Making the shift to a decentralized and open innovation model

25 August 2023 Consultancy-me.com 17 min. read
Profile
More news on

In today’s evolving and competitive landscape, the value of innovation is shifting from the traditional closed systems approach to a more open, decentralized, and community-driven approach. Paul Lalovich and Tesha Teshanovich from Agile Dynamics outline what is driving the trend, its implications for organizations, and how leaders can successfully operate at the forefront of the shift.

Innovation transcends the mere conceptualization of fresh ideas; it is the actionable process of enhancing existing products or conjuring entirely new offerings. While there is a strong correlation between R&D and innovation – with the former serving as a wellspring for pioneering thoughts – the journey from groundbreaking research to practical utility can be intricate and protracted.

However, it’s worth noting that innovation isn't solely tethered to structured R&D. It can spontaneously arise from sheer curiosity, a spark of inspiration, or even the simple act of refining or tweaking existing methodologies.

Making the shift to a decentralized and open innovation model

Firms might invest in R&D to catalyze innovation, but they can also harness external advancements – referred to as ‘spillovers’. After all, groundbreaking knowledge isn't always the exclusive domain of its creators, making external inspirations invaluable.

Emerging from a robust foundation of innovation, soft power presents tangible advantages. Leaders in technology often establish benchmarks that others deem beneficial to adopt. As a result, global standards lean favorably toward those pioneers. Moreover, countries recognized for their innovative acumen become prime territories for patent filings. These innovation hubs magnetize not just domestic but international investments and capital.

Perhaps the most profound testament to their soft power is the allure they hold for top-tier talents. For instance, Silicon Valley has evolved into a global nexus, drawing in exceptional minds from the realms of information, communication, and digital technologies. Such concentrations of talent can significantly influence a nation’s trade dynamics.

Tech monopolies slow down innovation

In the arena of global economic dominance, competition emerges as the cornerstone, propelling nations to the forefront of innovation and growth. While Chinese strategies appear to have adapted, embracing the dynamism of competitive markets, the United States stands at a crossroads. Some of its tech behemoths promote their size and market leadership as pivotal for cutting-edge innovation.

Yet, it is crucial to discern the nature of this innovation and whose interests it truly serves. Does it prioritize shareholder returns, or is there a broader, national interest at play? As smaller, agile firms emerge, emphasizing true boundary-pushing innovation, one must ponder: Is the spirit of unbridled competition – a force that once fueled the American economy – being overshadowed by the looming giants?

In the nuanced interplay between governmental oversight and market forces, recent actions within China's technology sector provide a captivating study of regulatory boundaries. This phenomenon, aptly termed ‘de-tycoonification’, captures a deliberate effort to harmonize enterprise innovation with centralized checks.

A leading digital commerce platform in China encountered regulatory attention. The swift determination that its practices were anti-competitive, accompanied by a significant financial penalty, symbolizes a broader intent to redefine market paradigms. Prompt official communique following these events conveys a clear perspective: monopolistic behaviours can inhibit the holistic evolution of a market-based economy.

This stance also emphasizes that thoughtful regulations, rather than restricting growth, might actually serve as pillars to stabilize and nurture it. The regulatory web further ensnared another major digital entity in China, underscoring the principle that technological ingenuity should operate within established ethical and legal frameworks. Such internal checks within China challenge certain dominant narratives in global tech centres.

The notion that maintaining a robust market stature acts as a shield against global tech adversaries comes under scrutiny. The introspective regulatory steps within China necessitate a broader re-evaluation of such assumptions.

The tech landscape today is unmistakably marked by the towering presence of Big Tech, but what underlies this dominance might point towards a concerning reduction in competitive intensity. For two decades, the profits raked in by American tech behemoths have remained unparalleled, with market valuations suggesting this trend is expected to continue, if not amplify, in the coming years.

Such sustained, sky-high profitability isn't typical in a genuinely competitive market. In such a setting, rivals and newcomers usually exert downward pressures, ensuring no single entity retains an overwhelming edge for extended periods. The tech industry's trajectory further points towards a rising penchant for consolidation. This is evidenced by the substantial acquisitions of budding companies by the tech titans.

Data sourced from Mergermarket underscores an uptick in acquisition activity by these colossal tech firms, particularly post-2010. The symbiotic relationship between persistent high profits and a trend toward industry concentration suggests that the tech market might be veering away from the vibrant competitive arena it once was.

Cardwell’s law

The tech landscape’s evolution, in its relationship with innovation, is witnessing a palpable shift in entrepreneurial motivation and vision. Historically, the fervour of pioneering something transformative, encapsulated in the ‘moonshot thinking’, drove entrepreneurs. This audacious spirit envisioned groundbreaking entities akin to the tech luminaries of the late 20th and early 21st century. Yet, today’s entrepreneurial aspirations seem more tempered.

Instead of fostering ambitions of building the next revolutionary tech empire, there’s a growing inclination towards securing an acquisition by an existing tech colossus. This shift in sentiment dims the likelihood of a new tech juggernaut rising to challenge the incumbent titans. Post the era of computer-centric, web-driven, and smartphone-related innovations, a cloud of uncertainty looms over the emergence of new tech powerhouses.

Notably, the promising technological domains of the upcoming decade – be it autonomous vehicles with their exorbitant R&D costs, virtual or augmented reality's significant development expenditures, the data intensity of artificial intelligence, or drones and the Internet of Things with their challenging profit margins – present formidable entry barriers.

These hurdles, combined with a changing entrepreneurial landscape, cast a shadow on the future dynamism of tech innovation. Cardwell's elucidation on the patterns of technological evolution offers a poignant lens through which to view the current landscape dominated by Big Tech.

Donald Stephen Lowell Cardwell’s seminal work from 1972 suggests that technological vigor within societies is not an enduring flame, but a fleeting burst of brilliance. Within the European context, as one nation's innovative energy began to wane, another would rise, ensuring a consistent relay of progress across the continent.

Visualize this relay of innovation as a torch, brilliant yet intense. Historically, regions such as Northern Italy, Southern Germany, Spain, and Portugal, and later Holland, Britain, the United States, and Germany, took turns in holding this torch, leading the march of innovation. Yet, no single society clung to this leadership for extended durations. The relay ensured that as one nation's innovation diminished, another took up the mantle, propelling the collective forward.

This phenomenon, coined as ‘Cardwell’s Law’ by Joel Mokyr, posits that when left in isolation, a society’s technological creativity is but a brief spark. Over time, conservatism’s stifling grip, intent on preserving existing structures of power and privilege, often curtails this innovative drive.

This is where the analogy becomes particularly relevant for the Big Tech landscape. In today’s digital age, a few colossal entities dominate, much like the leading nations of old Europe. Yet, as these tech giants solidify their positions, they risk becoming victims of the very conservatism Mokyr speaks of.

Instead of being conduits for continual innovation, their sheer dominance and entrenched positions could lead to a stagnation in technological creativity. As they grow in size and influence, there is an increasing tendency to preserve the status quo, which inadvertently suppresses the innovative spark found in smaller, more agile entities.

Decentralization and open innovation

In the contemporary milieu characterized by the overwhelming dominance of Big Tech monopolies, the paradigms of decentralized innovation and open innovation emerge as potentially transformative alternatives.

The concept of distributed strategy borrows from nature, suggesting that in the same manner that organisms such as trees maximize their efficiency by creating multiple self-similar structures like leaves instead of solely relying on a single core trunk, businesses too need to shift their focus from purely scaling their core processes to nurturing multiple iterative strategies at the organizational peripheries. This can be encapsulated in the mantra of ‘Think Local, Act Global’.

In essence, companies must attune to the nuanced demands and opportunities of each local market, while simultaneously integrating these learnings into a broader global strategy. This is particularly evident in industries undergoing rapid transformation; for instance, the automotive industry's evolution from merely selling cars to offering comprehensive mobility solutions, a shift that is predicted to significantly alter its revenue structure by 2035.

In parallel, in our data-driven age, there is an increasing realization that the sheer volume of data is less crucial than its meaningful interpretation. Organizations need to pivot from prioritizing data accumulation to developing advanced algorithms capable of drawing insights from fragmented, patchy datasets. In the rapidly shifting landscape of today's global business environment, numerous established multinational corporations find themselves at a perplexing crossroads.

The crux of their predicament stems from a foundational dilemma: how to juxtapose traditional scale-driven strategies with the emergent imperative of Distributed strategies. To dissect this conundrum, one must appreciate the inherently divergent organizational philosophies underpinning scale and distributed strategies. Transitioning from a scale-centric model to a distributed-oriented one is not merely about implementing a series of organizational modifications, no matter how profound.

The shift demands a comprehensive reimagining of the organizational ethos and operational mechanics. Moreover, it is a fallacy to view these strategies as mutually exclusive. In actuality, they exist on a continuum, each holding its unique value. The challenge for modern enterprises lies in striking an optimal balance between harnessing the benefits of scale and the agility of Distributed strategies. Regrettably, the journey to this equilibrium is riddled with pitfalls, and many companies, even with their vast resources and global reach, have faltered in this endeavor.

Contrary to scale-centric entities that depend on static assets, with streamlined yet inherently slower supply chains, Distributed organizations harness networks characterized by adaptability and continuous transformation. These networks are primed for swiftly addressing specific local requirements and seizing niche market prospects.

Such frameworks incorporate a blend of proprietary micro-production facilities, possibly utilizing innovations like 3D printing; leasing assets from providers offering asset-on-demand services; and coordinating flexible ecosystems of regional digital collaborators. The overarching aim is twofold: continuously devise innovative solutions tailored for local clientele and escalate them to various markets with optimal speed.

Distributed-oriented organizations prioritize decentralization, contrasting with the top-down hierarchies commonly seen in scale-driven entities. Within these structures, decision-making isn't confined to a centralized corporate core. Instead, considerable authority is delegated to customer-centric teams positioned away from the primary headquarters. This design fosters agility, allowing for a rapid response to localized demands and new opportunities.

Some multinational corporations have observed marked improvements in their performance metrics after such decentralization. They empowered regional leaders with financial oversight, decision-making rights, streamlined communication channels to the central office, and enhanced access to market analytics.

Another trend, seen in the case of an appliance industry giant, involves an even more radical shift. This entity introduced a unique organizational framework aimed at minimizing the distance between the enterprise and its customer base. In a bold move, an entire level of middle management was eliminated, redistributing power to numerous newly-formed, semi-independent, customer-aligned business segments. These units operate in synergy, linked by a unified digital platform.

Further reading: Knowledge and venture capital as a driver of innovation.

Meanwhile, ‘Open Innovation’ offers a complementary model, championing a departure from insular corporate research and development approaches. Instead, it advocates for the amalgamation of external insights, be they from academia, startups, or independent innovators, into the innovation process. This synergistic approach addresses the often-criticized inertia inherent in large tech monopolies, promoting a more dynamic and collaborative innovation ecosystem.

Both these paradigms, however, necessitate a significant cultural shift within organizations, demanding a more flexible, adaptive, and outward-looking ethos to truly harness their potential in countering the inertia often associated with tech giants.

The rise of open innovation, propelled by reduced communication costs and advancements in memory and computation capabilities, has ushered in significant changes in market dynamics and societal interactions. Unlike the traditionally centralized, firm-driven innovation models, open innovation champions a decentralized, peer-based approach that emphasizes intrinsic motivation and societal benefits.

Indeed, the literature has delved into the nature of these peer innovation communities, understanding their social structures and intricacies.

However, the repercussions of this shift towards open innovation on established and emerging firms remain inadequately explored. Current organizational and strategic theories don't fully encapsulate the nuances of community-driven innovation. Despite the transformative potential of open innovation, its influence on mainstream organizational and strategic discourses has been somewhat muted.

As we progress, it becomes imperative to develop a more comprehensive understanding of firms in this new context, addressing the interaction between traditional organizational structures and emerging community-based innovation paradigms.

Conclusion

In an evolving landscape where tasks are increasingly modular and knowledge about solutions becomes more widespread, the traditional closed systems of innovation shift towards open, community-driven models. The implications are profound: we can no longer rely solely on conventional understandings of innovation rooted in cost efficiency, control mechanisms, and external incentives.

As innovation gets embedded in a spectrum ranging from strictly internal processes to open community collaborations, our conceptualization of firms and their boundaries need revisiting. This doesn’t negate the value of traditional models, but it requires a hybrid approach where both internal and open strategies coexist.

A pivotal question arises: under what circumstances should firms toggle between these different modes of innovation? The answer, it appears, lies in understanding the nature of the product and the distribution of problem-solving knowledge.

For products that are inherently integrated and where specialized knowledge is centralized, the conventional in-house R&D model, bolstered by a strong innovation-centric culture, remains relevant. Here, innovation is typically cocooned within the firm's boundaries, spanning from distinct functional divisions to intricate, ambidextrous designs.

However, when a product can be broken down into modular components and the requisite knowledge is dispersed, the limitations of a closed innovation system become evident. In these contexts, the power dynamics of innovation are reshaped by the principles of openness, collaborative sharing, intrinsic motivation, and community engagement.

The challenge, then, for modern enterprises is to discern when to internalize and when to externalize, ensuring that they harness the best of both worlds while navigating the complex terrain of innovation.