Bhaskar Chakravorti
Innovation Without Borders
The classic image of the innovator is that of the iconclast who breaks away from
the pack and “thinks different.” Quite surely, that famous advertising byline helped
win the computer maker, Apple, ultimate iconic status of innovator as the ultimate
iconoclast. Equally famously, Apple Computer made its system incompatible with
the prevailing standard: you were either with the nearly 90% of users whose PCs
ran on Microsoft Windows or aligned with Apple’s unique system. Apple’s chief,
Steve Jobs, had declared his objective to “put a ding in the universe”; he certainly
did so by banging into the sides of much bigger competitors: Microsoft, IBM, HP,
Dell, among many others.
The Us vs. Them image of the innovator is not limited to Apple alone. The
popular idea of the innovator as the “disruptor”—and the many examples of com-
panies on the Web or from emerging markets that have, indeed, disrupted long
standing incumbents—has reinforced the competitive facet of innovation. And the
metaphors keep coming: making the competiton irrelevant; innovate—or die. In
fact, it is often remarked that some of the best-known innovative companies hire
attorneys with as much zest as in their hiring of scientists and engineers. In the
midst of all of these images of zero-sum innovation, the critical role of consensus,
cooperation and coordination in most successful innovations may have been over-
looked.
Last year, the percentage of successful innovative products that were developed
or commercialized with others was as high as 79%. The total return to sharehold-
ers for companies that adopted a collaborative approach to innovation was on
average 1.6 times that of more insular innovators. Collaboration also led to better
outcomes for users of the innovative products: the clinical survival rates of patients
who use products from externally sourced programs in pharmaceuticals are twice
the survival rates of patients served by products of internally sourced programs.1
The importance of outsiders in the innovation process often begins with the
very idea that ultimately becomes a winning innovation. The office supplies retail-
ing giant, Staples, had aspirations to boost its sales from highly appealing private
label merchandise. One of its hottest recent products is the Wordlock, predicated
on the simplest of ideas: people remember combinations of letters that spell famil-
Bhaskar Chakravorti is Partner with McKinsey & Company, working in the firm’s
Boston office. He is the author of The Slow Pace of Fast Change: Bringing Innovations
to Market in a Connected World (Boston, MA: Harvard Business School Press).
© 2007 Bhaskar Chakravorti
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iar words more easily than they do combinations of numbers. The Wordlock was
not the invention of Staples’ own tinkerers; it was the prize winner of an annual
“open innovation” contest, InventionQuest, through which Staples invites ideas
from all and sundry. In the same tradition, soliciting ideas from the outside, par-
ticularly from customers, has come out in the open across industries. The Danish
toy maker, Lego, tapped into the creative minds of a group of “lead users” to devel-
op a new generation of its Mindstorms kits. The mining company, Goldcorp ran a
competition to unearth new veins of gold on their Red Lake mining property.
Seven of the top fifteen drugs in 2005 did not originate in the pharmaceutical com-
pany that primarily markets them. An average of 40% of pharmaceutical R&D
among the major players is sourced from the outside. This list goes on…
More broadly, some of the most successful and innovative companies in recent
years have systematically sought out external partners for sourcing ideas, for com-
mercialization and for expansion into adjacent businesses and new segments.
Entire corporate strategies are predicated on a networked model. Starbucks, for
example, has established a brand that conveys a holistic experience associated with
the enjoyment of coffee. It has done so with a network of partners: Ethos Water,
Lionsgate movie studios, Paul McCartney as the early draw for its music label, the
satellite radio company, XM Radio, and a host of others, particularly for interna-
tional expansions. Google relies on content from the outside that it organizes and
searches for its users. Much of the innovative content that Google owns, such as
Google Earth, was acquired from the outside. Proctor & Gamble transformed an
insular organization focused on internally driven R&D to one that follow’s the
mantra of “sourcing 50% of new products externally”. P&G has re-aligned goals,
metrics and incentives to ensure that managers follow through on these objectives.
In addition to giving a high priority to its internal business development group,
P&G has established linkages with a wide network of external partners: academia,
customers, partners, retailers, indiviual inventors and technologists, industry
peers, ideas exchanges such as NineSigma, bankers, VCs, etc.
The willingness to connect with an external network is key in an environment
where products and services are themselves increasingly inter-connected. We see
trends in this direction for a variety of reasons, either because uses of multiple
products are complementary or because information and marketing networks
have become so prevalent and play a key role in decision-making and adoption.
The greater the inter-connectedness, the greater the need to collaborate with the
network into which the innovation must connect. In light of these trends and the
clear benefit of innovating “without borders”, it becomes critical for an innovator
to establish some rules of engaging with a network: whether to and how to play.
In this article, I shall offer a framework for evaluating three stages of the deci-
sion to engage with the network from the perspective of a prime innovator, who
instigates the change and bears central responsibility for bringing the innovation
to market. The approach is organized around three questions:
• Question 1: Should I open the borders and collaborate with an external net-
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Innovation Without Borders
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Innovation Without Borders
work?
• Question 2: What are the potential sources of resistance in the network to
innovation and what motivators and barriers determine the actions that the
network takes?
• Question 3: What are my options for overcoming the challenges and engaging
with the network to realize value by innovating without borders?
TO OPEN OR TO CLOSE THE BORDERS?
Our approach begins with the first of the three questions: the prime innovator
must make a decision on openness vs a closed model for realizing the value of
innovation. A way to re-frame the question to be addressed is: what conditions
must the prime innovator need to believe about how the network adds value? This
helps us understand the decision-making process involved in going to the network
in the first place.
In our work across a wide range of firms and multiple sectors, we have seen a
number of factors that are relevant in driving a decision between “closed” and
“networked” innovation. Figure 1 below summarizes the key conditions that the
innovator must believe to consider going to the network.
Against these benefits, the prime innovator must consider trade-offs of forego-
ing a larger share of the value created by innovation and several substantial risks.
These risks are summarized below in Figure 2.
As such, these factors offer a checklist for innovators considering the net-
worked vs closed innovtion choice. All of the examples from the first section, and
the increasing trend towards openness suggest that a greater number of companies
are evaluating these trade-offs and deciding in favor of opening up their borders.
And as more companies move in this direction there are more “best practices” in
place for anticipating and managing the risks outlined above. This also means that
when we speak of an “innovator”, only in a minority of situations is that innovator
likely to be a single entity. Usually, it is the prime innovator who acts as the cata-
lyst and leads the network, but in some way the entire network contributes in some
way to the innovation and to the value created.
SOURCES OF RESISTANCE IN THE NETWORK
As more of the innovations of the future require cooperation among multiple
players in a network, the motivations of each party in the network must be aligned
with creating the innovation and getting it to market. But with each in pursuit of
a private objective function and subject to private constraints and privately held
information, the alignment challenge is enormous. As a result, the more open the
borders are, the wider the network and the more the chances that the innovation
will not be realized.
The prime innovator must anticipate this possibility and expect that the mis-
alignment can potentially give rise to several sources of resistance, which can
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diminish, delay and even destroy the value of innovation. We outline a few such
possibilities below:
• Chicken-and-egg dilemma. This situation arises when each party to the network
waits on others to make the initial investment and adoption decisions needed
to incubate and scale up the innovation. Consider the much talked about
future involving a “hydrogen economy”. Automakers, such as BMW with its
Hydrogen 7 model, have announced models and plans in the pipeline that use
hydrogen as a fuel. Understandably, given the environmental benefits of such
vehicles, their successful diffusion can have a significant impact.
Yet, it is highly unlikely that hydrogen powered vehicles will become the stan-
dard anytime soon. A key challenge will be the absence of a system of re-fuel-
ing stations that such automobiles can use to replenish the hydrogen used up.
But such stations will not be built and the distribution networks will not be in
place until there is a strong expectation that there will be sufficient demand. In
the absence of the stations, the demand will not materialize, and the automak-
ers will not accelerate their plans for rolling out hydrogen powered vehicles.
This circular dilemma is a natural outcome of any “two-sided market”, where
each side must wait on the other. The challenge gets exacerbated when there
are many sides to the market.
• Scale Economies. Many innovations face the challenge that they are not cost
competitive relative to the status quo they are trying to displace. A major rea-
son for this is the fact that because innovations usually involve new and less
mature technologies, applications or processes, they cannot benefit from scale
economies. No single participant in the network has the incentive to subsidize
the innovation which could create the incentives for the remaining participants
to free-ride. This causes each party to the network to hang back and, as a
result, the innovation loses to the status quo.
Consider the emerging bio-diesels industry. Against the status quo of, say, $60 a barrel for crude oil, diesel would have a retail price of $1.60 for a gallon, while
bio-diesel from rapeseed and soy would have a per gallon retail price ranging
from $2.20 to $2.80 today. While these alternatives are expensive, an additional
problem is that there is limited headroom for scaling up; the feedstock is limit-
ed. If one were to consider other sources of bio-diesel, such as algae, the retail
price would shoot up even higher — to $26.50 a gallon.
• Conflicting Interests. The wider the network, the greater the chances that the
interests—motivators and barriers—of each participant will be hard to align.
The problem is particularly acute when the motivations of two critical parties
are directly in conflict. In addition, there are situations where both parties have
common motivations but find it in their interests to go it on their own or with
their own coalition rather than with entire network.
As an example of the first situation, consider the promise of the emerging field
of pharmacogenomics. It will allow genetic profiling and better prediction of
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Innovation Without Borders
the vulnerability of individuals to specific diseases such as, say, type 2 (adult
onset) diabetes. This advance knowledge can help put in place a variety of pre-
ventive measures for the individual involving changes in lifestyle and diet and
even go on medications that have preventive benefits. However, the difficulty in
getting the network to embrace such a beneficial innovation arises from the
fact that insurance companies and payers may not have the incentive to pay for
such genetic profiling: the indivdual may not stay on the current health plan or
current employment for a long enough period of time the insurers and payors
will not reap the benefits from the potential lowering of costs of the individ-
ual’s treatment later in life.
As an example of conflicting interests between competing coalitions, consider
situations where new technology standards have to be developed around inno-
vations and the network splinters. The competition between the standards
coalitions prevents them from taking a unified position in competing against
the status quo. The next generation DVD media standards wars between Blu-
ray and HD DVD are a recent case in point.
The three kinds of resistance we have introduced above leads one to ask about ways
to orchestrate the various privately motivated choices to be made by the network
participants. How do you encourage the critical participants to act in their own
best interests and, while doing so, help speed the course of innovation? I will offer
some alternative approaches in the forthcoming section. Before getting there, it is
useful to consider a visual tool that simultaneously captures the multi-lateral
incentives that must be aligned and the coordination challenge to be resolved.
The tool can best be explained through an application. Consider an innovation
that has been notoriously slow in its adoption. It is an eminently strong candidate
for innovation without borders. To some degree, it has suffered from all three of
the problems posed above of mis-alignment of multiple motivations.
Consider the long-standing problem of getting physicians to use CPOE
(Computerized Physician Order Entry). These are systems that allow the direct
electronic entry of medical orders by healthcare professionals. The systems have
several benefits: including the reduction of medical errors, input for electronic
medical records and improved clinical decision-making. A key source of the diffi-
culty in getting CPOE to be adopted is the complexity of the network that is rele-
vant for its success. This network encompasses several participants. On the
demand side alone there are: drug and device manufacturers, hospitals and clinics,
physicians and nurses, pharmacies and testing labs, insurers and patients. This net-
work is complex and covers only part of the entire universe of participants who
would be responsible for adoption. For example, this list does not include suppli-
ers of various technologies, products and services, standards bodies or regulators.
A good starting point for understanding the difficulties in getting CPOE
adopted is to ask what conditions would describe a successful “endgame” for
CPOE, where there is widespread adoption on the demand side of the market.
Consider the following scenario set out as a configuration of conditions or actions
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associated with each of the network participants; they represent one configuration
of a successful endgame for this innovation. In this scenario CPOE succeeds
through investments and sponsorship paid for by interest parties who get to use
the equipment as an advertising and branding platform in exchange:
• Drug and device manufacturers. A meaningful group of manufacturers act as
sponsors of the hardware, software and other system related investments, thus
subsidizing the cost. The sponsors’ brands or commercial messages are part of
the CPOE equipment in exchange. This must be balanced against any potential
ethical and legal concerns.
• Hospitals and clinics. A critical mass of these institutions complete implementa-
tion of wireless networks, CPOE and other complementary IT applications,
such as electronic medical records.
• Physicians and nurses. Wireless devices, CPOE and other IT applications are
adopted and supported by most physicians and their staff.
• Pharmacies and testing labs. A critical mass of these institutions adopt and sup-
port CPOE and provide partial sponsorship of the application since it reduces
their costs.
• Insurers. A critical mass of insurers support the sponsorship of the CPOE
application and provide incentives to hospitals that implement it.
• Patients. A critical mass of patients embrace instant wireless data transmission /
CPOE of their sensitive health related information, are not turned off by com-
mercial sponsorship and even act as advocates for its implementation through
patient advocacy groups and online forums.
The idea behind this scenario is that the conditions or actions outlined for the par-
ticipants are mutually reinforcing. These network participants are, clearly, not tak-
ing these actions currently—each is locked into a different set of mutually rein-
forcing actions; hence the slow pace of adoption. How does the prime innovator
help break away from the status quo?
We would propose that the innovator assess the total value created by the inno-
vation’s adoption and establish a business model that distributes this value in a way
that reinforces any motivating factors and compensates for the barriers that each
participant would have to overcome to get to the desirable outcome. Figure 3 lays
out a tool for doing the evaluation.
The endgame conditions along the top are a set of conditions lined up against
each critical participant on the demand side of the CPOE market. These are the
conditions we have just outlined above. To understand the underlying factors that
govern the actions of each of these network participants, we would need to exam-
ine the motivators that drive the participant towards the endgame and the barri-
ers that prevent them from doing so. The upward facing arrows represent the moti-
vators for each paticipant to get to widespread adoption. Correspondingly, the
downward facing arrows represent the barriers to change. When viewed together,
we see a snapshot of the dynamic situation and the forces that are in balance.
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Bhaskar Chakravorti
HOW TO GET THERE? THREE WAYS
There are three primary ways for the prime innovator to get networks to act in a
coordinated way and get to the desirable endgame conditions. Two of these involve
private initiative, while the third requires the prime innovator to seek help from a
resourceful participant outside the network—usually the public sector.
Approach 1: Integration
A potential way to coordinate across the many participants and their individual
motivators and barriers is to bring them under unified management. The ways to
achieve this could involve: vertical integration or horizontal mergers or partner-
ships.
Consider one of the fastest growing innovative sectors in recent times: the solar
(photovoltaic) industry. With the heightened interest in renewable energy sources,
this industry has been growing at rates of 40-50% a year. The key participants in
the industry can be identified by examining the value chain. Poly silicon is convert-
ed to ingots and cut into wafers, which is a key component of photovoltaic cells
that help transform solar rays into energy. The cells are embedded in modules and
solar panels, which are then marketed, installed and serviced by downstream sys-
tems and service providers and installers. There are several other participants that
contribute to each of these major elements of the solar value chain, such as tech-
nologists and materials providers, as well as government bodies and advocacy
groups and lobbyists.
The separate interests of the individual participants of the value chain can act
as a potential brake on further acceleration of adoption of solar energy. As an
example of the diversity of motivators and barriers to contend with, consider the
interests of the upstream poly silicon players. They have been through severe cycli-
cal patterns in their business, where they were left with a glut of poly silicon once
the high demand from semiconductor industry had slowed down with the cooling
of the high technology industry post-2001. This history would give them reason to
pause before adding capacity and making high upfront capital expenditures. In the
meantime, the downstream players in the industry cannot keep up with fast pace
of consumer demand for solar power because there is not enough poly silicon sup-
ply. The market positions of the downstream cells, panels, systems players depend
on securing access to precious poly silicon.
How have several participants responded to these conflicting incentives? Many
have gone down the path of vertical integration. REC, one of the biggest players in
the industry has expanded its footprint and extended across this value chain. Other
key players, such as BP, MEMC, SunPower have also expanded their position up
and down the value chain.
Similar patterns of integration as a way to coordinate across a value chain has
been the hallmark of many other industries in their early stages: automobiles,
computing, entertainment and media.
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Approach 2: Power Plays
Most networks tend to follow the so-called power law. There are economies of
accumulating power and influence and a small number of the participants in a net-
work tend to become the hubs or greatest influencers of the actions of the rest. This
is particularly relevant in situations with significant economies of concentrating in
the channel or in setting or dictating standards. Finding ways to complement the
most powerful players’ interests gives the prime innovator the ability to focus its
resources on a few target stakeholders, ride their coat-tails and maximize the abil-
ity to influence and transform large segments of the network.
Consider the strategies of cellular handset makers, e.g. Motorola or Apple, as
they pushed their innovative products, the Razr or the iPhone, respectively, to mar-
ket. A strategy that has worked well has been one of signing exclusive deals with
one of the major wireless service providers. Motorola launched its highly success-
ful Razr through a deal with Cingular, which had a dominant share of the US wire-
less telephony market. Subsequently, Apple did the same with the Cingular’s new
incarnation: AT&T.
In each case, the power player had much to gain from an exciting new handset
given the maturation of the wireless services business. An exclusive deal, even if it
is for a limited period, gives the service provider a way to lock up market share with
consumers attracted to the new handset. For the handset makers, piggybacking on
the dominant service provider’s commercial infrastructure and reach is a com-
pelling way to get to market and draw applications providers to the platform cre-
ated by the exciting new handset.
Approach 3: Public Solution
A final approach to resolving the dilemma is to take the route often used in the
event of clear “market failure”. This can come about when there is not enough
power in the network or no way to establish it through integration or no way to
complement the power players. These are precisely the circumstances in which
economists make the case for the public sector to play an active role or even take
over an industry. Generally, the public sector takes a more indirect role through tax
breaks, subsidies and other incentives. The prime innovator can play an important
role in educating policy makers and bringing political and economic constituen-
cies together to get the public sector to act.
For an example, we need look no further than the broad set of issues relating
to the response to climate change and need for multiple viable renewable energy
sources—a current that has been running through many of the examples in this
article. The public sector’s view must be viewed in a holistic manner. It has the
convening power to bring the multiple stakeholders—domestic constituencies,
cross-industry players, governments,
international and multi-lateral bodies
together on the issues, to set local and global standards for emission, construction,
environmental impact of initiatives such as urbanization, industrialization, defor-
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estation, etc., setting targets for greenhouse gas emissions, usage of renewable
energies as a percentage of overall energy used.
Most importantly, the public sector has been providing financial incentives
and subsidies for both R&D and for closing the retail cost gap between the renew-
able energy sources and the traditional sources against which they compete. In the
absence of these policy-led initiatives, the response to climate change agenda
would have stalled. In fact, the prime innovators would be well served to bring the
issue to the attention of policy makers more aggressively if they want to make the
many networks we have talked about earlier move in a consistent and value
enhancing direction.
CONCLUSION
Apple Computer, with which we began this article, eventually dropped “comput-
er” from its name.
More significantly, Apple went through an even more profound shift in its
innovation model. The lone wolf that “thought different”, Steve Jobs, gave his com-
pany a new lease on life with the creation of the iPod and iTunes. Many think of
the iPod largely as a marvel in product and design innovation. As much as it is a
brilliant example of innovative design and product engineering, the iPod repre-
sents an equally impressive innovation in the business model that delivers the
product to its many users and returns favorable payoffs to an innovation network
that extends well beyond Apple.
Apple worked with a many partners in the product and design of the iPod:
small players, such as Red Chair Software, Finlay Software, and many large players,
such as HP, Sony, Sharp, Texas Instruments, Hitachi, among others. Moreover, at
the core of the iPod and iTunes is an even more impressive innovation: in a busi-
ness model that cuts across traditional industry borders. It encouraged a music
label oligopoly, whose interests were firmly aligned with maintenance of a status
quo to sign up to the radically different iTunes model, unbundle the music tracks
on their albums, make them available on the Internet and price them at a flat fee
of 99 cents a song.
When you innovate across so many borders, you not only re-invent a compa-
ny but also an reinvent an industry. In this case, arguably, the cross-network col-
laboration catalyzed by Apple may have saved the industry.
It does make you want to break out in song.
1. McKinsey & Company analyses.
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