The Power of Network-Centricity
- "The key is to be able to collaborate—across town, across countries, even to the next cube. ... Global innovation networks help make this happen."
- —Tony Affuso, UGS Chairman, CEO, and President.1
Innovation used to be something companies did within their four walls. Storied organizations like AT&T's Bell Laboratories, IBM's Watson Research Center and Xerox's Palo Alto Research Center were the temples of innovation.2 Thousands of researchers and scientists toiled deep within the bowels of large corporations to create the next big thing. Corporations viewed their innovation initiatives as proprietary and secret. And they attempted to hire the best and the brightest researchers and managers to drive basic research and new product development. In fact, any self-respecting organization was afflicted with the "Not Invented Here" (NIH) syndrome—believing that it had the best ideas and the best people, so if it did not invent a certain something, that thing wasn't worth looking at.
Then the Internet happened. With it came phenomena like the Open Source Software movement, electronic R&D marketplaces, online communities, and a whole new set of possibilities to reach out and connect with innovative ideas and talent beyond the boundaries of the corporation. Even the lexicon associated with innovation is changing, with new adjectives that describe a very different view of innovation—open, democratic, distributed, outside, external, community-led. The changes in vocabulary and metaphors suggest that the shift in the nature and the process of innovation is broad and deep. Consultants, academicians, and mainstream business media have all joined the chorus to liberate innovation from organizational boundaries. Special issues and articles in business magazines with titles such as "The Power of Us," "Open Source Innovation," "and "The Innovation Economy" implore managers to reorient and amplify their innovation initiatives by tapping external networks and communities.
But, in the words of the miners in the California Gold Rush in the nineteenth century, is there real "gold in them thar hills"? Or, what exactly can such externally focused innovation deliver? To answer this question, we first need to look at the problems companies are facing in continuing to grow their revenues and profits.
The Quest for Profitable Growth
How the mighty can stumble. Consider Dell Inc., the leading seller of personal computers and accessories. From 1995 to 2005, Dell was a paragon of profitable growth, fueled by its innovative build-to-order manufacturing and direct-to-customer sales business model. During the five-year period from 2000 to 2005, Dell's revenues grew at 16% per year and its earnings increased 21% per year. The company was widely admired for its ability to drive growth and increase its market share by executing flawlessly on its business model, and staying focused on process innovation. When other companies started imitating its business model, Dell maintained its edge by further refining its business processes to become even more efficient in its operations. However, Dell's growth engine stalled badly in 2005. In 2006, it missed investor expectations for several quarters in a row, and its stock lost almost half of its value from July 2005 to June 2006. One reason behind the downfall of Dell is that it became too much of a one-trick pony—using the same direct business model for more than two decades, and not innovating enough in terms of new products and new markets. Meanwhile, Dell's competitors, including Apple Computer and Hewlett-Packard, who placed more emphasis on innovative products and new business models, grew faster and increased their market share at the expense of Dell. Dell's growth woes are likely to persist for the foreseeable future, and its senior management will be under intense pressure to reignite the growth engine.
Dell is not the only large company facing such growth challenges. Companies such as Kraft, 3M, Sony, Ford, and IBM are all finding it difficult to drive growth. Investors closely monitor the CEOs and senior management of large public companies on their ability to grow the firms they lead. No wonder then that a majority of the CEOs consider growth to be their highest priority—even more than profits. Although growth has always been on the CEO agenda, the perennial quest for growth has become more challenging in the era of global competition and shrinking product life cycles.
In their attempt to jumpstart growth, companies often turn to inorganic growth through mergers and acquisitions (M&A). M&A deals are very appealing to senior managers—they generate an immediate boost in revenues; the hard synergies (mostly financial) are very apparent; and the internal stakeholders (that is, senior managers) have a lot to gain from making the deals. As a result, M&A activity has increased to a fever pitch. In 2005, there were 10,511 mergers and acquisitions involving U.S. companies alone, with an aggregate value of more than $1 trillion—a 28% increase over 2004's $781 billion.3
However, there is trouble in "M&A land." Simply put, mergers and acquisitions don't work as advertised. Most studies and surveys paint a gloomy picture of the after-deal scenario. Between 70% and 80% of the M&A initiatives end up in failures—most of them within the first 18 months.4 Companies generally do well at realizing the hard synergies; for example, consolidating the borrowing, restructuring the taxation, pooling the working capital, purchasing at higher volumes, and so on. The soft synergies—operational consolidation, process improvement, channel merging, technology sharing, staff layoffs, extension of customer base, and so on—are what rarely materialize. Although most M&A failures are blamed on "people" and "cultural" issues, the end result is that such initiatives fail to enhance (and, often contribute to decline in) shareholder value. After the failure, the CEO often exits and a new CEO arrives who starts divesting those previously acquired divisions—and then promptly start acquiring new ones! Like a gerbil in a treadmill, the cycle of acquisitions and divestitures goes on, with the only sure winners being the consultants, lawyers, and investment bankers.
Given the high visibility of many recent M&A failures (remember Time Warner and AOL or Chrysler and Daimler-Benz), many CEOs have changed their tune and now proclaim innovation as the preferred pathway to growth. In a recent CEO survey, 86% of respondents indicated that innovation is definitely more important than M&As and cost-cutting strategies for long-term growth. In fact, many CEOs and senior managers have come to view innovation as their only alternative to achieve sustained growth.5
As Howard Stringer, Chairman and CEO of Sony, recently noted, "We will fight our battles not on the low road to commoditization, but on the high road of innovation."6
However, despite such public statements about the importance of innovation, when it comes to actual decisions and actions, many companies still take the easy way out—focusing either on cost-reduction initiatives that promise short-term profit increases or on mergers and acquisitions that create an illusion of rapid revenue growth, even if the former is often not sustainable and the latter mostly turn out to be failures. In short, a significant gulf seems to exist between the desire to innovate and the ability to innovate.