Inside the Notebook: Innovating legacy businesses
We've all seen disruptive innovation — and increased funding — in hot sectors like biotech, composite materials, software and communications. But what about innovation in the legacy sectors like fossil fuels, manufacturing, the electric grid, construction, health care delivery, higher education and transportation? That's a lot trickier.
Established business sectors in general have resisted change because of possible threats to their existing infrastructure and market presence. It's more difficult for these companies to introduce disruptive technologies, which could upend their way of doing business, their customers and their supply chain.
The answer for these change-resistant sectors is in thinking differently about how to innovate.
“Americans like to build technology 'covered wagons' and take them 'out west' to open new innovation frontiers; we don't head our wagons 'back east' to bring innovation to our legacy sectors,” William Bonvillian, director of the Massachusetts Institute of Technology's Washington, D.C., office said during a legacy innovation panel at the American Association for the Advancement of Science's annual conference from Feb. 11-15. “By failing to do so, the economy misses a major opportunity for innovation, which is the bedrock of U.S. competitiveness and its standard of living.”
Bonvillian added that getting innovation into legacy sectors essentially turns how we think about innovation upside down. Americans usually think innovation flows from research, and would rather move on than fix what's in place, he said. But introducing innovation into legacy sectors requires simultaneously thinking about policies, institutions and research to address the obstacles to disruptive technology.
One example of a legacy institution that has been successful is the U.S. Department of Defense, which has used its Defense Advanced Research Projects Agency to introduce innovations such as precision bombing and drones.
Another example is with driverless cars, which require car and computer companies to think of safe and operational cars, as well as to consider changes in financing, insurance, liability, legal structure, licensing and highway and transportation system designs. The approach for legacy businesses needs to be more holistic than for startups.
As technology advances, improving legacy businesses is imperative. Take electric power grids, which could be targeted by terrorists. The European Union is transforming its existing electricity system to deal with both environmental and security problems. This involves adding clean, sustainable power and integrating software and other technologies that can solve security issues. That transformation involves both the public and private sectors and their willingness to pay for the changes.
Manufacturing is a legacy business that has been hollowed out by offshore manufacturing to save costs. In the process, jobs and skills were lost that impacted entire communities. It's a phenomenon known as “jobless innovation.” Bringing manufacturing back home also improves the chance to innovate processes and create good jobs.
As Bonvillian noted, new technology must “parachute into occupied territory.” There may be initial resistance, but there are huge potential economic and environmental benefits from creating something new and fixing something old.
Sectors ripe for innovation include advanced manufacturing, energy, health care, intelligent cars and online education. The innovation doesn't always have to be cutting-edge, Bonvillian said, adding that the economic, political, cultural, social and legal context of innovation can be as important as the innovation system itself.
He said the whole picture can help overcome some of the hallmarks of legacy businesses. In energy, for example, current systems have an established infrastructure and price structure, expectations of cheap energy by the public, limited research and development as a percentage of revenue, powerful vested interests as well as obstacles placed by regulatory requirements. A new infrastructure could help move the sector forward and open the door to renewable energies like wind and solar.
What's at stake in these legacy industries is both the ability to innovate going forward and creating higher quality jobs.
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