Introduction

Innovation – the hunt for a gem in a new age of competition

Early economists asked a simple question: why is it that something as useful as water is available so cheaply whereas diamonds, with such limited practical use, are so expensive? The answer to this intriguing riddle was that water is widely available and diamonds are not. From this we derive a fundamental economic principle: it is the degree of scarcity that puts different price tags on different things.

The deeper dimensions of this idea are best left to academic lecture theatres. For the practical world of economic enterprises the principle sheds a useful light on vital business inputs such as labour, capital, land or ideas. Their scarcity, availability and affordability will change dramatically over the next twenty years when the balance of global economic power shifts further towards emerging countries, reflecting the trend towards globalisation.

Let’s look at it like this: there is the old world that most of us are familiar with and the majority of enterprises still see themselves as being up against. Here, things like skilled workers, suitable factory sites, natural resources, access to funding, affordable energy or even the right customer groups are vital business ingredients and hard to come by. Our experience tells us that these ingredients are available to different degrees – and therefore today still command substantially different market prices – around the world. Hence, a software engineer in Bangalore is still paid a fraction of the wage his identically skilled colleague in Boston receives. And it is certainly still true today that getting hold of a hard-currency loan in Botswana is more difficult and expensive than it is in Berlin.

But this is the core point about the not too distant future: in the new world of global competition – the birth of which we are witnessing – the hunt for rare business factors, these diamonds of various quality, purity and value, will become much less important if not, at some point, insignificant. Labour, capital, knowledge and other inputs necessary to set up shop will adopt the quality of commodities and be available – almost like water – at more or less globally harmonised prices. That does not necessarily mean they will become more affordable, but their still widely differing market values will gravitate into a narrower band. When virtually everything is available to everyone at a similar price, businesses around the world will find themselves in pursuit of a last remaining precious gemstone – innovation. Unlike the other inputs, this factor, by definition, is always “rare” enough to command outstanding prices. A distinct product, an exclusive patent, a pioneering production process, distribution channel, supply-chain mechanism or brand promise – any of these could make the difference for a company. In the new age of hyper-competition, what will distinguish you in the eyes of customers, rivals and shareholders will simply be the quantity of successful innovations you can come up with. This all-important capacity will hinge on you having a viable innovation process in place and the consistency with which you can make it work for you.

You might think innovation is something relative. How can novelty be measured accurately? How good is a good idea or a clever invention? There is a surgically precise answer: a good invention is nothing unless it can prove itself to be a success in the market place. Numerous truly good ideas falter because of bad implementation on their way to market. And an equal number initially thought to be wonderful end as hopeless cases because, contrary to preliminary assumptions, they simply fail to strike a cord with customers. The Austrian-American economist Joseph A. Schumpeter put it in a nutshell back in 1911: “Innovation is the process of finding economic applications for inventions.” This means it is only when an invention has been marketed successfully that we can call it an innovation. The yardstick is simple: new ideas are successful on the market when increased sales and decreased costs push the invention across the threshold of profitability.

We can get a clear, practical sense of innovation’s power by looking to Germany. The country has only recently lost its status as the world’s biggest export nation to China. Of course China has won the game (for now) by playing according to different rules: most of its products are still less sophisticated and manufactured with much lower labour costs. Germany, by contrast, was able for many decades to produce globally sought after export goods even with some of the world’s highest labour costs. The feasibility of this approach came down to one thing: innovation. This factor alone kept and still keeps a large number of German products and services in the game worldwide and many of those are still way ahead of the competition.

China has outmanoeuvered Germany as the biggest producer of solar panels

Moreover, despite their success, German companies have hardly been the world’s most active takeover buccaneers, which leads to another interesting point about innovation: having the capacity and knowledge to turn good ideas swiftly into huge commercial successes on the market will also eventually be the last viable alternative to buying rivals or crowding them out by lowering prices. Both of the latter strategies, numerous studies have made clear, show only mixed long-term results in margin improvement or shareholder value enhancement. From that point of view, even today a buzzing innovation pipeline already makes for the healthiest way a company can stem competition and achieve sufficient growth. In that regard, innovation will definitely be your best protection in any rough weather the globalised era might have in store.

The global harmonisation of business input costs discussed above will probably happen in just a decade and a half or so – with innovation remaining the sole exception. In fact, Indian outsourcing firms concede already that an IT specialist in Boston will, in only a few years, rival their staff in Bangalore on pay. In this general equalisation trend, the knowledge market will explode in volume – particularly driven by the transparency the internet creates. Patents and trademarks, the powerful protectors of intellectual property, will be traded easily on a deep and liquid world market between Shenzen, Stuttgart and San Francisco. Globally harmonised patent laws will make concepts and inventions available to anybody who feels entrepreneurial and wants to set up a business. They will turn into a resource like, say, energy is today. Companies in this environment will need to ensure they do not fall between the cracks, wasting money on poorly conceived internal R&D, then being unable to compete as buyers in the innovation market. Quicker idea generation will also be decisive, as innovations lose value faster in this highly competitive environment. Remember, it took one million years for mankind to modernise the axe and develop metal knives. Today a computer mouse becomes technologically dated within just five years.

Innovation pioneer
Joseph A. Schumpeter

The scenario laid out here is a multi-polar world. It will unfold at many economic epicentres and various poles of corporate power scattered around the globe. Whoever has deep enough pockets will be able to set up shop anywhere in no time and create difficulties for an established blue-chip company even on its home turf. We see plenty of early evidence of this already. Over the past decade, China, India, Russia and Brazil have turned up the heat on the USA, Western Europe and Japan – the economic establishment of the last century. Yes, the latter three regions are still the predominant well of technological and scientific innovation. Yet just a few recent headlines indicate the tectonic shift that is underway. Brazil has overtaken Germany as the world’s fourth largest car market. Russia has launched commercial passenger jets to rival an established duopoly of Western manufacturers. The same is true of China, an economic powerhouse that has already outmanoeuvred Germany as the biggest producer of solar panels and recently registered the most worldwide patents in a year. India, meanwhile, has come up with the most affordable mass car ever developed, while South Korea’s universities churn out more engineers every academic year in absolute numbers than the United States.

In a striking additional development, more and more world-class executives and managers are crossing the lines to head ambitious corporate organisations in emerging countries. In doing so, they are transferring the leadership skills and innovation experience they have garnered in the mature markets of the West to new hotspots in fast growing markets. Even this segment of the labour market is turning global as pay packages for international talent begin to harmonise.

In the energy and natural resources industries the new world has already knocked at the door

Why are the historic shifts described above especially vital to the energy and natural resources industries, our main focus in this book? Put simply, there is less time left in this sector before these changes begin to bite. In many respects the markets for these industries – raw material groups, power producers, oil and gas companies and chemicals manufacturers – are undergoing massive change as the balance of power shifts towards emerging economies and the world looks to a range of low carbon technologies.