Forbes: The Innovation Window Is Closing
The global economy has consistently expanded over the last 250 years, driven primarily by two things: population growth, and relentless creativity. This innovation has touched every area of human productivity, first in agriculture, energy, and manufacturing, and more recently in communications and information technology. When combined, these trends are changing the strategic value of innovation.
People innovate because they’re rewarded for it. In the last few centuries, someone in a market economy who had a genuinely useful idea could patent it, build a company around it, and grow wealthy for years or decades before anyone else caught up. In the process they might also build wealth for their employees and investors, and for the government to which they paid taxes.
Today, that “years or decades” has shrunk to months. The Innovation Window—the time between when a new idea becomes viable and when it gets knocked off by cheaper, faster competitors—is closing. This is inevitable as the economy becomes more globalized, unleashing potential competitors from formerly disconnected places. And as communication networks tighten, competitors are better able to see what each other are doing in real time and address each other’s customers directly.
This has the effect of spreading productivity out more widely: with a bigger addressable market and cheaper, more accessible technology, new producers can potentially be more productive than their predecessors. But for large organizations (and wealthier nations), it can have the opposite effect, reducing the time over which rents can be extracted from existing innovation, and causing the rate of growth to taper off.
The effects are already being felt. Perhaps the most cliched business story in recent decades is the large, established company being unseated by the smaller, more agile upstart: Netflix vs. Blockbuster; Uber and Lyft vs. the taxi industry; Airbnb vs. Marriott and Hilton. In each case, the new challenger is able to re-align more quickly and easily than the established leader, and take advantage of new opportunities. It also has fewer employees and less entrenched leadership, and has fully embraced technologies that speed up internal communication.
Larger companies are forced by the demands of scale to have more rigid alignment processes–the opposite of agility. And this makes them vulnerable. Today, the average time a Fortune 500 company spends on the NYSE before being acquired or going bankrupt is seven years. This is, incidentally, about the same tenure as a typical startup on the NYSE.
To get out of this trap, we need to examine our assumptions. Most business strategies today are based on a set of beliefs about how things work, and an expectation that they’ll work that way tomorrow. Specifically, they assume:
Innovation has traditionally been achieved through research & development, and once an innovative product or service was created, the company behind could expect to extract value from it for years, if not decades.
Markets are typically well-defined, and often physically localized. The ones doing the purchasing are nearly always individual people, who can be addressed through advertising and marketing efforts.
Organizations are defined by hierarchies and chains of command, especially as they grow larger and more complex. The question of how resources are committed is made at higher levels, and workers at lower levels are expected to work within constraints handed down to them.
Deals are negotiated carefully and methodically, because the cost of setting them up is fairly high. Teams of lawyers must work to make contracts robust and flexible enough to anticipate all sorts of future situations.
Change occurs at a predictable pace in areas like economic growth, market growth, and technological improvement.
But each of these elements is becoming much less certain. Markets are shifting, innovation processes are accelerating, deals can be negotiated and drawn up in seconds, and traditional hierarchies are proving too inflexible and slow-acting to stay competitive—to name just a few assumptions that are becoming invalid. All of this contributes to the shrinking of the innovation window.
This doesn’t mean that large organizations are doomed. There are many examples of big companies reinventing themselves in the face of a changing environment. IBM’s transformation from a hardware giant to a B2B services leader is a good example.
But these successful adaptations are the exception, not the rule. What sets them apart was that they didn’t just change their routines—they fundamentally restructured in order to take full advantage of new technologies and opportunities.
So what does this kind of transformation look like in the next decade, as organizations start to deal with the reality of a closing Innovation Window? There are many answers, but they all involve two things:
Using technology to make high-skilled workers more productive
Altering organizational architecture and culture to fit around these new tech-enabled processes (and not the other way around)
These can be combined and executed in a variety of ways, many of which won’t become apparent for years. Currently, the most promising strategies include:
Structural Innovation – As product cycles shorten, it’s better to differentiate your offering through process and business model innovation. Product innovation is far more vulnerable.
More R&D at Lower Cost – Companies will need to experiment more, and reduce the cost of each experiment. In practice, this means investing in more agile, aggressive internal innovation processes, and outsourcing R&D when possible.
More “Deep Innovation” – The organizations that use internal R&D as a strategic pillar will need to focus on innovation that’s difficult to duplicate, which often means longer term, higher risk efforts.
Opening Local R&D Centers – As customers and innovation both go global, companies will need to invest in satellite R&D centers, putting their research in the same places as their markets (often in Asia).
Obviously, not all approaches make sense for every company. In fact, some of you reading this might be part of the new guard, built from the ground up to take advantage of these new realities. You probably already have a robust innovation plan in place.
For larger, more established organizations dealing with competition from unfamiliar directions, it’s likely that new competitors are just the symptom, not the underlying cause. Dealing with a closing Innovation Window will look different for every company, but nearly all of us will be affected—and all of us need a plan.
This article originally appeared in Forbes