There's a revolution underway in how enterprises innovate. The discussion around the board tables at some of the world's most admired companies is of a radical shift in strategy that will lead to unprecedented levels of value creation and the adoption of a truly global execution model.

These multinationals are progressively abandoning their traditional approaches to the management of innovation in which R&D centres based at their global HQs (typically in North America, Japan or Europe) are the source of a one-way flow of creativity and knowledge. So, products and services are developed first for the home market and then rolled out to the rest of the world.

But now, influenced by the immense potential of the planet's largest developing economies, India and China - both as markets and sources of knowledge-driven creativity - such old certainties are breaking down.

Companies such as GE, Cisco, Nokia and Fujitsu are seeing these two giant nations as far more than a mine of low-cost offshore skills and fresh market opportunities; instead, they are regarding them as powerhouses of disruptive innovation, sources of multi-directional knowledge flows that leverage the exponential growth in their capabilities.

"Every global business is relying on growth from emerging markets," says Richard Christou, president of Fujitsu's Global Business Group. "But we're also looking towards these markets for new products and new ways of doing business. Innovation will be very important."

Beyond outsourcing

For such dynamic global enterprises, the future is one where each region's specific strengths come into play. The result is a more fluid scenario where innovation can come from anywhere and everywhere and then be adapted and applied to new markets, both in the developed and the developing world. This isn't just outsourcing taken to the next level. This, as defined by Jaideep Prabhu and Navi Radjou from the Centre for India and Global Business at Cambridge University's Judge Business School, is "polycentric innovation".

This new model, which they have been developing over the last 18 months while undertaking extensive research in India and elsewhere, is beginning to make the likes of Goldman Sachs, Best Buy, Oracle and even analyst firm Gartner sit up and take notice.

"It is very clear to us that the future of innovation for successful global businesses will be polycentric," says Radjou, the Centre's executive director, who moved to Cambridge after a nine-year stint as a VP at Forrester Research in the US. "Already for companies like GE and Cisco, the epicentre of innovation is no longer in one region. It's becoming more distributed, more diffused."

The reasons for this are twofold, Prabhu and Radjou believe: firstly the sheer size of the emerging markets; and secondly, the different approach towards creativity that is to be found there.

More for less for more

As every organisation knows, the BRIC markets of Brazil, Russia, India and China, are just too big to ignore - they are set to be the main growth drivers for most global businesses over the next 30 years. Goldman Sachs has forecast that by 2040 the combined GDP of those four economies will exceed that of the G6 (US, UK, Germany, France, Italy and Japan). And it's not just about the future: GE's business in China grew by 25% in the last year, against the backdrop of deep global recession.

Prabhu, who is the director of the Centre and also professor of Indian business at Judge, explains how this applies to India: "When the recession hit the West and the Indian urban sector [which is only about 30% of the nation's 1.1 billion population], it was the rural sector that kept the country growing, and that's an increasingly vibrant section of the population. So the likes of Nokia, PepsiCo, Unilever and P&G are now taking that demographic very seriously."

To do this, they have had to innovate - but in a different way to how they have previously done in the West. "For a long time, it's been an imperative in mature markets to innovate in order to differentiate from the competition," Prabhu says.

"But in emerging markets you now need to innovate because the market and the nature of the need is really different from that of the customer you've typically targeted. So you must rethink how you manage every aspect of innovation, from identifying needs, to developing solutions and then delivering those solutions."

Based on this, the goal of any future growth strategy, he believes, has to be the ability to deliver "more for less for more". By this, he means more value, for less cost, to more people.

Innovation on a shoestring

The second imperative for polycentric innovation, Prabhu and Radjou believe, is the fact that there is a completely different mindset at work in the emerging markets - one that is driven by scarcity. When essential resources, such as power, water, food and  finance, are thin on the ground, a particular kind of creative dynamism is fostered that is able to invent - and then apply - radical solutions to local problems. "We call this mindset jugaad," says Radjou.

Jugaad is a Hindi word that means finding a work-around or innovative fix that is successful in a situation dominated by scarcity. When applied to business, Radjou defines it as: "The ability to improvise an effective solution to a problem using limited resources. Or, put another way: frugal innovation."

But it's important to realise that, in this context, frugal does not mean second rate. World-class companies like Nokia and Cisco are putting this kind of jugaad thinking into practice, claims Radjou, finding great success with it in developing markets and then frequently bringing the results back to the developed world.

"Nokia has 130,000 retailers across India," he says. "It has massive factories. But it realised that this alone is not enough to crack the so-called 'next billion' consumer market, which is essentially the people who live just above the bottom of the population pyramid.

"And so Nokia teams have started thinking very much outside the box as to how they can go about serving this next chunk of consumers, and they have been very good at improvising solutions. They have the willingness to go back to the drawing board - using local R&D teams who really understand the market - and completely rethink how they can better serve the customer need."

So Nokia's bottom-of-the-range handsets in India have multiple phonebooks (as one handset is frequently shared by several people), flashlights (useful during frequent power cuts), and menus in different languages (to address the multilingual society). The Finland-based company has also been using India to pioneer the use of e-money - a project that it expects to go global.

Scarcity as a stimulus

Another example comes from GE's healthcare arm, whose standard heart scanner for Western markets was far too expensive for most Indian clinic budgets, and due to size constraints could only be used in hospitals, which are widely dispersed in the sub-continent.

So GE's Bangalore-based R&D team led the development of the MAC 400, which uses existing technology but is around one-sixth of the cost of its high-end cousin, and is small enough to be carried by a doctor on a bicycle. The product has proven a great success in the developing world, and is now sold in the US for use by mobile paramedics.

"It's the fact of scarcity in emerging markets that requires you to innovate," says Prabhu. And this has got to have resonance in the West in the current economic climate, he continues. "If you look at government budgets in Europe, or at public spending on healthcare in the UK or US - as an example - it's a time bomb. So you've got to figure out innovative ways to radically cut costs."

Radjou has a neat way of summing it up: "If necessity is the mother of invention, then scarcity is its grandmother."

Four steps to polycentrism

Jugaad, therefore, is an essential pillar for any organisation that embraces polycentric innovation. "The key question then is, who is taking charge of global innovation? Local centres or Western HQs?" asks Radjou.

His answer is, of course, both. "To give just one example, Cisco's R&D hub in India has a global remit," he says. Indeed, the California-based company is spending more than $1 billion on its "second global HQ" in Bangalore. "Cisco East" has its own P&L responsibility, and in the near future the tech giant expects 20% of its best employees to be located there.

However, simply shifting some R&D efforts to emerging markets does not make for a polycentric organisation - although it's a good start. Radjou defines four key steps towards this state of global innovation nirvana:

1. The organisation shifts some of its R&D work to low-cost countries, but local talent is used solely to create solutions for developed markets.

2. The organisation recognises the potential of the emerging markets and delegates more responsibility to local units, to manage R&D for local needs. However, P&L responsibilities remain with the global HQ.

3. The organisation starts networking R&D activities in emerging markets with the rest of the global business, to "cross-pollinate" ideas. P&L responsibility starts to shift towards the emerging market.

4. R&D hubs in emerging markets are given a global remit and their own P&L responsibility for global design and rollout of new products. He believes that only about 1% of Fortune 500 countries have yet to make it to Stage 4, but says, "Cisco and Nokia are comfortably sitting there."

Proactive CIOs required

But where is the role of the CIO in all of this? Radjou is convinced it's essential that multinational organisations establish global innovation networks to facilitate the easy transfer of ideas (as in Stage 3 onwards), and their subsequent conversion into business-focused value-adds. "The onus is then on organisations to tightly integrate their networks," he says.

Prabhu adds: "And not just within your own organisation. Part of the jugaad mindset is all about forming partnerships with people outside the boundaries of your company, and working with local partners."

He points to Xerox as an example. A few years ago, the company realised it was being left behind in terms of leveraging the power of the BRIC economies. It therefore jumped to an advanced stage in Radjou's timeline by setting up a global R&D hub in south India and fostering partnerships with leading Indian academic institutions, research labs and industry partners.

"Make no mistake, the business side is going to take the lead in running these global networks," says Radjou. "But they can do these networks by fax, phone or Facebook, if they want to. So the crucial question is, what is the role of IT? CIOs need to be involved from the outset and make sure there is enough security and scalability built into these networks."

It's therefore no coincidence that Xerox's effort, for example, is led by its CTO, who is also president of the Xerox Innovation Group.

Radjou continues: "If companies are going to be practising polycentric innovation in the coming decade, CIOs, CTOs and enterprise architects need to be thinking right now, 'How can we create an architecture using things like SOA or cloud computing? How can we apply different technologies that provide or facilitate open interfaces to allow these ad hoc networks to be formed?'"

Failure to do this, he believes, will lead to CIOs having to pick up the pieces in the years to come, once the train has left the station and an unholy mess has been created.

Future winners

So who does the future belong to? Many analysts have been forecasting the death of the "Western" multinational for some time, to be superseded by younger, fitter rivals from the BRIC nations. But Prabhu thinks this viewpoint is exaggerated. "I don't think it's the end of the road for them," he says.

"Many of these, the world's largest companies, have got there by investing in technology and brands over the past 100 years or so, which is hard to catch up with. But they have to remain driven, and the ones that are more driven and paranoid will probably continue to dominate global markets for some time to come."

Or as GE's CEO, Jeffrey Immelt, so succinctly put it: "If GE doesn't master reverse innovation [GE's own term, roughly synonymous with polycentric innovation], the emerging giants could destroy the company."

Prabhu also sees this new kind of thinking at the global enterprise level as a means of solving some of our planet's most pressing problems, from climate change and the energy gap to healthcare, food supply and population issues.

"The world requires global solutions," he says. "Finding them will require people to work together in diverse places. There is difficulty co-ordinating at governmental level, but maybe at the corporate level some of these multinationals could be at the forefront of finding solutions, because they operate in these different environments and, increasingly, if they find a solution that works in one place they are learning how to apply it elsewhere. And that," he stresses, "brings us back to polycentrism."

See also: Radjou and Prabhu's blog.

Photography: Pål Hansen

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