GLC, Advanced Entrepreneurship and Innovation (MGMT 4161)

Chapter – III – Sources of Innovation

Introduction
Where Do Innovations Come From?
Where do innovations come from? For many people that question will evoke images like that of
Archimedes, jumping up from his bath and running down the street, so enthused by his new idea
that he forgot to get dressed. Such ‗eureka‘ moments are certainly a part of innovation folklore –
and they underline the importance of flashes of insight which make new connections. They form
the basis of the cartoon model of innovation which usually involves thinking bubbles and
flashing light bulbs.
But of course, there is much more to it than that. Innovation is a process of taking ideas forward,
revising and refining them, weaving the different strands of ‗knowledge spaghetti‘ together
towards a useful product, process or service. Triggering that process is not just about occasional
flashes of inspiration: innovation comes from many other directions, and if we are to manage it
effectively, we need to remind ourselves of this diversity. The below diagram can give brief
information.

Let us look at some more in detail

3.1. Knowledge Push
An idea becomes an innovation when it is commercialized and creates value. The key to
innovation is a process of marrying invention and commercialization and is about matching a
problem and solution. Any innovation, hence, involves deep knowledge of both a problem and a
solution.
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 If an organization develops new technological capabilities first, and then search for
problems they can solve with them, this is PUSH method. Under this method,
commercial applications are known after technology is developed.
 If an organization identifies a real customer problem/need first, and then search for a
solution, this is PULL method. Under this method, commercial applications are known
before technology is developed.
One source of innovation is scientific research. And although there have always been solo
researchers, from a very early stage this process of exploring and codifying at the frontiers of
knowledge became a systematic activity which involved a wide network of people sharing their
ideas. In the twentieth century the rise of the large corporation brought with it the emergence of
the research laboratory as a key instrument of progress. Bell Labs, ICI, Bayer, BASF, Philips,
Ford, Western Electric, Du Pont – all were founded in the early 1900s as power- houses of ideas.
Their output wasn‘t simply around product innovation. Many of the key technologies
underpinning process innovations, especially around the growing field of automation and
information/communications technology, also came from such organized R&D effort.
For example, the rise of the huge global pharmaceutical industry was essentially about big R&D
expenditure, much of it spent on development and elaboration punctuated by the occasional
breakthrough into ‗blockbuster‘ drug territory. Similarly, the semiconductor and the computer,
and other industries which depend on it, have a long-term trajectory of continuous improvement
interspersed with occasional breakthrough.
The same pattern can be seen in products, for example the camera. Originally invented in the late
nineteenth century, the dominant design gradually emerged with an architecture which we would
recognize: shutter and lens arrangement, focusing principles, back plate for film or plates, etc. But
this design was then modified still further, with different lenses, motorized drives, flash
technology, etc. – and, in the case of George Eastman‘s work, to create a simple

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and relatively idiot-proof model camera (the Box Brownie) which opened up photography to a
mass market. More recent development has seen a similar fluid phase around digital imaging
devices.
3.2. Need Pull
If an organization identifies a real customer problem/need first, and then search for a solution, this
is PULL method. Under this method, commercial applications are known before technology is
developed. When an unfulfilled need is present and someone comes up with an idea to fill that
need.
In its simplest form this idea of ‗need pull‘ innovation is captured in the saying ‗necessity is the
Mother of invention‘. Innovation is often the response to a real or perceived need for change
and so we need to develop a clear understanding of needs and find ways to meet those needs.
Organizations that are most successful with pull-based innovation tend to be very customer
centric and close to customers. The digital world is full of entrepreneurs who use technology to
quickly come up with technology solutions for opportunities that they stumble upon. Quite often
the innovator may turn out to be a customer himself, who is fed up with the inability of existing
players to meet his needs.
Need pull innovation is particularly important at mature stages in industry or product life cycles
when there is more than one offering to choose from – competing depends on differentiating on
the basis of needs and attributes, and/or segmenting the offering to suit different adopter types.
It‘s also important to recognize that innovation is not always about commercial markets or
consumer needs. There is also a strong tradition of social need providing the pull for new
products, processes and services – a theme we‘ll explore in a later chapter. Whether it is social
needs like provision of health care or clean water in developing countries or more effective
education or social services in established industrial economies, the need for change is clear and
provides an engine for increasing innovation.

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3.3. Making Process Better

Of course, needs aren‘t just about external markets for products and services. We can see the same
phenomenon of need pull working inside the business, as a driver of process innovation.
‗Squeaking wheels‘ and other sources of frustration provide rich signals for change, and this kind
of innovation is often something which can engage a high proportion of the workforce who
experiences these needs first hand.
This approach provided the basic philosophy behind the ‗total quality management‘ movement
in the 1980s, the ‗business process re-engineering‘ ideas of the 1990s and the current widespread
application of concepts based on the idea of ‗lean thinking‘ – essentially taking waste out of
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existing processes.
This kind of process improvement is of particular relevance in the public sector where the
issue is not about creating wealth but of providing value for money in service delivery. Many
applications of ‗lean‘ and similar concepts can be found which apply this principle, for example in
reducing waiting times or improving patient safety in hospitals, in speeding up delivery of
services like car taxation and passport issuing and even in improving the collection of taxes. An
improved process on how a company carries out certain processes. PI involves the use of new
methods or tools to help enterprises satisfy consumer needs. Innovating processes requires a
combination of skills, facilities and technologies to boost efficiency. When done right, it leads
to cost and time savings without compromising the quality of products or services.

3.4 Whose Needs? Working at the Edge

One very interesting source of innovation lies at the edges of existing markets. It poses a
problem for existing players because the needs of such fringe groups are not seen as relevant to
their ‗mainstream‘ activities – and so they tend to ignore them or to dismiss them as not being
important. But working with these users and their different needs creates different innovation
options, and sometimes what has relevance for the fringe begins to be of interest to the
mainstream. US professor Clayton Christensen in his many studies of such ‗disruptive
innovation‘ shows this has been the pattern across industries as diverse as computer disk drives,
earth-moving equipment, steel making and low-cost air travel.
For much of the time there is stability around markets where innovation of the ‗do better‘ variety
takes place and is well managed. Close relationships with existing customers are fostered and the
system is configured to deliver a steady stream of what the market wants – and often a great deal
more (What Christensen calls ‗technology overshoot‘ is often a characteristic of this where
markets are offered more and more features which they may not ever use or place much value on
but which come as part of the package.)
But somewhere else there is another group of potential users who have very different needs,
usually for something much simpler and cheaper, which will help them get something done.
Meeting these needs not only creates a new market but can also destabilize the existing one as
customers there realize their needs can be met with a different approach. This phenomenon is
known as ‗disruptive innovation‘, and we‘ll explore it in more detail in a laterchapter.
Disruptive innovation focuses our attention on the need to look for needs which are not being met,
poorly met or sometimes where there is an overshoot. Each of these can provide a trigger for
innovation – and often involves disruption because existing players don‘t see the different patterns

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of needs.
One powerful source of ideas at the edge comes from the developing world, where conditions are
every different and radically new innovation options are beginning to emerge. Typically, the
conditions in these markets are characterized by high volumes of demand – millions of people
wanting goods and services – but limited financial resources. So the possibility for a low-cost
airline type of approach – offering a simpler, cheaper version of the core product or service – is a
very real opportunity.
3.5. Emerging New Markets at ‘the base/bottom of the pyramid”
The Bottom-of-the-Pyramid (BOP) markets, defined as consumers earning less than $2 per day
(Rangan et al, 2007; Polak & Warwick, 2013), present vast opportunities and unique challenges
to businesses (London & Hart, 2004). The BOP proposition argues that there is much untapped
market potential within the world‘s poorest communities. BOP markets have for long been
ignored by marketers under the impression that there is not much buying potential there (Munir
et al, 2010). However, BOP markets constitute almost two-thirds of the world‘s population and so,
in aggregate they possess huge purchasing power. Not only are they potentially huge, but they are
also growing rapidly, many are in countries with 5-10% growth rates, compared with rates of less
than 2% in mature, established markets (Payaud, 2014).
For companies looking to expand their markets, emerging markets represent an attractive target:
billions of consumers, eager for jobs, goods and services that will bring them further into the
global economy.
Of course, these markets also come with some challenges, most notably the fact that potential
consumers in the ―base of the pyramid‖ (BoP) – or the poorest half of the world population –
make, on average, less than $2.50 per day. But armed with the right product, the right marketing
and the right distribution network, a company could, conceivably, crack the code, make the sale,
help alleviate poverty and find itself breaking ground in a new economic frontier.
 Needed: a clear business objective: One of the first lessons for companies hoping to
enter the base of the pyramid is the vital need to directly and clearly set goals and
expectations. For example, a company hoping to develop a market for its existing
products will act differently than a company hoping to develop new consumer products,
which will act differently than a company that plans on launching a philanthropic effort.
Each option employs different strategies, seeks different goals and employs different
measures of success. To be successful at the bottom of the pyramid, a company needs to
develop a clear vision that plays to its strengths.
Mark Milstein, the director for sustainable global enterprise at Cornell University, cited

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chemical manufacturer BASF as one example of a company that did this the right way.
Recognizing the rising demand for housing in developing countries, it tried to find a

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way to enter the market. The obvious choices, like real estate or construction, were out
of its comfort zone. But ―they make products that go into other products, that eventually
make housing‖, Milstein noted. The company developed an additive that cures concrete
quickly and evenly, making it easier and cheaper to build houses. Marketing this to the
base of the pyramid, BASF built a business that, Milstein says, is doubling in revenue
every year.
 Scale is not a substitute for profitability: One commonly held idea about BoP
businesses is that they reach profitability through scale. In other words, companies
develop a product that has an exceedingly low profit margin, but aim to sell huge
quantities to make it worthwhile. Unfortunately, the panelists said, the large-volume, low-
profit model is often unsustainable.
Mark Martin, VP of international markets marketing at SC Johnson put this in
perspective, explaining that fixed costs and marketing can quickly eat up profits on low-
margin goods. ―We found that, in order to cover fixed costs, you need to charge high
margins on products,‖ he said. ―That‘s not to make a high profit. That‘s to cover the
fixed costs.‖
 Consumers don’t want a low-quality or depressing product: Another classic path for
companies looking to work at the bottom of the pyramid is to strip down a product,
removing many of the extra features that consumers at the top of the pyramid might
expect. Alternately, companies looking to the bottom of the pyramid often develop
products that give the customers what they need, such as an anti-malarial product, rather
than what they want.
Companies have tried numerous approaches to solving this problem. Instead of trying to
sell anti-malarial chemicals to BoP consumers, SC Johnson markets products like bug
repellents and cleaning solutions that offer an attractive primary purpose and protect
consumers against malaria – and sells them via local entrepreneurs, Martin said. It also
offers a subscription service that delivers a sampler of household products every month.
 Use existing economic and cultural structures: When looking to create economic
opportunities at the base of the pyramid, many companies are inclined to go with what they
know, seeking the kinds of development, production and distribution networks

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that exist in developed countries. And when these structures are missing, many try to
recreate them. However, even the lowest-income developing markets already have
economic and commercial structures. And companies that are able to integrate
themselves into these existing structures not only stand to make a profit, but also can
avoid the costs associated with reinventing the wheel.
 Don’t go it alone: When global companies like SC Johnson or SABMiller look to enter
the base of the pyramid, they have a major advantage: size. But what about smaller
enterprises that have products targeted toward developing communities but don‘t have
the reach or resources of large global conglomerates? ultimate conclusion is as true for
companies seeking to enter the base of the pyramid as for the consumers who live there:
―If you don‘t have resources,‖ he said, ―it can be hard to go it alone.‖
3.6. Crisis Driven Innovation
The pandemic showed technology and business leaders that a crisis can act as a catalyst for
innovation, removing entrenched orthodoxies overnight. While all innovation requirescreativity
and action to deliver value, crisis-driven innovation demands creativity and action under pressure
— and oftentimes constraint — in response to a disruptive event or trend. Understanding the
psychology of crisis-driven innovation is an essential component of building a more resilient
future and creating crisis-driven innovation principles.
Drive Sustainable Innovation with Crisis-Driven Principles
Set your firm on the path for future fit resilience against systemic risks by incorporating crisis-
driven innovation principles into your innovation competencies and practices. Explore how you
can adopt the principles as an effective way to maintain or improve your existing innovation
strategies. Use them to understand how you can incorporate learning from those who excelled at
innovation during the pandemic, and apply that learning within your own business context. To
achieve this, take the following steps:
 Start with why. Reflect on your purpose. Does your firm have a ―just cause‖? What is it
about your vision, strategy, and culture that will motivate your team in a crisis? What is your
true ―North Star‖ that will inspire a mission of innovation and creativity?
 Assess your future fitness resilience. Explore the potential impact and
interconnectedness of systemic risks against your enterprise risks to identify potential
resilience gaps. From this, identify the greatest threats that will guide you on candidate

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scenarios for development. Prioritize those scenarios for ideation by applying

appropriate triggers for action and constraints for creativity.
 Find your heroes. Seek out individuals from across the organization with innovation
traits and potential. Who are the individuals that exhibit resourcefulness, dedication, and
creativity? Build your cross-functional, diverse teams from those that demonstrate a strong
bias to action and a willingness to learn by doing.
 Evaluate your innovation maturity and readiness. Assess strengths, weaknesses,
opportunities, and risks across your innovation competency maturity level. Map out how
to integrate the principles into your existing and future innovation practices.
 Experiment and practice. Run through the crisis-driven innovation principles by
applying the ―think, do, apply‖ model, cycle testing different scenarios and ways of
working as you explore new ideas and potential solutions. Keep learning and
experimenting.
3.7. Towards Mass Customization
Mass customization is defined as follows: it refers to customer-oriented and individualized mass
production for a large market, meeting the different needs of each customer of these products at
costs that are comparable to those of mass production of standard products (Piller, 2001).
The mass customization strategy combines low-cost and high-volume manufacturing. It utilizes a
flexible manufacturing process, computer-aided information, and individual customization to
customize products.
The mass customization strategy combines low-cost and high-volume manufacturing. It utilizes a
flexible manufacturing process, computer-aided information, and individual customization to
customize products.
It serves consumer needs in manufacturing and services industries like retail, financial services,
software and technology, home construction and interiors, etc.
Depending on desired features, the price of customized products may be higher than the base
price, yet still lower than or equal to the mass production price.
Types of Mass Customization

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Below are the four main types of mass customization, each with different characteristics and are
applied under different conditions:

1 – Transparent Customization: It is the process of businesses providing unique products and

services within a standard package to specific customers without informing them that they are
customized. Companies accomplish this by observing consumer behaviors over time and
predicting their preferences without interacting with them directly.
The digital media streaming service Netflix, for example, recommends a list of shows and movies
for its viewers based on their viewing history. Another example is hotels, which provide various
ancillary services to consumers based on their behavior.
2 – Collaborative Customization: Unlike transparent customization, this approach requires
businesses to interact with individual customers to offer customized products or services. Such
customized products guide consumers who are unsure of what they should choose or cannot
specify what they prefer from the available options. It monitors and considersconsumer needs
while manufacturing specific products with unique features and functions. For example, while
purchasing spectacles, consumers can choose from various frames along with prescribed lenses.
Another example includes customizable shoes with different patterns and heel sizes.
3 – Adaptive Customization: It serves different purposes under different situations. Here,
companies do not need to interact with customers to know their requirements. In this

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customization technique, customers get a standard product or service with the option to
personalize, modify, or reconfigure it per their preferences.
It is suitable for online businesses. For example, the e-commerce company Etsy provides
personalized leather wallets with customer names and custom sign makers with neon lights for
parties. Another example is the variety of adjustable mattresses.
4 – Cosmetic Customization: It involves the marketing of standardized products and services
in unique formats or packages, depending on the needs of different customer groups. In other
words, customers get the choice of customizing the form, quantity, price, and packaging of
products that best reflect their personality and style.
For example, Planters Nut & Chocolate Co. markets its products (mix of nuts) in customized
shipping containers, labels, and sizes to fit customer preferences. Another example is certain drug
brands that come in the form of individualized capsules or pills.
3.8. Users as Innovators
Considering users as innovators has gained considerable support over the past 30 years. Eric von
Hippel‘s work in this area forms a significant part of the theoretical underpinning and evidence
behind this concept. Many further studies have been undertaken to support it. It has contributed to
our understanding of innovation management in general and new product development in
particular. Even so, Lüthje and Hasrat emphasis that empirical findings are scarce and that the
most radical innovations of the last 35 years were not developed by users. Ever since Joseph A.
Schumpeter (1934) promulgated his theory of economic development, economists, policymakers
and business managers have assumed that the dominant mode of innovation is a ―producers‘
model.‖ That is, it has been assumed that most important innovations would originate from
producers and be supplied to consumers via goods that were for sale.
However, the producers‘ model is only one mode of innovation. A second, increasingly
important model is user innovation. Under this second model, economically important
innovations are developed by individual users (consumers) and also by user firms. Sometimes, user-
developed innovations result from a number of users working together collaboratively. User
innovation is an institution that competes with and, I will argue, can displace producer
innovation in many parts of the economy. A growing body of empirical work clearly shows that
users are the first to develop many and perhaps most new industrial and consumer products.

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In addition, the importance of product and service development by users is increasing over time.
This shift is being driven by two related technical trends:
A. The steadily improving design capabilities (innovation toolkits) that advances in
computer hardware and software make possible for users;
B. The steadily improving ability of individual users to combine and coordinate their
innovation-related efforts via new communication media such as the Internet.
Five Steps for Turning Customers into Innovators
1. Develop a user-friendly tool kit for customers.
 The tool kit must enable customers to run repeated trial-and-error experiments and tests
rapidly and efficiently.
 The technology should let customers work in a familiar design language, making it
cheaper for customers to adopt your tool kit.
 The tool kit should include a library of standard design modules so customers can create
complex custom designs rapidly.
 The technology should be adapted to your production processes so that customer
designs can be sent directly to your manufacturing operations without extensive tailoring.
2. Increase the flexibility of your production processes: Your manufacturing operations
should be retooled for fast, low-cost production of specialized designs developed by customers.
3. Carefully select the first customers to use the tool kit: The best prospects are customers
that have a strong need for developing custom products quickly and frequently, have skilled
engineers on staff, and have little experience with traditional customization services. These
customers will likely stick with you when you are working out the system‘s bugs.
4. Evolve your tool kit continually and rapidly to satisfy your leading-edge customers:
Customers at the forefront of technology will always push for improvements in your tool kit.
Investments in such advancements will likely pay off, because many of your customers will need
tomorrow what leading-edge customers desire today.
5. Adapt your business practices accordingly.
 Outsourcing product development to customers will require you to revamp your
business models to profit from the shift. The change might, for instance, make it
economically feasible for you to work with smaller, low-volume customers.
 Tool kits will fundamentally change your relationship with customers. Intense person- to-
person contact during product development will, for example, be replaced by computer-
to-computer interactions. Prepare for these changes by implementing incentives to
reduce resistance from your employees.
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3.9 Watching others and learning from them

Another important source of innovation comes from watching others. Imitation is not only the
sincerest form of flattery but also a viable and successful strategy for sourcing innovation. For
example, the reverse engineering of products and processes and development of imitations – even
around impregnable patents – is a well-known route to find ideas. Much of the rapid progress of
Asian economies in the post-war years was based on a strategy of ‗copy and develop‘, taking
Western ideas and improving on them. One powerful variation on this theme is the concept of
‗benchmarking‘. In this process enterprises make structured comparisons with others to try to
identify new ways of carrying out particular processes or to explore new product or service
concepts. The learning triggered by benchmarking may arise from comparing between similar
organizations (same firm, same sector, etc.), or it may come from looking outside the sector but at
similar products or processes.
For example, Southwest Airlines became the most successful carrier in the United States by
dramatically reducing the turnaround times at airports— an innovation which it learnt from
studying pit stop techniques in the Formula 1 Grand Prix events. Similarly, the Karolinska
Hospital in Stockholm made significant improvements to its cost and time performance through
studying inventory management techniques in advanced factories.
Benchmarking of this kind is increasingly being used to drive change across the public sector, via
‗league tables‘ linked to performance metrics which aim to encourage the fast transfer of good
practice between schools or hospitals and via secondment, visits and other mechanisms designed
to facilitate learning from other sectors managing similar process issues such as logistics and
distribution. One of the most successful applications of benchmarking has been in the
development of the concept of ‗lean‘ thinking, now widely applied to many public and

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private sector organizations. The origins were in a detailed benchmarking study of car
manufacturing plants during the 1980s which identified significant performance differences and
triggered a search for the underlying process innovations which were driving those differences.
3.10. Recombination innovation, regulations and futures and forecasting
3.10.1 Recombinant Innovation: Another wrong assumption which we often make about
innovation is that it always has to involve something new to the world. The reality is that there is
plenty of scope for crossover: ideas and applications which are commonplace in one world may
be perceived as new and exciting in another. This is an important principle in sourcing
innovation where transferring or combining old ideas in new contexts – a process called
‗recombinant innovation‘ by US researcher Andrew Hargadon – can be a powerful resource.
Recombinant innovation is a phrase from the book The Second Machine Age that highlights the
way new applications are invented from a combination of existing technologies. For
example, the Waze navigation app became a very innovative product by combining
components and systems that already existed. Waze uses the smartphone, GPS, digital maps,
cellular system, social networking concept and the Internet to provide a real-time navigation
application that is used by millions of people.
Why do firms find recombinant innovation so challenging?
3 reasons stand out.
 First, existing organizational routines and culture create barriers and discourage fast cycle
experiments. In extreme cases, innovating teams can trigger an immune response from
existing corporate power centers.
 Second, companies are insufficiently supple. Recombinant innovation requires support for
innovating teams: more flexible reporting routines and different rewards.
 Third, most companies do not have a disciplined, lean, and replicable approach to
collaboration. Recombinant innovation requires the capability to form and manage
multiple complex networks.

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Many businesses – as Hargadon points out – are able to offer rich innovation possibilities
primarily because they have deliberately recruited teams with diverse industrial and professional
backgrounds and thus bring very different perspectives to the problem in hand.
3.10.2. Regulation
Given the pervasiveness of legal frameworks in our lives, we shouldn‘t be surprised to see this
source of innovation. From the moment we get up and turn the radio on (regulation of
broadcasting shaping the range and availability of the programmes we listen to) to eating our
breakfast (food and drink is highly regulated in terms of what can and can‘t be included in
ingredients, how foods are tested before being allowed for sale, etc.) to climbing into our cars and
buckling on our seatbelt while switching on our hands-free phone devices (both the result of safety
legislation) the role of regulation in shaping innovation can be seen.
Regulation can also trigger counter-innovation – solutions designed to get round existing rules or at
least bend them to one‘s advantage. The rapid growth in speed cameras as a means of enforcing
safety legislation on roads throughout Europe has led to the healthy growth of an industry
providing products or services for detecting and avoiding them. And at the limit, changes in the
regulatory environment can create radical new space and opportunity. Although Enron ended its

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days as a corporation in disgrace because of financial impropriety, it is worth asking how a small
gas pipeline services company rose to become such a powerful beast in the first place. The answer
was its rapid and entrepreneurial take-up of the opportunities opened up by the deregulation of
markets for utilities like gas and electricity.
3.10.3 Futures and Forecasting
Another way we can identify innovation possibilities is to imagine and explore into the future.
What may be the key trends, where may the threats and opportunities lie? For example, Shell has a
long history of exploring future options and driving innovations, most recently through its Game
Changer programme. Various tools and techniques for forecasting and imagining alternative
futures have been developed to help work with these rich sources of innovation.

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