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Blog: Arbitrage Will Soon Be Futile and Innovation Essential

Have we now reached a high water mark of globalization?

For years, businesses exploited international differences in the price of labor and other factors of production to secure competitive advantage. But within the foreseeable future, globalization itself will all but wipe away some of the very advantages it once created.

Mumbai, India
Neil Beer | Photodisc | Getty Images
Mumbai, India

In a world where costs are harmonized, innovation will be the only differentiator. And businesses must ask themselves whether they are ready to compete on these new terms.

Companies can still exploit the cost differences of global markets, whether in skilled workers, premium factory sites, scarce natural resources or access to funding. A software engineer in Bangalore is still paid a fraction of the wage of his identically-skilled colleague in Boston.

But in as little as 15 years, businesses from Beijing to Baltimore will pay similar prices for skilled labor, capital, quality premises and resources. Factors of production are gradually adopting the quality of commodities and will be available at prices that are not necessarily low, but more or less harmonised worldwide.

No longer will there be opportunities in arbitrage. The hunt for cost variation will be futile.

This process of harmonization is the natural outcome of a multi-polar world in which no region dominates in terms of financial, intellectual or economic capacity. It explains why Russia has launched commercial passenger jets to rival the established duopoly, why China recently registered the most worldwide patents in a year, and why India has produced the most affordable mass-market car ever developed.

The logical conclusion of this trend is that businesses will find themselves searching in the dust for one remaining precious gemstone: innovation. A differentiated product, an exclusive patent, a pioneering production process, supply-chain mechanism or brand promise -- any of these could make the difference.

Will this mean a greater focus on inventions and the creation of new ideas and products? Not quite.

Inventions, like the other factors of production, will themselves become commoditized, available for sale in an open global market for intellectual property. Even a ‘good’ invention is literally worthless unless it can prove itself to be a success in the marketplace.

A company’s capacity to turn invention into innovation will depend on its having a viable, strict and consistent innovation process in place to deliver a profitable commercial success.

Of all the sectors exposed to this new era in innovation, it perhaps the energy and natural resources industries that will be most affected. Not only are they among the most transformed by global forces, but resource constraints and the low-carbon agenda are demanding new forms of technological progress. And at some stage, the super cycle in energy and raw materials will come to an end, closing the doors to consolidation and takeovers as routes for growth.

Innovation alone will maintain margins and growth.

How do companies harness innovation as a truly genuine competitive differentiator? First, large business should leave inventions to start ups, and focus on how to commercialize, not what to invent.

Secondly, they must take R&D out of the laboratory and innovate in apparently mundane areas like logistics, customer care and marketing.

Finally, CEOs must take the helm of the innovation imperative and ensure that innovation is at the core of business strategy, fostering portfolios of innovation and that can fluidly adapt to new commercial opportunities.

As we scan the horizon for the next waves of innovation, the advent of the multi-polar world means we must look beyond the traditional locations. The next game-changing innovation might emerge from California or Germany, but the likelihood is it will come from somewhere else. What will matter most is not where innovation comes from, but the process that translates commoditized inventions into differentiated market success. _________________________
Stephan Scholtissek is author of "Innovation Excellence" and Global Managing Director for Growth and Strategy in Accenture’s Global Resources Operating Group.