
companies will need to SIGNIFICANTLY improve their innovation performance if
they are going to survive in the increaSINGLY COMPETITIVE GLOBAL ECONOMY.

Peter Flentov
20/20 Innovation LLC
We help you create the future!

I also fear that the issue with this trend, which is otherwise a
positive one for the spread of innovation, is that companies will
outsource their innovation simply to divest themselves of a complex and
difficult managment role. The value of innovation is much harder to
measure than other core business areas. The fall-out from this may be
an expectation that internal innovation is no longer necessary. That
all markets are best leaving their innovation to external groups,
rather than finding a balance between the two depending on the scale of
projects or where they fall betwen radical and incremental development.

It is difficult to guess the right model for future innovation
programs. On the one hand we have the current model of R&D, centralized
inside the company with some tentacles into the outside world (and
occasionally into the internal businesses they support ;)

On the other hand, you have the Marketing Department which in many
organizations is really an outsourced department. Marketing leaders set
direction (often guided by consultants and agencies), gather market
data (agencies and market research firms), interpret data (agencies and
consultants), identify projects and opportunities (internal - supported
by agencies), and embark on projects (outsourcing the work to
externals).

It is possible that the right role for innovation in R&D is to set
direction and manage projects...

... and yet I cannot help feeling that this would abrogate the future
direction of an organization to a loose, non-connecting network of
outsiders who do not share the overall organizations goals. Moreover,
to your point, Hannah, this new network structure does not get away
from the need to manage effectively - in fact the problem is worse. It
means managing completely new types of relationships, in the way that
few companies ever have managed to achieve.

Now, I am a middle ground person, so I believe both models are likely
to co-exist, and the bext companaies will combine elements of the two.
I think, therefore, we will continue to live in interesting times.

Mark

mark_turr...@imaginatik.com
www.imaginatik.com

Hannah McBain BBC Creative R&D wrote:

development.

hi All - this is a re-post from the Corporate Innovation Blog i thought
you might be interested in:

<a
href="http://content.sina.com/news/97/32/7973298_1_gb.html?skin=englishCenter">SINA.com
- Contents</a> Here's yet another article that suggests China's growing
potential in the global innovation arms race.

Senior Chniese ministers are talking about the building of a national
innovation mechanism to spur more scientific and technological
breakthroughs.  Very much unlike the current US government's attitude,
the Chinese are instead considering adopting new incentives to help
nurse innovative ideas and human forces for scientific innovation.

What's most impressed me is the stress on not borrowing/buying the
technologies needed from the developed countries - thus ensuring they
have the intellectual capability to innovate beyond the current
technologies... the debate continues..