With political gridlock and economic malaise troubling the U.S., Europe and China, the buzzword for this year’s World Economic Forum in Davos is uncertainty. Who or what will spur the innovation that leads to jobs and growth? Our roundtable discussion on Jan. 23, hosted by TIME and moderated by Jim Frederick, editor of TIME International, included John Chambers, CEO of Cisco; Walmart CEO Mike Duke; Anand Mahindra, managing director of Mahindra & Mahindra; Martin Senn, CEO of the Zurich Insurance Group; Harvard Business School professor Clayton Christensen; and Bain & Co. chairman Orit Gadiesh. Their view? In this difficult economy, even the meaning of innovation remains unclear.
— Roya Wolverson
(PHOTOS: Are Today’s Business Leaders Too Afraid of Risk?)
LEADING THROUGH RISK
Are leaders too risk-averse in their efforts to bring the economy back on track?
JOHN CHAMBERS: In our industry, my competitors from 15 to 20 years ago are all gone. And by the way, Cisco could get left behind in the same way. So if you’re in an environment where you don’t take risks and don’t push innovation, you will get left behind very quickly.
ORIT GADIESH: But there’s a difference between being risk-averse and what I would call unfamiliar risk. A lot of what we think is risky is actually unfamiliar. For example, cash used to be hoarded because it was scarce. Not anymore. Cash is actually abundant and is likely to be so for a while. And skills — especially in engineering, science and so on — are scarce today, to the tune of 10 million open positions that cannot be filled in the world. Not moving because of something that is uncertain is never a good thing. Not moving because things are unfamiliar and you haven’t bothered to learn how to operate on them is really a crime.
MARTIN SENN: Before anyone takes any risk, you have to have a reasonable expectation on the return you’re going to generate. We have at the moment not enough clarity as a function of the economic crisis on what return you could expect. It is very, very difficult to be gutsy about it.
CHAMBERS: The best return for companies is when things are really going the wrong way and you’re willing to go against the tide.
FINDING ROOM TO INNOVATE
I want to go to Clayton because we’ve had some ideas here about innovation. You have a couple of lenses through which you look at why companies are or are not investing in certain areas.
CLAYTON CHRISTENSEN: There are really three types of innovation, and each poses different levels of risk: Empowering innovations can transform products that historically were so complicated and expensive that only the rich had access to them. The Model T was one of those. The personal computer was one of those. The smart phone is this again. These kinds of innovations create jobs. The second type, which we call sustaining innovations, make good products better. They don’t create new jobs. The third, which I’m calling efficiency innovations, help us make the same products cheaper, and they reduce jobs in the economy.
Over the last 20 years, executives and investors have stopped investing in empowering innovations, because they pay off in five to eight years, and instead invest in efficiency innovations, which pay off in one or two years. We are awash in cash, and yet we continue to invest as if capital was scarce. And so we’re not investing in the kind of innovations that would create growth. Does it demand courage on the part of executives? Absolutely.
MIKE DUKE: Efficient innovation is really a lot about our business model. We often call it the productivity loop, and it’s really operating with lower expenses, more efficiency, lowering prices for our customers and as a result having more customers, which allows for more efficiency.
I’ve seen two areas of our company that I think have had a lot of empowering or disruptive innovation. One has been in the area of sustainability. Another area of empowering or disruptive innovation would be the area of e-commerce, using technology today. I don’t visit a store today anywhere in the world without seeing customers using technology on the floor, communicating online and shopping using what I see as more-empowering technologies.
ANAND MAHINDRA: We’re on the cusp of what I think is a major uptrend in innovation. Even the world of academia has been very obsessed with this phenomenon of frugal innovation coming out of Asia. Even Apple is facing the rise of companies like Samsung that are doing more for less.
What I think is going to happen is that we’re going to see cutting-edge innovation is required. People like us from India and China are not going to be able to get to our aspirations simply by doing more for less. We have to be able to do pioneering, cutting-edge innovation. But I think we’re now at the cusp of a boom where people like you will figure out where in your network in the world I can get the more-for-less DNA but still do pioneering innovation and come out with a grand synthesis.
CHAMBERS: The way you win as a company is thinking five, 10 years out, and those companies who think one to two years out will get into trouble.
duke: It’s not just how boards evaluate CEOs. It’s also how we evaluate management within our companies. We can be guilty ourselves of evaluation of management on short-term cycles and not really looking closely enough at the longer-term metrics of what we create in our own environment.
GADIESH: There’s an old Arab saying that anybody who’s ever been bitten by a snake is going to look at a rope and be afraid of it. That is actually what we are. There are many ropes out there that we treat as snakes. The uncertainty — yes, there is a lot of it, but there are certain things that are just unfamiliar, and we need to start managing that way.
SENN: There is going to be much more need for a balance in leadership, both political leadership and business leadership, as leaders have to show that they truly understand the risks we are facing. That is something that has been totally underestimated.
MAHINDRA: When I went back after business school to India, all I found was certainty, because we were a regulated economy. You hunger for uncertainty because that’s what you were taught to deal with in business school. All this talk about uncertainty — I thought that was our profession. We have to deal with that. Please don’t look for certainty. It’s regulated, autocratic economies that look for certainty. I want no part of it.
CHRISTENSEN: Just as I’m listening to the team here, I understand the problem facing Harvard Business School a lot more strongly now. What is really hard for us to do is to look down at the bottom of the market and see a business model coming at us — which is, we don’t need M.B.A.s anymore. Companies say, Come work for us; we’ve created GE Crotonville, Goldman Sachs University. It’s a different business model. This, I think, Orit, is your point. It has nothing to with “Do we have the courage to do this?” Somehow what is not known about a different business model just makes us scared to death.
REASONS FOR PESSIMISM
We’re heading into the fifth year of the global economic crisis. People are calling it the Great Stagnation, and there’s a great pessimism setting in. There’s a lot of disparagement of current technological innovation — that there were only a handful of things that truly changed the way people live. Do any of you believe this, that innovation is slowing down?
CHAMBERS: I think it’s the exact opposite. Change will actually accelerate. Just using the example of one thing that we’re interested in, you think about connecting every device in the world, of which 99% are not connected today. We think you can create an industry worth $14 trillion.
SENN: I have second thoughts on not being pessimistic but maybe a bit realistic. To make this happen, it needs a balance with the regulatory environment. A lot of the innovation is not really coming through, because you need to deal with it from a regulatory point of view around the world, and a lot of these regulatory pressures are not as aligned globally as they could be, particularly in the financial-services industry.
MAHINDRA: If you look around — you look at the news of the past four years — there has been a tremendous amount of focus on CEOs, on restricting what they can do. We can look at that as negative, or we can look at it as fences that will set us free. I think we have to spend an equal amount of time and rigor on setting up systems and protocols that encourage free thinking, that encourage innovation.
CHRISTENSEN: So I don’t want to come across as believing that innovation can end, but individual nations and individual companies can actually put themselves in a situation where they cannot innovate. So let me just pick on Apple. They start new markets with their technology, and that’s really the core of who they are and what makes them so good. Manufacturing these products is just a sidelight, and it’s really easy to outsource the manufacturing of that to people in China, who have better costs. We visited a plant in China that manufactures the logic circuit for an iPhone. There isn’t anybody in America who could innovate in that anymore.
CHAMBERS: I was with Martin a year ago. I would have been complaining about regulations. But my position has changed dramatically. You’re beginning to see a group of leaders who are thinking out of the box and saying, “I’m going to compete against other states. In Canada, I’m going to compete against other provinces. In emerging markets, I’m going to compete against other emerging nations, which will get their regulatory act together.”
GADIESH: We haven’t really spent time on education. And I think one of the first things that should be on any government’s agenda is reform in education, all the way from kindergarten to the top. Because what we have now is education that doesn’t actually provide for the jobs that are the most needed. China or Shanghai, for example, got it. Ten years ago they realized that. They were way down on the OECD list of countries and regions, and today Shanghai is No. 1 in science, No. 1 in mathematics and No. 1 in reading comprehension. In the West, I’m afraid, we’re behind. I believe in India we’re behind. It’s a real place where business should interact with governments.
SENN: There are still some countries that have to get the call. There’s competition between nations. Those countries that really set the tone to support innovation will create jobs.
OBSTACLES TO INNOVATION
What do you believe are the major barriers to business-model innovation?
GADIESH: One of the things that people don’t talk enough about is, How much of a right brain and left brain you actually have — right brain representing the creative side and left brain representing the commercial side. You need somebody who is a left brain to recognize that right brains are important or they stop them before they get a chance to move ahead. The second thing is that innovation really needs some structure. It’s not just sitting somewhere in a lab and thinking interesting thoughts.
MAHINDRA: To pick up on her comment about right-brain people — my undergraduate degree was in filmmaking. For a long time, it was my deepest, darkest secret [laughter]. I didn’t want anybody to know about it. Today I’m looking for filmmakers, designers, people from the humanities. That’s how I think I’ll create a culture of innovation.
CHAMBERS: As a parting thought, if there is something that could really make a difference in your company, your university, your country, but you’re not doing it because you have fear about innovation or fear of failure, just go for it. That’s what leadership is all about.