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Q&A: Driving innovation at the 'edge' of the enterprise
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May 09, 2005 (Computerworld) -- Most companies are structured to try and run their operations efficiently and squeeze as much profit as possible from each transaction. But emerging competitors in Asia are turning those concepts upside down, according to John Hagel III and John Seely Brown, co-authors of the new book The Only Sustainable Edge (Harvard Business School Publishing).
Recognizing that their wage rate advantages might be short-lived, smart companies in places like China and India are instead focusing on how they can create new business capabilities for customers and leverage IT to partner with specialized suppliers, according to Hagel and Brown.
The authors spoke with Computerworld late last week about the changing business landscape they're seeing.
As you point out in the beginning of the book, most companies are structured to try to run efficiently, not to drive innovation. For companies to flip this, they'd need to make some pretty wrenching changes to their operating models, yes?
Brown: The first step here is to move from a very closed view of innovation to a more open innovation model where there are suppliers and other people around the world that are at least as talented as people within our organization. By doing so, we can ask such questions as, "How can we tap into their innovation?" and "What do we want to consider to be our distinctive edge?" and "How can we work with these people and extend our own capabilities?"
Hagel: I would certainly accept that it's a challenge. In order to get better faster, you need to do that in partnership with other companies. No matter how many smart people there are in your organization, there are a lot more smart people outside that you could work with.
One of the things we tried to do in the book is provide a path for companies to make this transition [and] develop those relationships to get better faster and develop capabilities faster. We think there's a way to do this in a pragmatic evolution.
John Seely Brown
What are examples of some companies that are doing this effectively now?
Hagel: One company that we profile extensively is Li & Fung in the apparel industry to help apparel designers assemble customized supply chains and deliver very tight performance requirements in terms of speed to market and cost and quality objectives but doing it in such a loosely coupled way. This parallels to what the SOA and Web services community would talk about in defining interfaces to move one module in and one module out. Most American companies tend to very tightly define requirements throughout all stages of the process.
John Hagel III
A lot of this is being driven by the mind-set and the sense of urgency in Asia. In Bangalore, there's a sense of urgency because they were blocked from operating in the world economy for 50 years and there's a sense that they need to make up for that lost time. There's also the sense that the wage rate advantages they have are very transitional and that if they fall back on that they are going to rapidly lose market share.
Why are the greatest opportunities found at the "edge" -- whether it's the edge of the business where companies interface with suppliers and business partners or at the periphery of mature markets?
Brown: At the edge you have less inertia, so you can experiment and you don't have big legacy systems so [the] competitive edge is to think about things differently.
Hagel: At the edge, you will end up being able to build your capabilities much more rapidly than those organizations that are more inward-focused.
Would it be fair to say that most companies will struggle, if not fail, at trying to move their organizations in this direction?
Hagel: It goes back to the mind-set and sense of urgency. If they continue to be complacent and focus on operational efficiency versus driving capability, they will fail. What we see in these Asian companies is a focus on rapid innovation, a bootstrapping mind-set that we need to rapidly add value to that. It's a much different mind-set than what most Western companies do today.
Brown: And for Western companies to recognize that they don't have a divine right to being the main source of innovation.
Some people maintain that leading CIOs are well positioned to serve as enterprise "change agents," given their unique views of how people, processes and technology intersect. Are they equally well positioned to support those businesses that try to make those transformational changes?
Hagel: IT is a key enabler of these practices, and CIOs can be catalysts and change agents to help senior management recognize what's available to support these broader changes. There's also the ability to recognize what's possible through SOA through loose coupling and an important foundation in recognizing new processes.
Brown: Part of the irony is that it's the IT infrastructure that keeps businesses from experimenting with new things, like monolithic ERP systems. Loosely-coupled architectures become the new buzzword.
It's not always the big bang, but the ability to make new iterations with blinding speed that drive new opportunities.
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