Fighting innovation stagnation
10 things to watch out for if you want to stay on top.
NEW YORK (FORTUNE) -- It is one of the great paradoxes of business: All too often, the companies that boast market-leading positions, huge number of "touch points" with their consumers and all kinds of other advantages often are the least likely to innovate. They are the ones that say, "Oh, that market is too small for me to address," or, "That's not how we do business."
And then they watch as some other guy (often a start-up or an unexpected rival) leads the charge into a new area.
Diana Farrell, director of McKinsey Global Institute, McKinsey & Co,'s economic think tank, says her firm has seen this phenomenon all too often. To help business leaders combat innovation stagnation, she's assembled a list of ten trends that every businessperson needs to think about -- and if he's bright, he'll figure out innovative ways to capitalize on these trends.
Farrell, an all-around smart cookie who sits on a number of policy-related committees including the Council of Foreign Relations and the Pacific Council on International Policy, told a group at Fortune's Brainstorm conference that her ten trends are not intended as "top ten" list. Every executive, she says, will interpret the items a bit differently based on his or her company's priorities and objectives.
We thought the trends were thought-provoking enough that we decided to provide you with a crib sheet of all ten ideas. Now get innovating -- before some other guy does.
1) Centers of economic activity are shifting. China and India are on the rise; in a couple of decades Asia (not counting Japan) will represent about 25 percent of global GDP.
2) The public sector is overburdened. This isn't just an issue for wealthy nations but emerging economies, too. Farrell says there will have to be a new social contact put in place, and companies will play an even greater role in the delivery of retirement and healthcare benefits.
3) New consumers are coming. McKinsey estimates that there will be 975 million new middle-class households added over the next 20 years. The consuming power of those consumers will go from $4 trillion to $9 trillion.
"This new middle class will look and feel different," she notes -- they will have some disposable income but not scads and scads of money, for example, "and it will take a degree of innovation to serve these consumers." A good example of such innovation: A $3,000 car in development for India.
4) People lead social lives in a technologically connected world. The Internet has made everything transparent. If your company screws up, consumers will tell their friends -- and the rest of the world -- with a nasty posting online. Conversely, more and more social activity and commerce is taking place online, creating huge opportunities for companies.
5) Watch for turbulent tides of talent. Just as economic centers are shifting, so are labor markets: McKinsey estimates that there are about 33 million young professionals (college-educated folks with about seven years' working experience) in the developing world -- about twice the size of the young professional pool in the developed world.
6) The free market has a social cost. Increasingly, people in the developed world want their employers and vendors to have a social conscience. Companies may need to find ways to step up and show that they care about their communities and the planet in order to attract and retain the best talent and keep good customers. If companies don't step up, Farrell posits, those folks will vote with their feet and pocketbooks and find institutions that share their values.
7) Limited resources, unlimited demand. With 975 million families entering the middle class, the world is going to need to figure out ways to provide them with goods without bankrupting the planet. "Every bit of energy conservation we're able to achieve in the rich world is more than offset by growth in the developing world," Farrell says. This area, she notes, has dramatic potential for innovation.
8) New global industry structures are taking hold. The scale of companies is getting massive: The average size of the biggest 150 global companies is a whopping 123,000 employees. Moreover, the definition of a company is changing. Take eBay (Charts), which has a core group of employees on the payroll, but consists of a much larger ecosystem of sellers and middlemen.
9) A new science of management will emerge. Companies will depend more on data, algorithms and other hard measurements to make decisions -- and once one company in a field starts to adopt these techniques, the rest of the industry likely will follow.
10) A new economics of knowledge will evolve. Companies are spending more and more money on acquiring knowledge -- investing in R&D, funding university research. At the same time some knowledge is even easier and cheaper to access (think Wikipedia and other user-generated content, which can be had for free). Companies will need to figure out how to make this new knowledge economy work for them.