The Great Innovation Challenge of the 21st Century

By: Jeffrey Baumgartner

Global economic challenges that have had a profound affect on businesses will continue to do so indefinitely. This means that businesses must not only innovate in order to survive, but they will need to innovate in new ways to meet the changing needs, expectations and financial situations of their customers.

Changing economies

In addition to economic slowdown, the wealthier world’s economies are largely changing from being manufacturing-based to services-based. Manufacturers are closing shop or moving their operations to countries with lower labor costs. This means that many people who earned a good living working in a factory in developed countries may find it impossible to ever find another manufacturing job again. Worse, many of them lack the skills, knowledge and experience to move into the service economy, at least at the same wage level as they experienced in their former factory jobs. Going from €25/hour in a factory to €10 in a fast-food shop is not easy, especially if you are supporting a family.

As a result: many people around the world are without jobs, some who have jobs are earning much less than they did in the past and many people are worried about losing their jobs. Worse, the situation seems unlikely to improve for years.

Why is this trend important? It is changing the way people buy things. People who do not have money cannot buy as much. People who do have money are more likely to save it, rather than spend it, in case they lose their own jobs. As a result, most consumers in wealthier countries are being more careful about their expenditures. This is likely to last for the foreseeable future, because there are no quick fixes to the economic problems of the world.

At the same time, the gap between the rich and the poor has been expanding in most rich countries. This means that there is a small subset of society who can almost anything they want. However, they are notoriously demanding, expecting very high levels of quality. Not every business can cater to this small group. Most businesses need to cater to the masses – and the masses are spending a lot less than they used to.

The evolution of customer value

Prior to the recession, the middle classes in the developed world never had it so good. Jobs were abundant, salaries were good, borrowing was easy and inexpensive goods from the developing world enabled even people of relatively modest income to live lives of comparative luxury. Businesses, of course, eagerly catered to the free-spending masses, which spurred further growth. Better still, it was easy for businesses to find new products to sell to people eager to spend their wealth.

As a result, business innovation was largely about making improved products, adding new features to existing products, giving people perceived prestige, delivering convenience and providing greater luxury. From an innovation point of view, adding complexity and luxury is easy, particularly if costs are not much of a concern.

But the global economy has changed this. People are being more careful about their money. They are looking for value and affordability. Where once they would have borrowed to buy enticing new things, now they are paying off debts and saving more of their income. Companies that continue to try and sell expensive but low-value luxury goods or products packed with unnecessary features are finding that their sales are stagnant or worse.

Meanwhile, companies like Walmart, Aldi and other cut-price retailers have been growing as more service-oriented and expensive shops have seen their businesses shrink, particularly as the web enables people to seek the best bargains for almost every product. Plus, a growing percentage of sales of many types of products has been steadily moving to the web, affecting the fortunes of established brick-and-mortar retailers.

Companies that have been innovating ever-increasing complexity into their products to increase margins and income must now innovate to reduce complexity, provide additional value and reduce costs. Only those companies that cater the the wealthy may continue in their old habits. But when the percentage of wealthy people is a single digit number, there is a limit to how many companies can follow that route.

Businesses also need to realize that where once people would have paid for added convenience, they are now happy to do things themselves in order to save money.

Emerging economies

In spite of the world’s challenged economy, several countries are thriving economically. Aside from a few notable exceptions in the rich world, such as Australia and Germany, the countries that are truly thriving have been the big emerging economies, particularly India and China. Also, because incomes are still very low in these countries, businesses there have a wealth of experience in selling to people who do not have much money. Indeed, this has been a major focus of their innovation. Until recently, countries in the developed world have largely focused on innovation that increases the cost of the products.

As a result, manufacturers in the emerging economies have the innovative edge when it comes to producing low-cost products and services. If the world economy continues to struggle for years to come, this capability will undoubtedly become a greater competetive advantage for these low-cost firms.

What needs to be done?

Many, if not most, businesses in the rich world need to change their innovation strategy from adding complexity and cost to adding value while reducing cost. They also need to understand that poor people shop differently than middle income and wealthy people. For example, purchasing in larger volumes is usually less expensive than buying in smaller volumes. A five litre carton of ice cream costs less per litre than does a one litre carton. However, poorer people may not be able to afford the five litre box and, even if they could, they may not have the freezer space to store it.

If a family has only €50 for groceries in a given week, they will not be able to purchase the bigger quantity items that are less expensive on a per unit basis. This ironically requires that poor people spend more for the same products than do wealthier people who can buy in bulk and store stuff in their bigger homes with bigger refrigerators and freezers. Businesses in the developing world, such as in India, understand this. In Indian markets, you can purchase tiny packets of shampoo sufficient for a wash or two; single cigarettes and other small items very inexpensively.

Such knowledge, paired with an innovation strategy aimed at maximizing value for money, give growing global companies from emerging economies a distinct advantage.

The changing face of global innovation

In the past, we in the richer world have enjoyed the notion that we are providing value-added innovation but outsourcing cheap labor to the developing world where people work cheaply but do not innovate so well. This is a dangerous perception, which simply isn’t true today. China and India are innovating in their own ways – and many of those ways involve selling to low-income consumers, an innovation skill we in the developed world need to learn more about.

This is not to say that innovation in the future will come only from the developing world. The rich world still retains an advantage in cutting-edge technology, pharmaceuticals and the like. In addition, healthier economies have historically had more money to pour into research and development; this has given them a strong advantage in scientific and technical innovation.

Clearly, businesses in both the developed world and emerging economies need to learn from each other.

Meanwhile, here in the developed world (where I now live) I believe changes in the focus of innovation will need to happen. In particular, I believe businesses will need to learn to use innovation in order to:

1. Reduce costs while adding value.
2. Understand the buying habits and needs of those with reduced income.
3. Find ways to engage and employ fruitfully the developed world’s unemployed factory workers.
4. Enable innovators in emerging economies to bring their ideas to the developed world.

It’s a big challenge. But it is a necessary one.

By Jeffrey Baumgartner

Photo: Maze Challenge Direction Concept from Shutterstock.com