Monthly Archives: April 2013

Early History of Silicon Valley

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Anyone interested in understanding the early history of Silicon Valley should visit Steve Blank’s blog under Secret History.  He has posted a recent you tube presentation summary and copy of the slides.

The story provides a compelling view of how military technology development and funding investment during the cold war built on existing industrial strengths in the area before the Venture Capital industry had fully formed.   I don’t believe this early history story is understood when countries/regions look to replicate the success of silicon valley.

The story also illustrates the importance that early catalysts (key individuals, ready funding, labs, universities) can have to forming a thriving integrated innovation ecosystem.    Very difficult to recreate these conditions today.

Canadian Start-Up Funding For Successful Market Entry

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Toronto’s MaRS accelerator recently released a great summary of practical advice for Canadian start-ups seeking funding for their start-up and in particular looking at VCs from the US or abroad.

They contend that Canadian start-up company success is “closely correlated with their breaking outside of their regional boundaries and getting closer to their end markets” and provide some of the best data I have seen to understand US VC investment trends in Canada.  The article also compares US and Canadian VCs and identified the top three developmental challenges of Canadian VCs that are hindering fast growth Canadian start-ups: follow-on funding; sector depth; and qualified talent pool.

The study also suggests that now is a good time to look for VC investments from the US.   The article identifies US VCs that have been the most active investing in Canadian start-ups.

Improving Canada’s International Business Skills

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A report describing Canada’s international business experience gaps and a strategy to address the weaknesses was recently released by the Forum for International Trade Training.  The report is worth reading and also does a good job describing the concept of integrative trade.

From my experience international marketing is not a problem for large Canadian firms but it is a challenge for the 98% of Canadian firms that are SMEs.  Perhaps the largest impediment is the fact that international marketing is very expensive and Canadian SMEs lack the confidence and resources to put investments into prospecting trips at risk to develop this experience.   The second impediment to building international business experience is the lack of ambition of Canada’s SMEs to look for opportunities beyond the US or to even grow at all.  At the moment the risk return difference between opportunities closer to home versus far afield remain in favour of regional opportunities.   There are simply too few business leaders with sufficient risk tolerance.

For a country with a diverse multicultural population Canada needs to find ways of leveraging this strength to grow international business connections.  The strategy if funded will expand the support systems available to Canadian SMEs but the next step will be up to SME leadership to take small steps.

3 Rules For Superior Performance – A Delivery / Innovation Investment Compass

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Michael Raynor and Mumtaz Ahmed recently published an article in Harvard Business Review describing Three Rules For Making a Company Truly Great.  This study collected data on 25,000 US publicly traded companies between 1966 and 2010 with a focus on long run Return on Assets (ROA) performance because it reliably reflects management actions and levers within their control.   The best performing firms were labelled ‘Miracle Workers’ with ROA in the top 10% , the next ‘Long Runners’ with ROA in the top 20-40%, and ‘Average Joes’ with consistently lower ROAs.

The results of this study provide insight into how firms that successfully manage the Delivery-Innovation Paradox achieve superior long run results.  Although the study covers a vast array of different firms the three rules does suggest how managers of firms that leverage engineering talent (or advanced technology firms) could use the rules as a decision compass to prioritize and sequence delivery and innovation improvement investments for long run company success – A Delivery/Innovation Investment Compass.

The Three Rules For Superior Performance

Based on the large volume of data analyzed in the study, Raynor and Ahmed articulated three rules for long run superior performance:

  1. “Better before cheaper – or competing on differentiators other than price;
  2. Revenue before cost – or prioritizing increasing revenue over reducing costs;
  3. There are no other rules so change anything you must to follow rules 1. and 2.”

Raynor and Ahmed suggest that management should apply the rules to allocate scarce resources amongst competing priorities as they make investment decisions from year-to-year.

Long Run Superior Performance

To help clarify how management can put the rules into action, Raynor and Ahmed’s performance categories can be mapped into a simple 2×2 framework that illustrates value creation and value capture.   The ‘miracle workers’ were firms that consistently in the long run selected steps to be better before cheaper and revenue before cost to maximize value creation and value capture.  The ‘Average Joes’ were firms that consistently in the long run selected steps be cheaper before better and reduce cost before improve revenue.  The ‘Long Runners’ were firms that consistently fell within these extremes.

2x2 Performance Map 4

For superior performance, the first rule leads management to take steps for their firms to compete on non-price value creation (ie. to be ‘better’) rather than competing on low price (ie. to be ‘cheaper’).  To be ‘better’ the authors suggest that firms should invest in continuously improving the non-price benefits of their offerings such as great brand, exciting style, excellent functionality, durability, convenience, selection, or any other market relevant sources of value.   By extension then this implies that for technology firms to be ‘better’ than their competition management need to invest wisely and appropriately through disciplined innovation to create value – product innovation, business model innovation, marketing innovation, or process innovation.

For superior performance the second rule prioritizes value capture by putting increased revenue (either higher price or higher volume) ahead of reducing costs.  To put this into action this rule is really speaking to the importance of the efficiency and effectiveness of delivery by the business to achieve profitability.  To deliver more efficiently and effectively firms need to invest in initiatives that would yield higher grow margins, lower SG&A to sales ratio, lower capital to sales ratio, or higher market share.

Three Rules For Long Run Superior Performance For Technology Firms

With the strong evidence base underpinning Raynor and Ahmed’s study, managers of technology firms can therefore apply the three rules for long run superior performance stated this way:

  1. Use disciplined innovation to create value offer better before cheaper;
  2. Use efficient and effective delivery to capture value with revenue before cost; and
  3. There are no other rules so change anything you must to follow rules 1. and 2.

Paths To Superior Performance – Order Matters

In the long run the 2×2 matrix suggests the 3 rules can be used as a guiding compass as the firm evolves along paths taking them from the ‘Average Joe’ level of performance to the ‘Miracle Worker’ level of superior performance.

2x2 Performance Map 3

The 2×2 matrix implies that there are many paths that a firm can take in the long run.   The first observation one can make though is that order matters in deciding innovation over delivery efficiency because value capture is difficult if it hasn’t been created.  But once value is created management must maximize value capture.  Each path involves an ongoing balance of competing priorities in the face of competitive dynamics while avoid traps at the extremes which are both recipes for disaster.  The two management traps at the extremes are:

  1. Obsolescence Trap – Management continuously decides to prioritize delivery over innovation continuously leading to obsolescence by not refreshing offerings – value capture at expense of value creation ; or
  2. Poor Innovation Execution Trap – Management continuously prioritizing innovation over delivery leading to poor execution – value creation without value capture.

Either trap will lock their firms in a perpetual ‘Average Joes’ level of performance or business failure.  Over time then the optimum path is an incremental ‘zig-zag’ through the middle interrupted by market disruptions and changes – or reminding one of the game of snakes & ladders.    The authors also note through examples when management stop following these rules that performance suffers and the path can take them back down.

The 2×2 framework is perhaps an over simplification of some fairly obvious business principles but it helps to reset management’s thinking if they get lost in the details.  To achieve long run superior performance the results of this study suggests that managers need continuously balance and sequence innovation and delivery investments – the three rules provides a delivery / innovation compass to help guide management investment decisions year-over-year and in response to competitive dynamics.

Canada’s Low Innovation Performance – Time For Clear & Aligned Industrial Strategies

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The Conference Board of Canada recently released its annual innovation report card for Canada where the country remains near the bottom when compared with 16 peer countries with a grade of D and a ranking of 13th.   Unfortunately Canada’s ranking remains largely unchanged from recent annual grades of D/2011, D/2009, and D/2007 suggesting that Canada’s current innovation activity has essentially plateaued.

Notwithstanding the impact of resource windfall to Canada, the importance of innovation to economic growth remains key to the country’s long-term sustained prosperity.  To make tangible innovation improvements over the long-term Canada needs clear industrial strategies aligned with agreed national strengths.

What Canada Does Well

The authors note that Canada is above average in: top-cited papers, ease of entrepreneurship, government online services, new firm density, scientific articles, and aerospace exports.  The authors also note that Canada is average in public R&D spending but below average in the remainder.

Why Canada Does Not Perform Well

The view of the authors is that it is still not clear why Canadian innovation does not perform well. The authors note that leading opinions attribute the low innovation performance to public policies such as taxation, heavy reliance R&D tax credits rather than direct R&D funding, regulations, or market structural issues.   Also lack of sufficient risk capital, scientists, engineers, or qualified business managers are also mentioned.   The lack of industry leaders risk taking propensity or lack of willingness to build globally competitive large corporations.   The Council of Canadian Academies prepared an excellent paper on Canada’s weak innovation and business strategy performance that explores these entrepreneurial problems deeper.

Is The Innovation Measurement System Right

The grading system has been continuously evolving and this year improved with the addition of 11 new indicators of innovation performance organized within a structure of creation, diffusion, and transformation of ideas based on the Conference board’s definition of innovation – “innovation as process through which economic or social value is extracted from knowledge – through the creating, diffusing, and transforming of ideas – to produce new or improved products, services, or processes”.

Although improved, the grading system is still not clearly aligned with Canada’s economic and industrial strengths particularly with respect to export trade.  For example, the emphasis on export market share in aerospace, electronics, office machinery and computers, and pharmaceuticals is somewhat optimized more for clusters that matured in the 1980s and 90s in Ontario and Quebec.  These indicators also reflect the notion that innovation=’high-tech’ whereas we understand today that innovation covers product, service, marketing, and business model innovation not necessarily in ‘high-tech’ sectors.  The indicators ignore other strengths where significant innovation is occurring in other regions of the country.

As a result the report card is not particularly useful to drive effective action and decision-making.  To really improve innovation performance there needs to be a clear ’cause-and-effect’ relation drawn between innovation activity / investments and economic performance aligned with Canada’s economic strengths defined in terms of industrial sectors.  Today the picture remains diffuse, opaque, and unsuitable for defining clear action.

Lack of Industrial Strategy

Canada lacks coherent and comprehensive industrial strategies for key sectors that reflects the structure and strengths of the economy.  To do this Canada needs to agree on what are and what will be Canada’s economic strengths going forward.

The authors speak of the need for coherence across all the innovation indicators to score well on the report card.  The problem with the innovation indicators is that they are measured as an aggregate evaluation of the Canadian economy as a whole and do not go deep enough to understand how the innovation performance aligns with Canada’s economic and industry strengths sufficient for political and industrial leaders to develop coherent and comprehensive industrial strategies.

Canada’s Export Trade Mix Has Changed Dramatically

Furthermore, over the last twenty years the nature & mix of Canada’s exports has changed dramatically.   There is a misalignment in the innovation export ratings between the limited set of ‘high/medium tech’ export indicators with the actual economic structure of the economy.  Canada’s top 5 exports in 1992 were Autos & parts, computers & electronics, oil & gas, paper, and primary metals.  By 2008 had changed to oil & gas, reduced autos & parts, chemicals, primary metals and machinery.  Was this because of a coherent and comprehensive industrial strategy or is Canada simply drifting in the global economy?  Canada appears to be struggling with a view of economic strategy set in the 1980s and 1990s with the traditional ‘hewers of wood and drawers of water’ economic view as well as how the knowledge economy fits in an integrated picture.

Part of the problem is that Canadian political and business leaders can’t clarify and define where Canada needs to focus its strengths with recent debates on energy strategy, importance of clean tech, and challenges of the automotive industry.  Regional and provincial politics confuses this debate as does the shifting economic power within the country.

Agreement needs to be reached on what are Canada’s top economic strengths, key industries, and how the federal and provincial economic development strategies should be aligned to maximize the outcomes from these strengths/industries.  No more drifting, Canada needs then to develop comprehensive industrial strategies that build on its strengths and clarify how Canada’s unique R&D infrastructure (universities included) align to support these strategies.  The report card should then be aligned with the structure and strengths of the Canadian economy to be more useful to public and industry decision makers.

Innovation Stuck in Universities

How university research is aligned with national industrial strategies is relevant to innovation performance because Canada is an outlier in the volume of research conducted in universities as opposed to innovation performed in industries.  Canadian industry either can’t or won’t perform R&D and universities traditionally have been better able of performing R&D given the structure of the Canadian economy (98% small and medium enterprises who perform little R&D and few large corporations that do perform R&D).

A long-standing issue remains that although idea creation is happening in the universities, the ideas remain stuck in the universities and the economic benefit from commercialization of the ideas is not happening.  There are many reasons for this issue such as the distinction between pure and applied science, misalignment between university researcher priorities and commercialization, IP ownership, political jurisdictional power struggle between federal research funding and provincial responsibility for post secondary education, and weak academic/industrial relations to name a few.  Politicians are beginning to drive change, as in Alberta recently, but university researchers continue to resist in the name of academic freedoms. Fundamentally relying on universities to conduct applied research that can be commercialized and how this activity is aligned with industry strategy must be resolved.  Various incubators and technology transfer organizations across Canada are trying to solve this problem at local levels but outcomes remain minimal in economic terms.

Weak Product Development

With the lack of industrial strategies Canada is not investing wisely in starting and growing enough high quality product firms that can create/design new or improved products with their long-term cash flow generation potential driving sustainable economic potential aligned with Canada’s strengths.

Most economic debate focusses on the decline of manufacturing and fails to clearly communicate the importance of design in an integrated product design/build model to growing companies into world players.  Product firms that reach global competitive size such as Bombardier and Blackberry are rare in Canada.  The strategic importance of the ability to create new or improved products is under emphasized.   While supply chains have gone global and the build function has moved off shore significant innovation occurs in the product design/build development capability.   The product design/build development capability is crucial for economic development, anchoring businesses and their headquarters, and enabling the growth of small firms into large multinationals over several decades.  Reframing the manufacturing debate was recently well articulated in the context of the US economy in an MIT study of production in the innovation economy (PIE).

The new Canadian start-up visa is a positive step to drive more innovation through new product development but how will candidates be selected and do their ideas align with Canadian strengths. What are the priority industries and how was this determined? Will they become frustrated if Canada’s small venture capital market does not support their ideas?

Importance of Innovation To Restart Economic Growth

The debate on the importance of innovation in driving economic growth is front and center in leading diversified advanced economies like the US, as the MIT study demonstrates, as well as in the UK.  The importance of encouraging innovation and R&D investments in strategic industries for sustainable growth is understood to be a long-term national strategic matter.  For example, the UK has identified eight priority technology areas with significant funds investments and suggestions for catalysts such as “grand challenges” and ” demonstrators” are proposed.  In the UK, there is a clear national alignment between industrial sectors, industrial R&D, university based technology development with overall economic development which provides a model for Canada’s economic innovation strategy.

Canada has some work to do to improve innovation performance.  To deliver tangible gains Canada needs to agree on what are and what will be Canada’s economic strengths going forward particularly in the knowledge economy.   With a solid definition of Canada’s strengths industrial strategies can be developed in a collaborative manner between the various levels of government and industry leaders.  With clear ’cause and effect’ investment and effort decisions can be more effectively aligned through long-term industrial strategies.   Only then will Canada see improvements in innovation performance.