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BY AMY MULLER AND LIISA VALIKANGAS
Drivers of Extended Innovation
everal
contemporary factors are driving extended innovation:
- Reduced transaction costs, with resulting disaggregation of business units and focus on capabilities such as innovation
- Recognition of the value of intangible assets
- Software tools for knowledge management and collaborative working
- Research that indicates that firms who form alliances are more likely to innovate
- The growing number of cross-industry knowledge networks
- The speed with which value chains migrate, which sometimes necessitate a rapid recombination of assets by established companies
Among these drivers, a decline in transaction costs-the consequence of B2B marketplaces, supply-chain integration, and outsourcing-may be the most significant. Reduced transaction costs weaken the economies of scale that companies formerly derived from aggregating business processes such as innovation, manufacturing, sales, and distribution. When transaction costs are negligible, companies have the freedom to disaggregate these processes into stand-alone businesses.
This trend toward disaggregation has been under way for some time. The Ford Motor Company used to make its own tires and even owned rubber plantations in Brazil during the 1920s and 1930s. More recently, the 1980s exposed the organizational deficiencies of conglomerates such as ITT Industries. And in the 1990s, organization around strategic business units began to outlive its usefulness, giving way to a need for separate businesses that are organized around capabilities such as innovation, manufacturing, assembly, design, brand management, customer service, distribution, inventory management, and so on.
For example, General Motors recently disclosed plans to make the company's internal software applications available as a service to other companies. By so doing, GM is exploiting a competence in enterprise software applications. The company believes that it has sufficient applied knowledge in applications such as inventory management to challenge the software industry's incumbents. Indeed, GM may have more applied knowledge of inventory management, for instance, than Oracle, SAP, and PeopleSoft combined.
Thus, disaggregation leads to new growth opportunities (the provision of software services by an automobile manufacturer, in this case) in perhaps unexpected businesses. Of course, it also leads to competition from unexpected places. Extended innovation is a means to identify these opportunities and competitive threats.
The recent recognition of the value of intangible assets is another driver of extended innovation. Historically high price-to-book ratios of corporations today reflect this recognition. In an increasingly knowledge-based economy, intangible assets such as patents, brands, and intellectual capital require management as much as do tangible assets such as buildings, machines, and inventories.
The availability of software tools for knowledge management and collaboration further drives extended innovation. For example, the latest Web-based tools from AristaSoft support cross-company product development. And also notable are results from a quantitative study that shows that firms who form alliances at a high rate are more likely to be frequent product innovators (Kelley, 2002). Alliances that introduce a firm to more distant technological and geographic contexts are more likely to provide access to new and unique knowledge. But alliances between firms in a similar context merely duplicate preexisting relationships and add little value to either firm (Rosenkopf, 2001).
The proliferation of knowledge networks suggests that companies are now seeking ways to acquire this kind of new and unique knowledge. The Toyota Production System, for example, illustrates the value of networks as a source of external knowledge (Kogut, 2000). Cooperation in this complex network of automotive assemblers, parts suppliers, and subcontractors has generated organizational innovation and productivity improvements that helped to place Toyota at a competitive advantage over U.S. automakers.
The speed with which industry value chains now reform is another driver for extended innovation. Ten years ago, value in the personal-computer industry, for example, resided in the assembly of components-a strength of Compaq. More recently, Dell has created a competitive advantage for itself from a shift in industry value to Dell's strengths in supply-chain management and customization. More established companies such as Compaq, IBM, Sony, and Hewlett-Packard have had to scramble to respond to this shift.
The ability of companies to quickly recombine assets becomes imperative in an environment in which value can shift so quickly. An established insurance company, for example, might face a threat of disintermediation by an online competitor. If the established company excels at back-office operations such as claims processing, it might be able to recombine its assets to sell back-office services more profitably than it currently sells insurance policies.
As Exhibit 1 suggests, firms can combat the threats and explore the opportunities that value migration presents by searching for innovation with less regard to corporate boundaries or traditional conceptions of an industry.
