Category Archives: Innovation

How To Execute on Innovation Better

1 Reply

Failure to execute is a leading reason why organizations don’t gain the full benefit of their innovation initiative investments. Day-to-day business pressures quickly overcome all the good work creating an innovative idea when it comes time to execute. Something we have previously called the innovation-delivery paradox.  An ongoing challenge is how can firms execute on innovation better while still delivering on the day-to-day?

The four disciplines of execution or 4DX method developed by Chris McChesney, Sean Covey, and Jim Huling provides a solid methodology to solve this challenge.

4DX Method

The 4DX method is based on these four disciplines:

  • Discipline 1: Focus on the wildly important
  • Discipline 2: Act on the lead measures
  • Discipline 3: Keep a compelling scoreboard
  • Discipline 4: Create a cadence of accountability

Why The 4DX Method Is Particularly Well Suited To Execute on Innovation

Focus. The 4DX method helps the innovation team bring focus to the main business goal of the innovation and drive cross organizational collaboration for innovation that requires change to the firm’s business model.

Results Oriented. Most business executives are well aware that key performance metrics are usually lag measures and organizations have difficulty linking actions to lag measure results. Lead measures that are often less than obvious enable team members to link their efforts to lag measure results. The 4DX method provides a systematic method to identify and optimize lead measures unique to the innovation.

Allows Experimentation. This is perhaps the most critical reason. Experimentation, failure, and learning are central to innovation. The regular team session based on commitment, accountability, and problem solving supports fast and responsive adaption as the innovation idea is implemented. No innovation initiative can foresee all the challenges in bringing an innovation to market. The 4DX method enables teams to break down the challenges and try different approaches to learn faster.

Enables Change. All innovation requires some degree of change. Change in behaviour. Change in business model. Change in procedures. Failure to execute on innovation is closely tied to failure to change. The 4DX method provides a positive framework to help teams through the change necessary to implement innovation.

Facilitates Engagement. Innovation is a team sport.  Everyone in the firm has to contribute to achieve the full benefit from innovation. The 4DX method facilitates engagement by clarifying how each team member can contribute to success as well as how their efforts achieves results.

Builds Momentum to Success. The regular cadence of the 4DX method along with flexibility to support experimentation helps to build momentum where team members get faster feedback and short term success. Through the medium term repeated application to follow-on innovation enables the culture of innovation execution to be strengthened.

Moving Forward

Adopting the 4DX method to overcome the challenge of innovating while delivering the day-to-day requires effort, commitment, and resilience. Alopex can help you through this process and strengthen your culture of innovation execution.

 

Why Corporate Skunk Works Need to Die

Leave a reply

Steve Blank

In the 20th century corporate skunk works® were used to develop disruptive innovation separate from the rest of the company. They were the hallmark of innovative corporations.

By the middle of the 21st century the only companies with skunk works will be the ones that have failed to master continuous innovation. Skunk works will be the signposts of companies that will be left behind.

——–

In the 20th century companies could be leaders in a market for decades by just focusing on their core product(s). Most companies incrementally improved their products with process innovation (better materials, cheaper, product line extensions) and/or through acquisitions. Building disruptive products were thought of as “risky” and a distraction since it was not “core” to the company and did not fit existing corporate structures. Why make big bets if no one was asking for them and competitors weren’t doing so.

a-12 CIA A-12 spy…

View original post 614 more words

Creativity, Inc. & The Fuzzy Front End

1 Reply

iStock_000005724324MediumThe fuzzy early stages of any idea that offers the potential to create new value involves more art than science and is very difficult to achieve in business.  Ed Catmull’s book Creativity, Inc. sheds light on these early stages and provides incredible insight into how to lead a development organization’s fuzzy front end in the context of the lean engineering framework.

The fuzzy front end starts with the identification of an unmet customer need and ends with convergence on the optimum solution that a firm can repeatedly produce and sell profitably in new or competitive markets. Ideas that lead to market-creating innovation are of immense strategic importance in today’s competitive markets.  The fuzzy front end is messy, unpredictable, and highly uncertain. Start and end points are ambiguous. The process involves novelty, experimentation, complexity, creativity, and non-routine engineering work. Ed Catmull’s book provides a broad set of management tools and mindsets that every engineering leader needs to master to nurture ideas for new value creation to improve business performance in the fuzzy front end.

Protecting Ideas In The Fuzzy Front End

Catmull does a wonderful job describing the tension that exists in firms between what I call the delivery and innovation paradox. He uses the analogy of ‘The Hungry Beast and The Ugly Baby’ to describe how engineering leaders need to be mindful of the balance between day-to-day delivery and idea driven innovation. His point is the day-to-day delivery (The Hungry Beast) can quickly kill idea driven innovation (The Ugly Baby) because originality is fragile and the fully mature product resulting from the original idea do not just pop into the world as Catmull says ‘already striking, resonant, and meaningful’ to the market. New ideas need to be protected during the fuzzy front end to be developed and enable the convergence on the optimal solution (the best all around solution from among a variety of possible choices).

To create the right environment Catmull suggests several management actions:

  • Seek Balance (Continuously) – Management needs to give continuous attention to achieving strong counter balance in the face of the strong delivery desire for efficiency and consistency of workflow by: enabling give & take from parts of the business; not allowing one function to win at the expense of the whole company by seeing balance as the collective end objective; allow continuous healthy conflict; act on situations where balance has been lost; and ‘hold lightly to goals and firmly to intentions’ which permits adjustment as new information and learning comes to light.
  • Constructive Feedback Through An Advisory Team (Brain Trust) – New ideas don’t develop in a vacuum but rather need a constructive feedback mechanism to evolve, improve, and be tested as they develop through the fuzzy front end.  The Brain Trust at Pixar provided the constructive and iterative feedback system facilitated through candor, challenge,  independent and emotionally disengaged advice, all by people who ‘have been there and done that’ free from overpowering outside agendas. Catmull emphasized that to function effectively the Brain Trust had no authority avoiding negative influence on development team dynamics.
  • Trusting Culture – Management needs to continuously facilitate a culture that enables honesty and candor, accepts failure with no retribution, sees change as good, and pushes employees mindset beyond their comfort zone. Management also has to recognize that they can’t possibly have all the solutions to unforeseen problems trusting all employees to respond with solutions because they are closer to the problem and have the best information.

Engineering leaders faced with the need to continuously innovate in response to competitive pressures should read Creativity, Inc. to understand how they can manage the fuzzy front end. The book is rich with examples, methods, and advice. As Catmull observes ‘discovery means you don’t know the answer when you start’ which capture perfectly the essence of the fuzzy front end.

 

 

 

 

 

 

The Capitalist’s Dilemma Explains A Lot

1 Reply

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.

 

Systems Thinking For Innovation

Leave a reply

Firms that compete through technology based innovation strategy need to contend with how their product/service delivers value in rapidly evolving complex systems present in today’s markets. Complexity has reached the point were we now talk in terms of system of systems to describe markets.  For example, electric vehicles operating within an electrical power generation and smart grid system, advanced aircraft operating within an air traffic management system, a swipe card payment system for an integrated public transportation system, or a medical device operating connected within an electronic records management in an integrated health services system.

Firms need better systems thinking in their strategic and tactical delivery actions. The success of the firm depend on external partners, integration challenges, customer adoption, and market conditions beyond their control. Firms that apply systems thinking  can help to maximize the return on innovation investment that drives profitability, growth, and competitiveness. Engineering leaders responsible for delivering technology solutions in complex systems markets also need to develop their staff the think in terms of systems, adopt systems engineering practices, and apply better strategic tools to leverage systems thinking.

Systems

To understand systems thinking firms need to understand complex systems. A system is a set of connected things or parts forming a complex whole.  Individual systems from the examples given could include: an electric vehicle itself; a payment system; a medical device; mobile phone; or tablet. Each alone can be complex systems in their own right. The system of systems takes a wider view of all the individual systems that must operate together in the broader context. Annette Krygiel defined systems of systems as “an interoperating collection of component systems that produce results unachievable by the individual systems alone“. For example, the electric vehicle market comprises systems such as: the electric vehicle itself; electrical power grid; charging stations; electrical power generation/transmission system; and the environmental regulatory system. All of these systems in the electrical transportation system of systems are undergoing rapid transformation but provide exciting potential for innovators active in this space.

Complex systems markets are changing rapidly making it difficult for engineers to predict how their potentially novel products/services will perform in the future system. In today’s markets complex systems perform beyond the sum of the parts and often in unexpected ways with emergent properties. How future technology users will face pervasive connectivity with the evolving ‘Internet of Things’ is an excellent example. The Royal Academy of Engineering observed that “A system is a set of parts which, when combined, have qualities that are not present in any of the parts themselves. Those qualities are the emergent properties of the system. Engineers are increasingly concerned with complex systems, in which the parts interact with each other and with the outside world in many ways – the relationship between the parts determine how the system behaves. Intuition rarely predicts the behaviour of novel complex systems. Their design has to iterate to converge on an acceptable solution. That solution might not be what the customer originally envisaged – aligning expectations with what is achievable is an important part of the design of systems and the design engineer has to work closely with the customer and other stakeholders.”

Engineers also need to ensure system outcomes such as: safety; reliability; robustness; interoperability; versatility; flexibility; and future growth are delivered in complex system markets. In terms of tactical actions, systems engineering is the field of engineering that according to INCOSE (the international professional body for systems engineering) aims to enable the realization of successful systems as defined by these intended outcomes. Eisner defines systems engineering as “an iterative process of top-down synthesis, development, and operation of a real-world system that satisfies, in a near optimal manner, the full range of requirements for the system“. Systems engineering is about managing reality, complexity, uncertainty, and increasingly innovation within budget, schedule and other project specific outcomes. ISO 15288 is the recognized standard for the systems engineering. In fact project management and systems engineering are becoming increasingly integrated as evidenced by the closer cooperation between PMI and INCOSE.

Formal systems engineering methods are described in INCOSE’s Systems Engineering Handbook employing processes, methods, and tools have evolved since the end of WWII to apply systems thinking initially in complex cold war military systems.  Firms in aerospace, defence, nuclear, and transportation regularly use systems engineering to manage complexity, safety, interoperability, and performance but as the world becomes more connected other industries need to learn and adopt these methods. It has only been recently though that other industries have become exposed to systems engineering methods.  Some industries have been more proactive than others but some like construction are finding it increasingly difficult to deal with complex infrastructure projects that involve novel technologies and system of systems. Unfortunately there has been limited talent transfer from the traditional systems industries in many jurisdictions, non-system industries adoption has been slow if there is little need to connect, some see the methods as too costly or difficult to apply. Most university engineering and management programs do not cover systems engineering leaving industry to learn and often relearn lessons in siloes. So stand alone industries need to consider whether they need systems engineering to deliver their value proposition in an increasingly connected and complex world.

Systems Thinking

Systems thinking or ‘big-picture’ thinking, is the key systems engineering mindset that takes a holistic view of the system, its environment, its users, its stakeholders, over its life time. Peter Senge defined systems thinking in The Fifth Discipline to be ” a framework for seeing interrelationships rather than things, for seeing patterns rather then static snapshots. It is a set of general principles spanning fields as diverse as physical and social sciences, engineering and management“. INCOSE UK define systems thinking to be “a way of thinking used to address complex and uncertain real world problems. It recognizes that the world is a set of highly interconnected technical and social entities which are hierarchically organized producing emergent behaviour“.

Most engineers are functional experts but as they assume greater leadership responsibility they often have to consider design implications in a broader context and begin to recognize the importance of systems thinking. Functional point designs without consideration for the broader system often lead to inferior outcomes. Engineering leaders in industries that are becoming more complex systems of systems therefore need to develop in themselves and in succession plans how to be better systems thinkers.

To ensure present day firms develop and sustain their competitiveness in the face of an increasingly complex world, the UK Royal Academy of Engineering suggests six principles that firms who leverage engineering capabilities should adopt to apply systems thinking:

  • Debate, define, revise, and pursue the purpose;
  • Think holistic;
  • Follow a systematic procedure;
  • Be creative;
  • Take account of the people;
  • Manage the project and the relationships.

A prior post looked at methods to sustain system thinking as the baby boomer generation retire in the traditional system thinking industries.

At the strategic level how can engineering leaders deliver returns from innovation investments in applying systems thinking?

Innovating in Complex Systems Markets

Rod Adner provided a powerful strategic approach for innovating systems in his book The Wide Lens by putting systems thinking in a business context and a form more usable by industry. Adner’s method looks beyond the execution of the firm’s innovation to consider co-innovation players and the adoption chain in the complex system market.  Co-innovation players are those firms or entities that need to innovate in order for the firm’s innovation to succeed. The adoption chain considers who else needs to adopt the firm’s innovation before full value can be achieved. Adner’s wide-lens steps are:

  1. Build a value blue print that illustrates the complex system market by network mapping of the key suppliers, intermediaries, complementors all leading to the end customer;
  2. Prepare a leaders/followers diagram to illustrate who of the players in the value blue print wins (or benefits) and who loses (and could resist) the firm’s innovation;
  3. Map first mover matrix to understand if being a first mover is an advantage or not;
  4. Considering the 5 levers of complex system market reconfiguration (ie. changes to the value blue print) to facilitate value creation by the firm’s innovation: what can be separated?; what can be combined? what can be relocated? what can be added? and what can be subtracted?
  5. Taking steps to sequence successful complex system market construction through such strategic actions as: minimum viable footprint; staged expansion; and system carryover.

By visualizing the complex system market using Adner’s approach engineering leaders can apply systems thinking that drives profitability, growth, and competitiveness.

Mind The Gap

1 Reply

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.

How Does Canada Compare With Other Resource Economies

Leave a reply

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.

Innovation Strategy

1 Reply

With the Harper government signing the Canada-EU Trade Agreement which is expected to come into force in a year or two Canadian business leaders are reminded to assess their current strategy in anticipation of increased competitive pressure.  A major free trade agreement such as CETA will change market competition by allowing new entrants into Canadian markets but also give Canadian firms improved access to foreign markets. Business leaders need to decide if they need to up their innovation game in response to increased rivalry.

Canadian business competitiveness has been falling behind in recent years traced to Canada’s lagging productivity compared to the US. Canada’s lagging productivity has been linked to Canadian business leader’s failure to adopt innovation as a strategy.

What are some innovation strategies and how can business leader’s select the right strategy for their industry/market?

Innovation Strategies

In their quest for above average industry profits business leaders can choose to find better ways to deliver their services or offer better products. The essence of innovation is in creating and capturing new value measured in terms of higher industry profits, improved growth, and strengthened competitiveness. Innovation can result from better products, processes, marketing methods, and business structures.

There are several categories for innovation strategies but I prefer the following:

  1. Do Nothing Innovation Strategy – Management decides that their existing assets and competencies are appropriate to achieve acceptable returns in their markets. These markets are often protected in some form so competitive intensity is low.
  2. Adapt / Adopt Innovation Strategy – Firm’s imitate innovative business practices or acquire ‘off the shelf’ solutions that incorporate new methods or technologies to improve returns or defend returns. Business practices could include copying processes, marketing methods, and business structures used by rivals or leading firms in other industries. Acquired innovations could be embedded within capital equipment, tools, information systems. Acquired innovations could also include licensed technologies or methods.
  3. Incremental Innovation Strategy – Incremental innovation involves making improvements to existing products and services in terms of the relevant performance, cost, & quality measures for the market.
  4. Transformational Innovation Strategy – Transformational innovation involves making a step-change improvement to a product or service far beyond what incremental innovation can achieve also measured in terms of the relevant performance, cost, & quality measures for the market. A transformational innovation could also be demonstrated in a completely different way of structuring a business or a different way of marketing.
  5. Breakthrough Innovation Strategy – A breakthrough innovation involves creating a new-to-the-world market for a product or service.

Firms can choose to adopt the ‘do nothing’ innovation strategy or one/several of the other strategies. Tactical actions and investments then follow the implementation of the selected innovation strategies.

Innovation Strategy Market/Industry Alignment

How aligned is your innovation strategy with your market/industry? Porter’s five force model of competition is the gold standard for assessing industry competitive intensity. Innovation strategies provide a means for firms to create barriers to entry, maintain an edge against substitute products, and differentiate products all to create value and capture profits in attractive markets. Generally speaking the choice of innovation strategy is in response to competitive intensity of the market and can illustrated with the following diagram:

Innovation Strategy Options

Although this diagram is simplistic it does help to make a gross strategic assessment whether the firm is investing enough in innovation to sustain company profits.  As competitive intensity increases businesses need to invest more and take more risk to survive and thrive. First movers can gain a temporary market advantage with higher profits with increasing magnitudes and durations for incremental, transformational, and breakthrough innovations.

Normal progress in industries can see adapt/adopt innovations become the necessary cost of entry for an industry rather than the source of differentiations. These industries drive industry participants to continually invest in innovation faster than some nominal rate of progress. A study by Curry & Clayton in 1992 revealed that the majority of Canadian firms employed an adapt/adopt innovation strategy. Benchmarking Canadian innovation performance with OECD peers since then has not demonstrated any improvement.

Business Leadership Behaviour

Are your risk tolerance and innovation investments enough to keep up? Canadian business leaders are known to be risk adverse and underinvest in R&D (a proxy for innovation). Canada’s small market size, distance from global trade routes, proximity mainly to the US, business preference to remain local, low ambition, and trade protections result in mainly low competitive intensity in Canadian markets. Canadian firms who choose to export face higher competitive intensity.   As globalization continues and trade barriers fall, new competitors will enter Canadian domestic markets and Canadian firms have the option of exporting more. Domestic and export competitive intensity will increase with the CETA and other trade agreements so business leaders need to decide if their traditional risk tolerance and R&D investment commitment will sustain their business in the face of this increased competitive intensity.

To evaluate their risk tolerance and level of sustaining R&D investments the industry competitive intensity diagram suggests that there is a minimum threshold necessary to survive for the current market competitive intensity. As competitive intensity increases the required level of risk tolerance and magnitude of sustaining R&D increases as illustrated below:

Innovation Strategy Risk Tolerance

Canadian businesses risk falling behind if they continue to be risk adverse and don’t spend enough on innovation to remain competitive with rivals.

Innovation Strategy Industry Change Alignment

How fast is your industry changing? The rate of industry change or industry dynamics provides insight into their time horizon to adopt innovation as a strategy. McGahan’s industry change diagram is useful to assess the magnitude of industry change and the degree of strategic response that may be required. The industry change model enables management to assess the degree of threat to the firm’s current core activities and core assets.

McGahans Industry Change Model

Normal progress is experienced in the progressive change box with neither core activities or core assets threatened because competitive intensity change is slow.  Adapt/adopt is often sufficient to survive in markets with progressive change. As industry change is directed towards improved processes and tools core activities and assets become threatened. The incremental innovation strategy is usually sufficient to remain competitive but management must take larger risks and invest more in R&D to keep up with the competition.  Radical change results if both the core activities and core assets of the firm are threatened such that the firm risks become obsolete rapidly. Transformative and disruptive innovation strategies are necessary to survive.

Canadian Industrial R&D Spending

3 Replies

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.

Canada Should Adopt The DARPA Model For Funding Key R&D

1 Reply

Canada, and other developed countries, need to improve their ability to drive prosperity through innovation yet this goal has been elusive. A recent article in Harvard Business Review “Special Forces” Innovation: How DARPA Attacks Problems written by Regina Dugan and Kaigham Gabriel provides some new insight into this problem and in particular how Stokes’ research model can help to make better R&D funding decisions.

Root Causes For Canada’s Poor Innovation Performance

There are many reasons cited for Canada’s poor innovation performance such as low competitive intensity due to the small population, low population density due to the large geographic area, low VC funding, risk aversion, lack of entrepreneurial spirit, and lack of ambition.

There is also no urgent necessity driving a need to innovate in corporate Canada. Experts often look at Finland’s commitment to an innovation-led economic strategy which ‘arose due to the severe economic crisis of 1991 and simultaneous impact of near collapse of the domestic banking system and massive export disruption du to the disintegration of the USSR’. Urgent necessity only exists in several localized areas: 1) youth who see lean software start-ups as their only choice for a good career, 2) clean tech for those who think that global warming is real.  Canada’s complacency stems from being a stable country, high wages, social safety net, stable food supply, affordable cost of living such that the majority of population are well off.  Also Canada came out of the financial crisis fairly well off. Canada also has no natural enemies to drive defence R&D similar to how the cold war fuelled Silicon Valley’s development before the emergence of venture capital funding.

Canada’s Approach to R&D

Another leading reason often cited for Canada’s poor innovation performance is the approach used to fund R&D does not lead to economic benefits. Canada is an outlier in several respects when it comes to how R&D is funded namely:

1) Due to the absence of many large firms, R&D funding is driven by the government and directed to universities who don’t have a good track record when it comes to commercialization of the R&D funding; and

2) R&D funding is provided to firms indirectly through R&D tax credits as opposed to direct funding.

Industry does not fund more R&D because 98% Canadian firms are SMEs who can’t afford to invest much in innovation.  Most Canadian SMEs have no ambition to grow being content with selling to their local markets. There are also a lack of mid sized firms in industries who could commercialize R&D being undertaken in Canadian universities. 527 mid-sized companies reportedly vanished between 2007 and 2010 representing a drop of 3.6 per cent compared with a rise of 2.6 per cent of the overall number of new Canadian firms according to numbers compiled by the Business Development Bank of Canada (BDC).

There is also a lack of industrial strategy aligned with Canada’s strengths and misalignment between business and universities. No sustained plan to target new emerging industries is evident and large research endeavours tend to lose focus and attention as multiple competing agenda’s erode economic exploitation. So it is difficult to build momentum with misalignment, lack of focus, bureaucratic complexity, geography, lack of large firms, etc.  My own study in Alberta’s innovation system revealed the lack of focus and low return on investment from R&D investments made in Alberta universities over the last decade.

Dugan and Gabriel’s paper use Stokes’ research model to explain DARPA’s success. Stokes’ research model is very useful to understand why Canada has not fully benefited from the significant investments in R&D spent at Canadian universities over the last 15 years.

Stokes’ Research Model

Princeton’s political scientist Donald E. Stokes proposed the following 2×2 diagram to categorize research and naming each quadrant with a leading historical researcher who exemplifies each approach:

Stokes Research Model

Each quadrant categorizes research by answering whether the research has practical use and whether it is a quest for fundamental understanding. The answers to these questions defines four categories:

  1. Pure Basic Research (Bohr Quadrant) – Curiosity driven research that is directed at seeking foundational knowledge without consideration of practical use characterized by the work of Niels Bohr.
  2. Pure Applied Research (Edison Quadrant) – Pure applied research that is directed at finding a solution to a real problem with no interest in explaining the underlying scientific phenomena characterized by the work of Thomas Edison.
  3. Use-Inspired Basic Research (Pasteur Quadrant) – Research that is directed at expanding basic scientific knowledge in order to meet pressing societal needs characterized by the work of Louis Pasteur. DARPA is a leading example of an organization that has adopted this type of research with results demonstrated by their achievements as described in Dugan and Gabriel’s article.
  4. Unnamed Quadrant – Research that is neither scientifically interesting or useful was left unnamed.

Stokes’ model suggests that Canada’s approach to R&D funding at universities tends towards Bohr’s quadrant which is not clearly driven by practical use – although eventually it may be commercialized it is not at the speed-to-market demonstrated by DARPA in Dugan and Gabriel’s article.

Reorienting Canada’s NRC

The Canadian federal government has begun to make changes by reorienting NRC to focus on commercialization and is working to consolidate the many government R&D funding programs. This is akin to emphasizing Pasteur quadrant research in the Stokes’ model.  Also the federal government is seeking to leverage defence procurement through key industrial capabilities for better economic outcomes. Although far from a DARPA model this approach is linking a need to the drive research.

While the government is moving the right direction there has been significant push-back from university researchers who feel that pure basic will be harmed by focusing more on commercialization. Ongoing pressure by the Alberta government to change the university research system to foster more commercialization is running into increasing resistance from academics. Unfortunately the government-university debate is highly emotive and often presented as a black or white, either-or type situation by the university researchers. The Stokes’ research model suggests that Canada could take a more holistic view of allocating research funds. The Stokes’ research model also provides a means to take a more balanced approach by establishing how university R&D research investments would be allocated between the three quadrants.

Recommendations

Viewing Canada’s poor innovation performance using Stokes’ research model suggests several recommendations:

  1. Canada needs more Pasteur quadrant research and bring clarity/balance to how R&D investments are allocated to each of the Pasteur, Bohr, and Edison quadrants.
  2. To implement recommendation 1 a balanced team of leading thinkers and public/industry engagement should create and prioritize a list of pressing needs whose solution would create economic benefits and national/societal good for Canada.
  3. National priorities and industrial strategies should be aligned as previously discussed on this blog.
  4. Several grand challenges (not solutions) be selected from this list that should receive significant funding employing a DARPA style approach.
  5. Innovation performance metrics that measure time to market should be incorporated into the current innovation scorecard that has deficiencies.
  6. Adopt the DARPA approach (described very well by Dugan and Gabriel) to achieve faster-time-to-market results for Canada’s pressing needs identified in recommendation 2.

In terms of a balanced portfolio of R&D investments in Canadian universities more work is needed to determine what the optimum balance should be between Pasteur, Bohr, and Edison quadrants.