Category Archives: Growth

The Capitalist’s Dilemma Explains A Lot

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Developed economies have settled into a new normal of low growth as a result of the structural change from the recent financial crisis. Clayton Christensen and Derek van Bever recently suggested that The Capitalist’s Dilemma explains why growth hasn’t picked back up like after previous recessions and is the leading reason why “despite historically low interest rates, corporations are sitting on massive amounts of cash and failing to invest in innovations that might foster growth“. The thinking behind The Capitalist’s Dilemma also help to understand the delivery-innovation paradox, Missing M in SME, innovation investment decision risk aversion, low R&D spending, innovation investment behaviour by large firms, and Canada’s poor innovation performance. Business leaders need to understand the implications of The Capitalist’s Dilemma because it may lead to the biggest change of all in current times – the end of capitalism – if the current financial orthodoxy does not change.

The Capitalist’s Dilemma

Christensen and van Bever describe the capitalist’s dilemma as “doing the right thing for long-term prosperity is the wrong thing for most investors, according to the tools used to guide investments“. Readers should refer to their article for their complete argument but essentially they blame the confluence of supposedly success oriented finance metrics (RONA, ROIC, RORC, IRR, etc), false sense of correctness from spread sheet models, low loyalty investors, and analysts pressures to force short term business decisions that result in low returns and low growth and a bias against new value creation. Their argument is based on revisiting the basic economic assumption that capital is scarce and costly which drives the backwards looking finance metrics towards the wrong decisions for developed economies at the macroeconomic level but also for long term value creation for investors through firm level innovation.

Explains A Lot

The finance orthodoxies from before the structural change and the capitalist’s dilemma explain much of why business investment in R&D and innovation is so low, the preference for low risk investment decision alternatives, and why Canadian business leaders don’t adopt innovation as a strategy. Economic growth requires innovation but business leaders given the choice are not investing heavily in innovation or if they do are not receiving good results (in terms of top line growth) or think they are innovating a better future by investing in continuous improvement alone. How can we make sense of better outcomes from innovation investments?

Innovation Outcomes and Impact On Growth

Christensen and van Bever frame innovation in a way that helps to differentiate how different innovation activities(R&D, business model innovation, new product development) , emphasis, and investments lead to positive growth outcomes or not.  By categorizing innovation by outcome (be it top-line revenue growth or more jobs) they propose three categories and how each impact growth:

  1. Performance Improving Innovation – Innovation that replaces old products with new and better models. The impact of performance improving innovation are substitutive in the market place that don’t drive growth.
  2. Efficiency Innovation – Innovation that helps companies make and sell mature, established products or services to the same customers at lower prices. The impact of efficiency innovations raise productivity that frees-up capital for more productive uses.
  3. Market-Creating Innovation – Innovation that transforms complicated or costly products so radically that they create new classes of consumers or a new market. The impact of market creating innovation is growth from new customers. The authors also note that efficiency innovations that turn non-consumption into consumption are market creating innovation.

Using these categories Christensen and van Bever demonstrate that the way that investment assessments are made under the current finance orthodoxy lead to too much performance improving and efficiency improving innovation and with a bias against market-creating innovation. So business leaders say they are investing in innovation by investing in performance and efficiency innovations but these don’t drive growth. To drive growth business leaders need to invest in more market-creating innovation but the finance orthodoxies inhibit this choice. What will it take to change the finance orthodoxies going forward to allow market-creating innovation to flourish?

Actions Going Forward

Developed countries and Canada in particular have several options:

  1. Do Nothing – Allow existing businesses to not grow and slowly fail and the current generation of business leaders, CEOs, CFOs, financial analysts to go extinct to be replaced by a new generation of leaders and financial in those firms that manage to survive.
  2. Change The Rules of the Game –  Christensen and van Bever identify several:
  • Repurpose capital away from migratory and timid capital to enterprise capital through tax policy, loyalty shareholder investment rules
  • Rebalancing business schools away from the success financial metrics.
  • Appropriate risk adjusted cost of capital for the new structural norm enabling longer term investments.
  • Reallocate innovation pipeline emphasis for more market creating innovation rather than heavy weight emphasis on performance and efficiency innovation.
  • Emancipating management and reducing the influence of tourist (short term) investors.

The drivers of corporate change over the last several decades now themselves must change. The question is will they follow their own advice or have they become the dinosaurs. Investment in performance innovation and much of efficiency innovation is not good enough going forward.

 

SME Growth Stall – The 100 Person Ceiling

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Small firm growth tends to stall when their staff levels reach about 100 employees.  Understanding this phenomena is important because Canada’s economic growth depends heavily on creating more medium firms (2.6% of all firms) that generate 12-14% of GDP, 16% of jobs, invest more in R&D, and are better able to export and compete internationally.

Why Growth Stalls At Around 100 Employees

Many small firms are led by an owner/founder leveraging a local personal network to drive business growth. The business owner/founder is heavily involved in the day-to-day business and become overwhelmed. Churchill & Lewis explored management issues of SME growth in their seminal 1983 HBR paper The Five Stages of Small Business Growth. They explored how the demands on owner/founder become limiting as the firm grows requiring disengagement, delegation, and added systems to manage growing complexity. Owner/founders who choose not to disengage, working at their personal capacity, limit any further growth and the firm continues in a marginally surviving mode market demand conditions permitting.

Sutton and Rao have provided new perspective on the problem of growth in their book Scaling Up Excellence: Getting To More Without Selling For Less. Sutton & Rao review the key research underpinning ‘the problem of more’ driving extra burden, higher cognitive load, labour efficiency, communication, coordination, and ‘grooming’ as firms grow.  In particular they quoted work by Oxford anthropologist Robin Dunbar who determined that “when an organization reaches about 150 people the communication and coordination demand outstrips what the human mind can handle”. Sutton & Rao observe that “some leaders and teams handle growth and program expansion and others do not”.

How Can Leaders Overcome This Hurdle

Sutton & Rao provide some powerful advice with excellent examples to help small business leadership grow effectively assuming that they take the decision to disengage if they are the owner/founder. Their advice centers around building a “better organizational operating system” coined from Salesforce.com that moves accountability from the growing senior management to smaller teams that held team leaders and members more accountable. Sutton & Rao identified five tactics to employ to manage “the problem of more”:

  • Subtraction – Subtraction is the removal of “crummy or useless rules, tools, and fools that clog up the works and cloud people’s minds”. Subtraction includes simplifying standard work by working through a learning process of “simplistic-complex-profoundly simple” because to get to “profoundly simple” teams often need to understand the complexity.
  • Make People Squirm – Sutton & Rao suggest that everyone need to challenge the status quo to make subtraction work. This tactic relies on the broad field of change management.
  • Load Busters – Load busters are “simple additions of objects, activities, and technologies that cut cognitive load” by focussing on “what matters most and away from what matters least”. This tactic works when as firms get more complex staff can loose perspective on what is important for good business health.
  • Divide and Conquer – This tactic improves coordination and accountability by dividing the organization into smaller groups. This tactic relies on the benefits of teams.
  • Bolster Collective Brainpower – This tactic is based on “sticking with savvy insiders and stable teams and blending people who have worked together before” as teams are added rather than relying on outsiders.

Sutton & Rao also suggest that as the organization grows that there is a balance to be continuously managed between too much/little complexity, too much/little management, too much/little bureaucracy. They suggest give ground grudgingly adopting “the Goldilocks Theory of Bureaucracy” of “injecting just enough structure , hierarchy, and process at the right time”. Using a Salesfore.com approach of “running a little hot” giving staff the flexibility to operate more freely and accountable while not running the operation too close to 100% capacity  beyond their cognitive and emotional limits.

Founder/Owners of small firms who have reached the 100 person ceiling but are hesitant in taking the next step should read Sutton & Rao’s book.  The case examples are excellent and practical tips plentiful to provide helpful guidance to chart a way forward.

 

 

Mind The Gap

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Canada’s innovation performance is weak compared with leading industrial nations with an increasingly clear gap between Canadian business innovation and the country’s strong science & technology capabilities. The gap has confounded decision and policy makers trying to understand why Canada’s strong science & technology capability has not translated into economic growth, improved productivity, and prosperity. The country has relied on an “R&D Supply Push” model by heavily investing in post-secondary research investment that has not translated into any meaningful commercialization.

The importance of this issue is paramount for the future prosperity of Canada as developed countries emerge from the financial crisis with weak growth. Although Canada came through the crisis relatively unscathed due in large part to a highly regulated financial system and strong resource sector the nation’s growth is beginning to fall behind other industrial nations who from their own visceral experiences during the financial crisis recognize that competing on innovation is essential to drive future growth in a new global economic structure.

The Council of Canadian Academies has published as series of studies between 2009 and 2013 exploring Canada’s weak innovation performance. These key studies are Innovation and Business Strategy: Why Canada Falls Short,  The State of Science & Technology in Canada 2012, The State of Industrial R&D in Canada, and Paradox Lost: Explaining Canada’s Research Strength and Innovation Weakness. The most recent, Paradox Lost, is perhaps the most important as it summarizes the results of previous studies to get to the heart of the gap problem in Canada.

The Council of Canadian Academies has identified three main reasons why Canadian business leaders have not adopted innovation as a strategy:

  • Canada’s Role In An Integrated North American Economy – Canada is integrated in North American value chains offering “comparative advantages as upstream suppliers of both commodities and cost-competitive manufactured products” where “acquiring needed innovation from the US has simply been easier and cheaper“.
  • Size of the Domestic Market – Canada has a small domestic market with low level of international competition dominated primarily by competition in the US in an upstream supplier role.
  • Commercial Success of Canadian Business – Competing in the upstream supplier niche Canadian firms have had little or no motivation to change so “have settled into a ‘low-innovation equilibrium’ that has conditioned business habits and ambitions“.

The Council of Canadian Academies suggest though that the underlying conditions are changing that will force Canadian firms to seriously consider adopting innovation as a strategy because of: declining growth rates in highly developed countries including the US; environmental challenges of global development-driven resource demand; adoption of genomics and nanotechnology by competitors that could leave Canadian firms behind; and aging population forcing up labour costs in Canada.

Although policy makers are becoming more aware of this issue business leaders and the population in general have not felt the need to consider the implications because, as the Council points out, there has not been a “visceral realization needed to motivate a meaningful change in strategy“. Canadians experience this problem differently depending on their region since Canada is composed of two very different economies: the east dominated by manufacturing and the west dominated by resource sectors.  Central Canada with a strong dependence on manufacturing is perhaps feeling the most pain and this region has often relied on a weak Canadian dollar as a competitive pressure relief selling into the US. With a thickened border with the US it is difficult to predict if central Canada will be able to return to the past without international market growth. Western Canada has felt the increasing competitive pressures of environmental challenges which is certainly driving innovation but the underlying high production cost of oil & gas in particular has not been addressed. As the Western energy producers are exposed to international markets in competition with lower cost producers production cost issues will need to be solved for the young Western energy supplier base to survive, thrive, and grow.

Moving forward the Council of Canadian Academies suggest that Canadian innovation policy will need to become more ‘firm-centric’ and according Bob Fessenden, one of the key authors noted that “science & technology will be necessary but not sufficient” to drive economic growth. The emphasis will change in Canada from the traditional “R&D supply-push” approach to a “business pull” on Canada’s strong science & technology capabilities.  He noted recently that innovation policy in Canada will need to move to a new paradigm where the Canadian government will need to take a “whole of government approach” aligning trade, procurement, regulatory, and championing “visionary initiatives” or “grand challenges” to drive business growth through innovation.  The new innovation policy should more broadly cover and align these government influenced market signals, input costs, innovation ecosystems, and science policy.  Innovation policy is therefore moving closer to “industrial strategy” which is something that the country has been sorely lacking to align the R&D investments with Canada’s comparative advantages in the new global economy and emerging competition.

The Council also noted that “Canada’s fundamental challenge is to transform its commodity-based economy to one based on providing a greatly expanded number of markets with an increased variety of goods and services where firms must compete primarily through product and marketing innovation“.  Pending some new black swans, perhaps Ontario and Quebec becoming “have-not” provinces with persist high unemployment may be just the visceral realization necessary to make this change happen.

The Missing M in SME

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Canadian industry data reveals a recent trend in the falling number of medium sized firms (100-499 employees) in the Canadian economy – referred to as the ‘Missing M in SME’ problem.

The Globe & Mail raised the alarm in 2012 with the article Canada’s Vanishing Mid-Sized Firms based on BDC’s report on medium sized firms.  According to the Globe & Mail Between 2007 and 2010, 527 mid-sized firms exited the economy representing a 3.6% reduction.  Canada is managing to sustain about 40 large and multinational Canadian owned businesses as reported by the Institute For Competitiveness and Prosperity based on data reported in  2009 for firms exceeding $1B. The importance of small businesses to Canada’s economy has received more attention lately as reported by Industry Canada’s small business statistics because as of 2012 small businesses represent 98.2% of all Canadian firms with medium firms making up 1.6% of firms and large making up 0.2% firms. So if the economy is composed primarily of small firms why is ‘The Missing M’ problem important?

Why Is ‘The Missing M’ Problem Important

As the Globe & Mail observed medium firms ‘are more productive, hire more Canadians, and have more clout on the international stage‘ and in 2012 ‘mid-sized businesses, which represent 12 per cent of Canada’s gross domestic product and 16 per cent of the jobs’.  Mid-sized firms grow into large firms that can compete better in the global economy.  The Institute for Competitiveness and Prosperity trend data from 1985 to 2009 does reveal that the number of large firms has increased over this time period, but only slightly, as some firms have exited.  Canada is an exporting country with about 75-80% of GDP derived from export trade so if Canada is not growing more medium sized firms the country’s growth will remain slow. Emerging economies represent tremendous opportunities for Canadian firms but if firms are not large enough to enter these markets and compete the benefits will go elsewhere.

What Is ‘The Missing M’ Problem

What is ‘The Missing M’ problem? Is it a company growth problem? Is it a national productivity or competitiveness problem? Is it the number of medium sized firms or is it the revenue contribution of the medium firms what matters?   Was this a short-term phenomena as a result of the 2008 financial crisis? Is this a result of global economic structural change? ‘The Missing M in SME’ problem needs to be clarified.

What Is Causing The Missing M Problem

What is causing the ‘The Missing M’ problem? Is this phenomena because of the shift from goods production to service delivery economy? Or is it because of the pivot to a more resource-based economy from a manufacturing-based economy? How does this problem manifest itself in different industry sectors or different regions of the country?  Is the Canadian economy comprised of more private firms whose data is more difficult to see? Does the problem reflect in other business measures such as R&D expenditure where there is a distinct ‘U-Shaped’ phenomena in Canadian industry data as reported in a previous post?

Various causes suggested, but not fully substantiated, include:

  • Lack of business leadership growth ambition particularly internationally;
  • Risk adversity;
  • Preferences for ‘Life-Style’ companies;
  • ‘Branch-Plant’ effects where foreign firms acquire mid-sized businesses to gain foot-holds;
  • Canadian M&A activity;
  • Inability to raise capital in medium revenue range;
  • Investor liquidity influences;
  • Management experience;
  • Effects of international competition;
  • Currency effects of a high Canadian Dollar;
  • Tax policy somehow disadvantaging medium sized firms;
  • Small domestic market size;

At the moment no one has fully connected the dots to reveal a clear understanding of the problem nor is there a sense of urgency to fix this problem. Canada’s future economic growth is dependent on the country solving this problem and increasing the number of medium sized firms.

How Does Canada Compare With Other Resource Economies

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Growth in emerging nations is radically altering the global economy in particular the demand for resources to support among other things an expanded middle class. The demand for resources has increased dramatically increasing the number of resource-driven economies from 58 to 81 countries. How nations effectively translate resource endowments into long term prosperity was the subject of McKinsey Global Institute study Reverse the Curse: Maximizing the potential of resource-driven economies.

The McKinsey study primarily explores the socio-economic aspects of how non-OECD countries have failed to fully reap the benefits of resource endowments and how to improve the injustices of resource exploitation by other countries or their own internal problems. The study also provides an important methodology to benchmark resource driven economies and provides a unique independent view of resource-driven economy best practice and how Canada stacks up against upper-middle income and high income countries. The data presented portray the full spectrum of national approaches to effectively translate resource endowments into long term prosperity from the best to worst. The study also does a good job of removing biased agendas using ‘Dutch Disease’ or extreme environmental arguments replacing with a more objective rationale for how to properly benefit society in low income resource-based countries from increasing resource demand. What the study does not do however is look at the broader implication of what population growth and global middle class on the capacity of the planet to support the level of demand in the long run.

Resource Economy Growth Model

McKinsey suggests that resource-driven countries (particularly low income nations) need a new growth model with six core elements:

  1. building the institutions and governance of the resources sector;
  2. developing infrastructure;
  3. ensuring robust fiscal policy and competitiveness;
  4. supporting local content;
  5. deciding how to spend resource windfall wisely; and
  6. transforming resource wealth into broader economic development.

McKinsey applied these elements to rank resource driven economies to evaluate their national effectiveness at translating resource endowments into long term prosperity. McKinsey structures these metrics in three key areas : Develop Resources (Building Institutions and Governance), Capture Resource Value (Fiscal Policy and Competitiveness), and Transform Value Into Long-Term Development (Spending the Windfall and Economic Development). McKinsey defined a resource-driven economy as one whose oil & gas and mineral sectors account for more than 20%  of exports, generate more than 20% of fiscal revenue, and resource rents are more than 10% of economic output.

Main Conclusions

McKinsey concluded that in 2011:

  • 81 countries have resource-driven countries up from 58 in 1995;
  • Those 81 countries account for 26% of global GDP up from 18% in 1995;
  • 69% of people in extreme poverty are in resource-driven countries;
  • 90% of resource investment has historically been in upper-middle-income and high-income countries;
  • Half of the world’s known mineral and oil & gas reserves are in non-OECD and non-OPEC countries;
  • $17 Trillion of cumulative investment in oil & gas and mineral resources could be needed by 2030 or more than double the historical rate of investment.
  • 540 million people in resource-driven countries could be lifted out of poverty by effective development and use of reserves;
  • Opportunities to share $2 Trillion of cumulative investment in resource infrastructure in resource-driven countries to 2030;
  • There are 50%+ improvement potential in resource-sector competitiveness through joint government and industry action.

How Does Canada Compare

How does Canada stack up on the six elements of the McKinsey resource-driven economy growth model compared to 81 resource-based economies?

  • Building Institutions and Governance: 2nd (Behind Norway)
  • Developing Infrastructure: 1st
  • Robust Fiscal Policy and Competitiveness: 1st
  • Supporting Local Content: 1st
  • Spending Resource Windfall Wisely: 3rd (Behind Norway & Australia)
  • Transforming Resource Wealth Into Broader Economic Development: 5th (Behind Norway, Qatar, Australia, Iceland)

These rankings and their underlying basis are helpful to evaluate where Canada needs to improve beyond the domestic partisan debates.   In a global context though Canada is within the top 5 resource-based economies out of the 81 resourced-based economies. When compared to high income peers the country is very fortunate compared to less stable low income countries but Canada ought to be doing better in transforming value into long-term development (spending wisely and economic development). Other leading countries will strive to improve so Canada should not be complacent and target improvements particularly in transforming value into long-term development or Canada risks falling behind in prosperity.

Improving Canada’s Performance – Transforming Value Into Long-Term Development

Looking deeper into the McKinsey metrics for transforming value into long-term development spending the resource windfall is based on quality of budgetary process, level of savings, and effectiveness of delivery while the economic development is based on the McKinsey Global Institute economic performance score. The McKinsey economic performance score is based on 21 metrics categorized under five dimensions of: productivity, inclusiveness, resilience, agility, and connectivity.

In terms of spending the resource windfall McKinsey observed that there are five ways to send the resource windfall:

  • invest the money abroad;
  • invest the money domestically;
  • allocate money to specific regional areas;
  • consume the money or resources in the domestic economy; and
  • direct transfers to citizens.

McKinsey suggested that there are six broad principles to guide effective spending of resources revenue: set expectations; ensure spending is transparent and benefits are visible; smooth government expenditure; keep government lean; shift from consumption to investment; and boost domestic capabilities to use funds well.

In terms of economic development McKinsey observed that most resource-driven economies have found it difficult to reap a permanent or longer lasting dividend from their endowments due to boom-bust cycle. Canada however was identified along with Norway, Oman, and Indonesia as examples of sustained growth post the 1970s oil price spike. Interesting though that Canada did not view itself as an Oil & Gas superpower at that time with very different economic drivers (ie. proximity to the US, strong manufacturing, and NAFTA). Today this is a very different story with a declining manufacturing sector, over-reliance on the US, and stagnant NAFTA growth. McKinsey suggest that resource-driven economies focus on five distinct groups of sectors that operate differently from one another and require different interventions:

  • Resource sector itself;
  • Manufacturing sector;
  • Resource riders (transport, construction, professional & technical services, real estate, wholesale goods, and utilities) sector;
  • Local services sector (Financial services, retail, information media and telecoms, hospitality, and administrative support); and
  • Agriculture.

McKinsey also explores the concept of benefaction in the context of economic development as a strategy that leverages an existing sector to create additional jobs and economic activity in subsequent (down-stream) stages of the value chain.  McKinsey notes that although benefaction is attractive there are potential downsides including: subsidizing economically unfeasible activities; and increased regulation that may undermine the global competitiveness of the extraction sector. McKinsey suggest that governments consider the following lessons when attempting to capture downstream value:

  • Understand the potential value of moving down-stream;
  • Understand the fit with local capabilities;
  • Establish supporting regulations;
  • Don’t just regulate but build enablers; and
  • Monitor and enforce.

Specific data how Canada performs according to these measures was not provided except in a couple case examples but it would be useful for Canada and indeed regions such as Alberta, BC, Saskatchewan, and Newfoundland to assess their current performance and set targets for improvement. In a broad sense Canada has implemented well along these various aspects of transforming value mainly because the economy was largely diversified and well developed when resource income began expanding rapidly in the 1990-2000s time frame. The five sectors all have flourished (particularly in western Canada) but Canada has not fully developed benefaction in terms of down-stream value chain activity.  Canada understands its fundamental constraints in terms of fit with local capabilities in areas such as skills mismatch and transportation but is taking steps to solve these problems. Arguably work on supporting regulations, enables, monitoring and enforcement is proceeding but interprovincial political differences/barriers remain problematic.

Alberta Innovates 2013 nanoConnect Conference

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Alberta’s nanotechnology industry participants came together for Alberta Innovates 2013 nanoConnect conference that explored nanotechnology opportunities emerging within Alberta. As a steering committee member of nanoMEMS Edmonton cluster from 2001-2007 I was curious to understand current developments and progress made since 2007.

Reflecting on the discussions I was pleased to see how the product development support infrastructure has matured and is now fully in place to help entrepreneurs productize their ideas – physically realize a product for field trials, early adopters, and limited product runs. The technical support infrastructure is based on $300M capability investment since the late-90s in Edmonton resident in NINT, University of Alberta nanoFab, ACAMP, and NAIT nanoCARTS with some capability resident in Calgary at the University of Calgary AMIF.

The creation of Alberta Innovates in 2010 consolidated multiple research programs into a coherent innovation system that builds on Alberta’s jurisdictional advantages in: energy, environment, agriculture, forestry, and healthcare. The logic as I understand it is that Alberta Innovates provides the platform for nanotechnology application commercialization building on these jurisdictional advantages. The current Alberta nanotechnology strategy guiding research and commercialization activities was released in 2007. The return on investment in terms of economic benefit from the $300M nanotechnology capability investments, R&D activity, and new venture investments though has still has not contributed to any perceivable growth in Alberta GDP so is beginning to come under some pressure to show results.

A consistent theme during the presentations and well articulated by Skip Rung from Oregon based ONAMI was the importance of three main building blocks: research; talent; and capital/business formation in order to see economic benefits of new technology.  I would add a fourth being the need for market development. Alberta’s nanotechnology industry is strong in the first two but struggling in the other two – capital/business formation and market. Although the end-to-end systems are in place to realize the product….business formation, customer development (in Alberta industries & global product markets), and market connections remain weak and immature.

The commercialization impediment of intellectual property stuck in universities (where most R&D tends to be invested in Canada) received some attention but other challenges to economic gain from Alberta nanotechnology investments remain:

  • Weak Demand Side Engagement – If commercial exploitation is being directed towards Alberta’s jurisdictional advantages then to move to the next level the Alberta nanotechnology industry needs much stronger and active demand side engagement from Alberta’s jurisdictional strength industries. Participation remains too heavily weighted towards the ‘bottoms-up’ supply side or ‘technology push’ oriented. Building strength from a strong domestic Alberta base is critical to economic success so where was the engagement from Alberta’s jurisdictional advantages? I have heard it said that industries don’t understand nanotechnology, how to use it, or what competitive benefits it brings.  The best example I have seen recently of senior executive participation was at the Cellulose Nanocrystal (CNC) pilot plant grand opening because of the burning need to find new applications for the forestry industry brought about by the decline in pulp & paper segment from the digital economy. More demand side ‘top-down’ engagement like the CNC pilot plant is needed.
  • Industry – Research Misalignment – Underlying the weak demand side engagement is the misalignment between research and industry. Canada’s heavy reliance on universities for R&D funded by federal and provincial governments and the misalignment with industrial needs is well-known. Refocusing resources in Alberta to leverage Alberta’s jurisdictional advantage is bringing alignment and clearly local start-ups who presented are pursuing industry problems which is much better than 6-7 years ago. We heard both sides of the ‘spin-off’ success debate but pressure is mounting to get universities aligned with industry needs.
  • Industry Receptors – The structure of industries (size, ownership, head office location) exploiting Alberta’s jurisdictional advantages are holding back demand side engagement and industry – research alignment. Although energy, petrochemical, and forestry have larger Alberta based businesses that conduct R&D in Alberta the agricultural sector is a diffuse collection of SMEs.  Environmental and healthcare sectors are very young composed of start-ups or small businesses.  The environmental sector benefits from strong energy industry support and investments. There are no large healthcare firms headquartered or with large operating divisions in Alberta.  BioAlberta is the main cross sector voice for the nascent advanced technology growth with Agriculture, healthcare, and biological based environmental industry.
  • New Venture Financing – After experiencing the ‘valley of death’ in a molecular diagnostic medical device start-up in Edmonton the issue of poor new venture financing in Alberta (and Canada) remains a problem. The Alberta Enterprise Corporation was formed in 2009 to inject funds into venture funds but there was no evidence during this conference that this initiative has made any impact in support of commercializing the province’s nanotechnology investments. The AEC 2012 deal flow study determined that nanotechnology (combined with aerospace & robotics) only comprise 2% of the Alberta sector venture deals although the percentage is likely slightly higher in their data because of how they may have categorized embedded applications in life sciences, devices, materials, and chemicals applications.
  • Internal/Local Focus – As former Alberta based international vice president sales & marketing with experience in 25 countries and recently working in the UK for a year it is clear to me that the vast majority of Alberta are still too internally focussed. Whether due to a preference for life-style companies, lack of ambition, or lack of global business experience too few Alberta firms don’t take an external view.  Although Alberta is a land locked province, with no tidal ports, constrained international airline access, and not on major global trade-routes it is still possible to access global markets. The internal focus may also be due to Alberta’s jurisdictional advantages that are more commodity oriented with an over reliance on the US market rather than driven by-product/market choice growth strategy. Alberta is still a small market with only 4 million people so global markets for product companies are critical to growth and economic prosperity.
  • Lack of Urgency – Nanotechnology investments have not ignited economic growth – who is accountable for results and does this matter to anyone?  Saying that nanotechnology is not ready for commercialization is a way to take the pressure off but there are examples of MEMS and basic nanomaterials seeing commercial success. Our current resource wealth and prosperity means that we are not fighting for survival as Nava Swersky Sofer’s presentation on Israel very succinctly emphasized. Canada lacks natural enemies as our territory is largely not in dispute – Canadians are fortunate but should not be complacent in a rapidly changing world. The vast majority of Albertan’s really haven’t experienced a significant threat to our way of life other than the NEP.  Alberta is largely protected from world events and has only experienced localized or sector specific problems that in the aggregate not slowed growth such as: pipeline capacity limits, low natural gas prices, reduced pulp & paper, BSE hitting Alberta beef sales; or a strong Canadian dollar.  There is no sense of urgency driving nanotechnology commercialization.
  • Investment Dilution – Canada’s geography, large landmass area, and low population density will always be a challenge to focus enough critical mass to generate significant economic benefits that for example Finland has been able to achieve in Helsinki through Otaniemi as described by Ari Huczkowski. Clusters and creative cities matter. Rivalries and special interests will always work against critical mass in Canada. Edmonton has been fortunate to build critical mass on the supply side but lack or results is raising questions.

Solutions to improve economic outcomes from Alberta’s nanotechnology investments:

  1. Clear Grand Challenges – Dr Carlo Montemagno’s discussion of ‘grand challenges’ resonated with me as a means to align research-investments and build critical mass to improve commercial outcomes in Alberta. I did not see or hear a list of ‘grand challenges’ so this is worth building consensus across Alberta’s jurisdictional advantages.  A clear list of ‘grand challenges’ can serve to finally bring industry-research alignment, alignment with provincial priorities, and serve as a compass to guide wise investment decisions.   I also think it is worth distinguishing between solving ‘Alberta’s Grand Challenges’ such as environmental impacts of heavy oil and solving one or two of the ‘World’s Grand Challenges’ such as food and water supply constraints. In competing for limited funding resources which will take priority?
  2. Adopting a DARPA Approach to Commercializing ‘Grand Challenges’ – A prior post describes the basis for the approach. The Alberta nanotechnology industry needs some quick wins and a DARPA approach aligned behind the ‘Grand Challenge’ vision would help.
  3. More Senior Demand Side Participation – Future conferences require senior executive participation from industries representing Alberta’s jurisdictional advantage to be the voice of the customer to communicate ‘grand challenges’ – ‘can nanotechnology solve these industry challenges….’.  For example participation from COSIA made up of energy firms who are collaborating to address: tailings, water quality, and green house gas emissions.  Participants from agriculture, forestry, healthcare, and the environment.

Canadian Industrial R&D Spending

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Statistics Canada has released Industrial Research and Development: Intentions report summarizing R&D spending in Canada to 2013. The results echo the declining R&D investment trend reported in the Science, Technology, and Innovation Council 2012 State of the Nation report on Canada’s Science, Technology, and Innovation System report that has Canada falling from 16th of 41 countries in 2006, to 17th in 2008, and 23rd in 2011 in terms of gross domestic expenditure on R&D as a share of GDP. The Statistics Canada report results show industrial R&D in 2013 is anticipated to be down 2.8% from 2012 at $15.6B and remaining below the pre-recession peak of $16.8B in 2007.

R&D Spent By Size of Firm

These charts illustrate the % and amount of R&D (intramural R&D) spent by firm size (# employees) for 2007 to 2011 across all sectors from the Statistics Canada report.

Can R&D % Bar Chart

Can R&D % Line Chart

Can R&D $ Line Chart

Unfortunately the number of firms performing R&D by size was not provided to adjust these charts for this data set however the 2012 small business statistics reported that small businesses with 1-99 employees make up 98.2% of all firms, medium firms with 100-499 employees make up 1.6% of all firms, and large firms with greater than 500 employees make up 1.6% of all firms.

Canadian SME Growth Numbers

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The annual Canadian Small business statistics for 2012 were recently published by Industry Canada. In 2012 Small business (1-99 staff) made up 98.2% of all firms, medium firms (100-499 staff) made up 1.6% of all firms with the remainder large firms (>500 staff). Looking at high growth SME statistics, innovation, and export activity which reflect small business growth performance some of the main results are summarized.

High Growth SMEs

The highest concentrations of high growth SMEs (Annualized growth rate > 20%, over a three year period, with 10 or more employees) between 2006-2009 were:

  • Construction (4.9% of all firms).
  • Business, building, and other support services (4.6% of all firms).
  • Professional, scientific and technical services (4.5% of all firms).
  • 7.4% of service producing SMEs expect to grow more than 20% and 13.7% grow 11-20% between 2012-2014.
  • 9.0% of manufacturing SMEs expect to grow more than 20% and 19% grow 11-20% between 2012-2014.
  • Observation was made that high growth firms are not restricted to high technology firms.

Innovation

In terms of innovation:

  • In 2009 small businesses performed 31% of R&D ($4.8B), 18% medium firms performed R&D ($2.8B), and 51% of large firms performed R&D ($7.7B).
  • Between 2009-2011 SMEs that innovated between 2009-2001 were found in manufacturing (58.1%), knowledge-based industries (50%), and professional, scientific, and technical services (43.5%).
  • 38% of small businesses and 56% of medium business made at least one innovation between 2009 and 2011.

Exports

In terms of export activity in 2011:

  • 90% of exporters were small businesses (compared with 85% in 2008) but only 10.2% small firms exported.
  • 34.4% medium firms exported.
  • Total exports were $374B (increasing $48B over 2010) with 23.9% by small firms, 16.2% medium firms, and 59.9% large firms.
  • Exports account for 30% of GDP down from 34% prior to 2008 and has not reached pre-recession levels yet.
  • SME export destinations were US (89.3%), Europe (32.1%), Latin America (11.9%), China (11.6%), Other Asia (11.6%), and Others (15.4%).

Innovation Diffusion From University R&D

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R&D in Canada is conducted primarily in universities as opposed to industry. In fact Canada is an outlier in OECD countries in this respect. Canadian industry on the other hand is below average on R&D spending. This situation has created a significant up hill battle to move investments in university R&D to industry supply chains delaying economic benefits years into the future. Canada’s time to market performance commercializing new technology is far too long. Why is this and what are the implications for Canada?

Industry Supply Chain Innovation Diffusion

Outcomes from university R&D moves through two slow innovation diffusion processes: research commercialization (measured by Technology Readiness Levels); and industry supply chain adoption. Both innovation diffusion processes can be illustrated by this diagram:

Industry Cluster Innovation

From an industry supply chain perspective products purchased and used by consumers, businesses, or governments are sold by the Original Equipment Manufacturer (OEM) at the “system level” in the top right. Whether they be cars, aircraft, smart phones, refrigerators, the product is an assembly of parts purchased from a supply chain (into the diagram) and constructed in a unique way by the OEM to satisfy customer needs. The assembly of parts are based on building blocks starting with materials, components, subsystems, up to the complete system (seen as series of steps in the diagram). Software may be embedded at the component, subsystem, and/or system level. New technology can be leveraged for competitive advantage in all levels of the product hierarchy in an industry.

Industry Supply Chain Adoption

Product industries led by competing OEMs are supported by supply chains typically composed of four tiers below the OEM: Tier 1 major system integrators; Tier 2 components & sub assembly suppliers; Tier 3 machine shop service providers; and Tier 4 materials & special process service providers. Assembly and integration is performed at each level in a value adding process starting with basic materials. Examples of industry supply chains include aerospace, automotive, ships, and consumer electronics.

Product development, process/manufacturing development, and continuous improvement is performed at each level in support of business strategy and competitive forces. New technologies compete with existing proven technologies to demonstrate improved performance, quality, reduced cost, and time savings. Each tier therefore presents an adoption period before new technologies are accepted into high volume production and customer use. Customers in this case not only means the end user of the product but also each successive tier as the customer for the next lower tier. Supply chain adoption time is therefore based on development, sales, demonstration, and qualification, and experience from in-service use stages lasting 3-5 years at each tier on average although the adoption time can be much longer in conservative industries and shorter in hyper competitive industries.

Supply chains today are global with some national or regional industry clusters where local supply chains have agglomerated at several levels in the past. Canada’s industry supply chains are largely fractured except in certain industries where the country has invested heavily and developed world class “system level” product companies that can exert market pull to the develop local supply chain. Leading examples are Bombardier for commercial aircraft and rail or Blackberry for mobile devices. Unfortunately Canada also has difficulty maintaining a lead as world class “system level” product companies fall from grace such as Nortel or as Blackberry slips.

Research Commercialization

Any part that makes up the end product is based on existing technology with occasional introduction of new technology in hopes of achieving a competitive advantage. Improved product performance, quality, or cost can be achieved through technology advances for any tier in the supply chain. Firms at any level of the supply chain can secure sustained competitive advantage if they take steps to protect their new technology by patents.

Technology advances in Canada are primarily based on research conducted in universities and follows a long road to commercialization as it passes through a series of readiness levels such as the technology readiness level scale illustrated below:

Technology Readiness Levels

The technology readiness scale reflects the notion that the earlier stages are big “R” with small “d” with the emphasis moving to small “r” and big “D” in the latter stages. New technology is formulated and validated in the research lab before moving to prototyping in simulated environments and the real world.  Uncertainty and risk is reduced at each level until ultimately the technology is proven in the real world.

New technology can take 8-10 years to move through the technology readiness scale. Technology complexity and novelty can add time to this time delay. There are few short-cuts although firms that perform more of the steps internally have better control of the commercialization process, with fewer changes of hands, and achieve faster outcomes. Unfortunately the trend in most developed economies is that firms did perform much of the process internally are outsourcing the earlier research steps.

Research Commercialization Chasm

Lab researchers are unfortunately often far from the market pull of the product end user particularly in today’s global economic structure leading to a “commercialization chasm” as illustrated below:

Commercialization Chasm

University research focuses on lab work which is effective in bringing ideas to proof-of-concept stage. In today’s complex, fast changing world the jump to the real world is very large where lab prototypes are far from ready particularly for demanding operating environments or discerning/fickle consumer markets.

A key problem today is that Canadian universities are highly disconnected with industry except in a few rare cases. While geographic separation from Canadian industry clusters or international supply chains is a major source of commercialization delay the leading delay remains due to the commercialization chasm.

Implications For Canada

The implications of long diffusion time from university research commercialization and supply chain adoption are significant for Canada and the leading reasons behind the countries poor return on R&D investment. Should Canada’s economic growth begin to stagnate renewed focus on commercialization performance will take center stage as it is today in Europe and US.

As a resource based economy new technology in materials research is an obvious choice to drive growth. Unfortunately material research has the longest path to travel to commercialization because it must progress through both the technology maturity scale and be adopted by industry supply chains in Canadian clusters and global supply chains. The “bottom up” approach to commercialization will not yield timely return in investment to support economic growth.

A “top down” approach could be taken but Canada has few “system level” product world leaders to pull from Canada’s university R&D investments and bring alignment to fractured supply chains / clusters. While there is a strong desire for Canadian suppliers to access global supply chains a coherent and integrated industrial strategy amongst the levels of government and plethora of funding programs does not appear to exist. Canada’s small domestic market size and regional politics continue to hinder supply chain efficiency and effectiveness sufficient to align with a dispersed university R&D approach. Canada must get better at developing industrial strategy to maximize return on investments in developing competitive supply chains even if the top supply chain levels are foreign. The National Shipbuilding Procurement Strategy (NSPS) and national energy strategy debate are attempts at forming several new coherent and aligned strategies where none exist today but other industries would benefit such as agriculture, food processing, pharmaceuticals, medical devices, and clean energy. The importance of leveraging national industrial strategy to export trade for a country that depends on exports for its prosperity cannot afford to be lost in the regional political debate.

Canada’s university spin-off performance could be better. Simulation technology has advanced dramatically in recent years and pilot prototype facilities are increasingly available the cost for these stages are often not included in Canadian R&D funding programs. University spin-offs and start-ups often cannot obtain funding for these stages which is a leading reason underlying the “valley of death” barrier experienced by many Canadian start-ups.  This simulation/prototyping shortfall therefore presents a major barrier or “commercialization chasm” further delaying adoption by industry supply chains. Recent restructuring and repurposing of Canada’s National Research Council is directed at solving this problem but Canada remains weak in developing clear industry strategy to align all the players for better economic outcomes.

Canada’s Business Leadership Crisis

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In our current age of turbulence and rapid global change the growth challenge for developed economies, including Canada, may be due in large part to a business leadership crisis. For several decades Canadian businesses were protected from the ravages of intense competition previously by the low dollar and now resource revenues. The influence of global competition are increasing as Canada is set to sign several new trade deals. As non-renewable resource revenues wane what will sustain Canada’s prosperity in the long run?

Two Leadership Tendencies

In leadership and strategy studies the propensity of leaders to tend towards either “juice squeezers” or “innovators” poses some interesting perspectives on SME growth in Canada and possibly other economies. The tendency was observed by Gary Hamel in his book Leading the Revolution published in 2000 at the height of the dot.com bubble and is worth a relook today.

Hamel identified two leadership tendencies:

Value Squeezers – extract as much profits from the current business model.

Revolutionaries – created new value propositions and businesses.

In comparing the two leadership tendencies Hamel noted that value squeezers will eat away at profits of their existing business model until they finally die whereas revolutionaries look for ways to change their existing business model. Hamel’s central theses is that business leaders should evaluate new business models, challenge and if necessary destroy their old business models to avoid profitably going out of business.

Essentially Hamel was saying that value squeezers focused predominantly on value capture to the extreme while revolutionaries focused predominantly on value creation. In a previous post on delivery / innovation looking at Michael Raynor and Mumtaz Ahmed recent article in Harvard Business Review describing Three Rules For Making a Company Truly Great it is perhaps more important to be able to balance both tendencies in the long run or avoid always defaulting to the extreme of juice squeezing.

Leadership Tendency Holding Back Growth

When interpreting Deloitte’s observations that Canadian SME growth tends to slow after the first five years of rapid growth combined with the modest number of Canadian global leaders and the mystery of vanishing medium firms in Canada one might conclude that Canada may have too many juice squeezers and not enough innovators. Indeed the propensity for business leaders to not adopt innovation as a strategy was thoroughly explored by the Council of Canadian Academies in their 2009 report Innovation and Business Strategy: Why Canada Falls Short.

The juice squeezer likely view their leadership tendency is just fine for a market that has changed little over the last several decades and for now is not directly threatened by globalization or major change. Perhaps their market is protected or they have found a nice niche that supports their lifestyle. Risk averse, preference for lifestyle support, and comfortable that their business model is good enough for their existing geographical market and customers are juice squeezer behaviours. If they take any strategic step to grow it is to use their profits in excess of their own or their company’s needs to grow through acquisition. The acquisition will likely be of a similarly positioned firm in the same market.  By acquiring an existing firm risk is low but no real new value has been created in the process. In all likelihood value has been destroyed from the transaction cost and cultural mismatch during integration. A juice squeezer would certainly not see the need to invest in R&D, collaborate with research organizations, diversify their markets, or export.

In the mind of the juice squeezer they likely rationalize that their leadership style got them this far so why change. The problem is that the juice squeezer leadership behaviours may be harming the economy in the long run since the world has fundamentally changed. With all the drive for change to squeeze more profits out the existing businesses in the name of efficiencies have business leaders forgot to look in the mirror and ask themselves if they need to change?

Engaged, purpose driven employees have a good sense whether they see their leaders are juice squeezers or innovators. The question is are boards challenging business leadership or are business leaders themselves self reflecting whether their own leadership tendency is appropriate for today’s turbulent markets?

Role of Demographics

Canada’s and the developed world changing demographics may be our opportunity for leadership change. The current business leadership tendency towards juice squeezing should be seen as “old school’ or applicable for the pre-financial crisis world but not for the post-structural break reality of a global economy where first world nations economic superiority no longer stands. As baby boomers retire with their lifestyle wealth the next generation of Canadian SME business leaders should look towards innovation leadership, purpose driven value creation, and adopting innovation as a strategy.

Leading For Growth Through Innovative

How can a new generation of Canadian business leaders adopt a new set of behaviours to drive growth going forward? How can a new generation of Canadian business leaders create new sources of value rather than shuffling around existing aging value sources? Hamel’s book provides a good working framework.

Hamel proposed some rules for enabling a more innovative organization:

  1. Set unreasonable expectations
  2. Maintain an elastic business definition (or business model)
  3. Create a cause, not a business
  4. Listen to revolutionary voices
  5. Create an open market for ideas
  6. Create an open market for capital
  7. Create an open market for talent
  8. Encourage low-risk experiments
  9. Grow by cellular division
  10. Share the wealth

Many of these behaviours have matured in the decade since the book was first published. Elastic business definitions executed through business model canvas and business model pivots. Creating a cause is central to social innovation. Open innovation has become main stream through crown sourcing. Low risk experiments through creaction, little bets, and the learn-build-measure cycle.

In reflecting on this post if you hope to be in a leadership role in the coming years what kind of leader do you want to be? Canada’s future prosperity depends on it.