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Excerpted from "The Future of Management," by Gary Hamel with Bill Breen.
In a world where strategy life cycles are shrinking, innovation is the only way a company can renew its lease on success. It’s also the only way it can survive in a world of bare-knuckle competition.
In decades past, many companies were insulated from the fierce winds of Schumpeterian competition. Regulatory barriers, patent protection, distribution monopolies, disempowered customers, proprietary standards, scale advantages, import protection, and capital hurdles were bulwarks that protected industry incumbents from the margin-crushing impact of Darwinian competition. Today, many of these fortifications are collapsing:
• Deregulation and trade liberalization are reducing the barriers to entry in industries as diverse as banking, air transport, and telecommunications.
• The power of the Web means upstarts no longer have to build a global infrastructure to reach a worldwide market. This has allowed companies like Google, eBay, and MySpace to scale their businesses freakishly fast.
• The disintegration of large companies, via de-verticalization and outsourcing, has also helped new entrants. In turning over more and more of their activities to third-party contractors, incumbents have created thousands of “arms suppliers” that are willing to sell their services to anyone. By tapping into this global supplier base of designers, brand consultants, and contract manufacturers, new entrants can emerge from the womb nearly full-grown.
• Incumbents must also contend with a growing horde of ultra-low-cost competitors—companies like Huawei, the Chinese telecom equipment maker that pays its engineers a starting salary of just $8,500 per year. Not all cut-price competition comes from China and India. Ikea, Zara, Ryanair, and AirAsia are just a few of the companies that have radically reinvented industry cost structures.
• Web-empowered customers are also hammering down margins. Before the Internet, most consumers couldn’t be sure whether they were getting the best deal on their home mortgage, credit card debt, or auto loan. This lack of enlightenment buttressed margins. But consumers are becoming less ignorant by the day. One U.K. Web site encourages customers to enter the details of their most-used credit cards, including current balances, and then shows them exactly how much they will save by switching to a card with better payment terms.
• In addition, the Internet is zeroing-out transaction costs. The commissions earned by market makers of all kinds—dealers, brokers, and agents—are falling off a cliff, or soon will be.
• Distribution monopolies—another source of friction—are under attack. Unlike the publishers of newspapers and magazines, bloggers don’t need a physical distribution network to reach their readers. Similarly, new bands don’t have to kiss up to record company reps when they can build a fan base via social networking sites like MySpace.
Collapsing entry barriers, hyperefficient competitors, customer power—these forces will be squeezing margins for years to come. In this harsh new world, every company will be faced with a stark choice: either set the fires of innovation ablaze, or be ready to scrape out a mean existence in a world where seabed labor costs (Chinese prisoners, anyone?) are the only difference between making money and going bust.
Given this, it’s surprising that so few companies have made innovation everyone’s job. For the most part, innovation is still relegated to organizational ghettos—it is still the responsibility of dedicated units like new product development and R&D, where creative types are kept safely out of the way of those who have to “run the business.”
Today innovation is the buzzword du jour, but there’s still a yawning chasm between rhetoric and reality. If you doubt this, seek out a few entry-level employees and ask them the following questions:
1. How have you been equipped to be a business innovator? What training have you received? What tools have you been supplied with?
2. Do you have access to an innovation coach or mentor? Is there an innovation expert in your unit who will help you develop your breakout idea?
3. How easy is it for you to get access to experimental funding? How long would it take you to get a few thousand dollars in seed money? How many levels of bureaucracy would you have to go through?
4. Is innovation a formal part of your job description? Does your compensation depend in part on your innovation performance?
5. Do your company’s management processes—budgeting, planning, staffing, etc.—support your work as an innovator or hinder it?
Don’t be surprised if these questions provoke little more than furrowed brows and quizzical looks. Truth is, there are not more than a handful of companies on the planet that have, like Whirlpool, built an all-encompassing, corporatewide innovation system.
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