Part1: Disappearing Boundaries and the Age of the Challenger
Dr. Kou Yukawa
Research Fellow, Economic Research Center
Fujitsu Research Institute (FRI)
The phrase "Hyperconnected World" is an apt reflection of the way the world is changing. The idea that people and the things around us are becoming more connected, and barriers – physical, technological, organizational, industrial - are disappearing. What sort of society will emerge in a hyperconnected world? And what sort of changes will the new society bring for companies and individuals? We sought the views of Dr. Kou Yukawa, Senior Research Fellow of the Economic Research Center, Fujitsu Research Institute.
Anyone will be able to take a leading role in innovation
In the first part of the "Fujitsu Technology and Service Vision 2014," Fujitsu cites the notion of a "Hyperconnected World" as a trend with a huge impact in the future. How will innovation change in a Hyperconnected World?
Yukawa: I think we are about to see the full-blown emergence of "the age of the challenger." Already, the boundaries between hardware and software, the real and the virtual, corporations and startups are becoming indistinct. As hyperconnectivity spreads, the more these sorts of boundaries fade away, and the greater the opportunities for innovation by those who can challenge established businesses from outside. In fact, I think that in the coming era, it will actually become difficult to identify areas where opportunities cannot be found.
So with barriers disappearing, can any company, regardless of the industry it belongs to, become a challenger, and produce ground-breaking products and service?
Yukawa: It's not limited to companies. I think the greatest impact brought about by progress in ICT has been the empowerment of the individual. Through advances in ICT, it's now possible for individuals to come up with innovations not only in the virtual world, but in the real world as well.
Can you give us an example?
At the White House Science Fair, children up to high-school age are honored by President Obama for achievement in innovation. In 2013, a young man received an award for developing a prosthetic arm that could be controlled by brain waves- and blinks. The 17-year-old boy was inspired when he met a girl who used an artificial arm costing $80,000. He succeeded in developing an arm for a cost of around $250, using a 3D printer. A 16-year-old boy also received an award for developing a detection kit for pancreatic cancer, a disease where early detection is crucial to give any chance of surviving it. His kit was one thirtieth of the price of existing products, and more than 100 times accurate. Both of these young people came up with their innovations after finding out for themselves what they needed to know, using resources freely available on the internet and elsewhere.
In every age there are brilliant young people who come up with inventions. However, it seems doubtful that a young man or woman could have produced something like a brain wave-controlled prosthetic arm even as little as 10 years ago. It's the development of the Hyperconnected World, where barriers of access to high tech capabilities and knowledge are falling away, that is providing opportunities for individuals to create more and more sophisticated innovations. Judging by these examples from the Science Fair, it looks like the range of what is possible for a creative challenger to achieve is continuing to expand.
The growing importance of "boundary-less" connections between individuals
If individuals start to take a leading role in innovation, presumably companies will have to change the way they do things?
Yukawa: It will be as important as ever for companies to bring out the creativity of individuals. But how well they can use the connections that individuals have both inside and outside the company is also going to be crucial to a company's growth.
Nowadays, employees can use social networking to engage with people outside the company who have highly specialized skills. These individuals' connections are deeply related to their specializations and creativity. Yet, if teams are assembled only from within the company and with members who simply happen to be available, as has been the way in the past, the potential success of projects is limited. Of course, I don't think the importance of the corporate organization is going to wane overnight, but it looks like we are starting to get to the point where individuals within a company can seek out the best and brightest from around the world to put together a project team.
Given the spread of social networks, it seems that there will be a natural shift away from closed, in-house innovation towards open innovation. To what extent is open innovation occurring in Japanese companies at the moment?
Yukawa: Many major companies are aware of the need for open innovation, and the trend toward seeding innovation outside the company is growing. I think the fact that more and more major companies, including Fujitsu, have established CVC (corporate venture capital) funds in order to invest directly in startups can be seen as an endorsement of that approach.
In a Hyperconnected World, companies will need to exploit innovation potential of individuals and startups. Japanese companies have been underperforming in recent years, partly as a result of the global economic conditions. But we are reaching the limits of the innovation that large companies can produce in-house, and this must also be seen as a factor.
The way large corporations approach startups is also changing. In the past, a startup would make a pitch to a large corporation, and the large corporation would consider investment or a partnership based on that presentation. Today, events like "Connect!" aim to match startups with established corporations and strengthen the links between them. Large companies give presentations where they indicate the type of startup they are looking to partner with, and startups can choose the large corporations they are interested in. At the first "Connect!" held in Tokyo in 2011, there were around 40 participants. Last year's event, co-sponsored by the Ministry of Economy, Trade and Industry, attracted nearly 1,000.
Looking overseas, hardware companies have been active for quite some time in investing in or acquiring software and internet startups. Why do you think this is happening?
Yukawa: You could say it has happened because now, more than ever, software serves to add value to hardware, and the boundary between hardware and software has begun to fade. Even in a Hyperconnected World, people and things being connected is not, in itself, meaningful. The crucial thing is how intelligently one handles the data that comes, on a daily basis, from people and things being connected, and how that data is interpreted. Software is becoming indispensable for performing these tasks.
Also, software integrated with hardware is constantly upgraded, improving its functionality. A familiar example is the smartphone. If you've downloaded a lot of apps, you'll notice that they often prompt you to update them. I think that in the future, various other kinds of hardware will be regularly enhanced by having their software updated.
For these reasons, the trend toward a greater focus on software is not something that is only happening in hardware companies; itis also apparent in various other industries as well. For example, Wal-Mart Stores has established a base in Silicon Valley, and has begun to acquire startups.
Making lots of "small bets" as a shortcut to success
In a Hyperconnected World, the possibilities for innovation are everywhere, but if these are not handled the right way, they may come to nothing. What do companies need to keep in mind in order to deliver innovation?
Yukawa: I think the concept of numerous "small bets" is important. Large corporations usually make "big bets," but if the aim is to achieve results through open innovation, you need to think smaller but act much more often.
By making small bets, you limit the potential losses. You can lose money as the result of a failure, but with the improvements in open source software and cloud services in recent times, the cost of starting a business or establishing a project has fallen markedly. Some venture capitalists have pointed out that the cost of starting a business is only about one-thousandth of what it was 10 years ago.
But with this fall in the cost of starting a business, why is there still a deeply rooted culture among Japanese companies of not allowing failure?
Yukawa: Management teams of large corporations are naturally cautious about risk taking. We can't expect them to embrace the same culture and tolerance of failure that you find among venture capitalists in Silicon Valley.
But compared to the past, the amount of money required for investment in a startup is much, much smaller now. The investment failures of large corporations in the past are something quite different from investment in a startup in the present environment. Even if such an investment does fail, by learning from the experience, one can increase the possibility that the next investment will close in on success. I think it's essential to think in terms of approaching success through a cycle of making small bets and then amending one's ideas after a failure.
Also, companies lose time as a consequence of failure and, just as with money, I think it's possible to reduce the pain of failure in terms of time. For example, when Facebook started services in 2004, it took 10 months to acquire 1 million users. After LINE started up in Japan in 2011, it gained 1 million users in 3 months. Developments in ICT has dramatically reduced the amount of time needed to judge whether a startup will succeed or fail, and the time lost as a consequence of a failure is likewise becoming shorter.
A return to the global top-tier for Japanese companies
So if investment risk is reduced, and success or failure can be assessed at an early stage, investment opportunities will increase and there will be more opportunities to be involved in innovation?
Yukawa: That's right. I think that in a Hyperconnected World, boundaries will become even less distinct, and very fast-growing startups will appear. Bold challenges coming from new domains will have a great influence on future growth. In the past 20 years, many companies have been created and achieved rapid growth — Google, Amazon, and Facebook, to name a few —. From the perspective of the big Japanese ICT companies, these are still regarded as startups in the industry. Had they adopted a more open mindset, the type of innovation these new entrants have demonstrated could have been reflected in their own businesses much sooner.
As a Hyperconnected World develops, it's important to the growth of Japanese corporations to make small bets, to become more comfortable taking risks, and to get involved with various innovations at an early stage. Real innovation occurs when markets are created through the development of technology-based ventures and mainstream systems are put in place in response to the new market. Eventually things reach the stage where society undergoes major change. In other words, it takes time for innovation to have significant impact on society as a whole. However, in a world where boundaries are becoming indistinct, becoming proactively involved in the next generation of innovation at an early stage should be regarded as a way of expanding the business opportunities of one's own company through small risks.
In order not to keep repeating the same mistakes of the past, I think it's important to take another look at what Japan sees as its strengths, such as craftsmanship and manufacturing, and to make the best use of ICT to connect all people and all things. Personally, I anticipate that by understanding the changes the Hyperconnected World is bringing, Japan's industries as a whole will regain global top-tier status.
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