Getting An Edge On Innovation

Outsourcing is proving to be a far greater challenge to America than anticipated. Not only are companies sending their low-cost production and services to Asia, but they are also shipping much more of their research and development overseas. What were once considered core competencies for high tech and other companies are now becoming inexpensive global commodities. Chip design, mechanical and electrical engineering, testing, software writing, and high-tech manufacturing are heading to India, China, and Eastern Europe. Indeed, a large chunk of the nation's existing knowledge economy is migrating, along with many high-paying jobs. Neither Corporate America nor Washington is prepared for this vast change in the U.S. economy. It's time to get ready.

Companies such as Procter & Gamble (PG ), General Electric, (GE ) Johnson & Johnson, (JNJ ) and Motorola (MOT ) are at least beginning to transform their cultures and reshape their business models by moving beyond the 1990's Six Sigma focus on quality and cost. They are focusing on high-impact innovation that targets consumers, who increasingly want their products and services tailored to their individual needs. These companies no longer just spend broadly on R&D and toss the latest high-tech gizmos at people. They try to first unearth the unarticulated needs and wants of buyers and then satisfy them. The goal is to create special, differentiated experiences using proprietary brands. Such out-of-the-box innovation may be the best path to top-line revenue growth and fat profit margins.

But it's hard to make elephants dance. This business strategy requires a skill set very different from managing the old Six Sigma way. Companies are discovering that they need different talents, compensation systems, and goals to organize this kind of enterprise. Implementing this magnitude of cultural change can be wrenching.

Companies also must decide where they draw the line on outsourcing. In a world that keeps commoditizing core technologies and skills, it takes sophisticated strategic thinking to determine what intellectual property to keep and what to farm out. If too much innovation is outsourced, corporations may find their own suppliers competing with them. One thing is certain -- understanding the consumer zeitgeist requires a cultural intimacy that cannot be delegated elsewhere. Intellectual property that enhances customer experience should be held close. Choosing what to let go will be painful.

But not as difficult, perhaps, as redesigning America's education system. Colleges are still graduating mechanical and electrical engineers who can no longer compete against equally competent but lower-paid Indian, Hungarian, and Chinese rivals. America's schools and universities must move up to the next level in math and science. And far more people should be graduated in the "soft" sciences of anthropology, sociology, and psychology. Whether it's redesigning hospitals to improve patient stays (and lower costs) or building stores to increase the experience of shopping (and raise profits), more of these "right brain" people will be needed. Many of the best jobs in the future will be found in the sweet spot where design, customer understanding, and emerging technologies come together for business.

Globalization is moving so fast that now even the knowledge economy is being redistributed around the world. A whole new set of winners and losers will appear in the years ahead. Corporations and the nation have work to do if they are not going to be left behind.

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