Category Archives: Innovation

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

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

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

The Three Rules For Superior Performance

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

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

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

Long Run Superior Performance

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

2x2 Performance Map 4

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

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

Three Rules For Long Run Superior Performance For Technology Firms

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

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

Paths To Superior Performance – Order Matters

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

2x2 Performance Map 3

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

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

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

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

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

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

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

What Canada Does Well

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

Why Canada Does Not Perform Well

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

Is The Innovation Measurement System Right

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

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

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

Lack of Industrial Strategy

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

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

Canada’s Export Trade Mix Has Changed Dramatically

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

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

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

Innovation Stuck in Universities

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

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

Weak Product Development

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

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

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

Importance of Innovation To Restart Economic Growth

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

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

Innovation in Canadian SMEs

Innovation is a key focus in developed countries suffering from slow growth. The innovation debate often turns to large multinational brands where examples of innovation are readily observable. Small and Medium Enterprises (SMEs) though drive most developed economies and create most jobs. Start-up technology firms typically hold the spot light when it comes to SME innovation. Innovation across the full spectrum of SMEs needs greater attention.

In Canada, the department responsible for economic development is Industry Canada. Industry Canada has begun to track innovation in Canadian SMEs which is shedding light on how the broader population of SMEs approaches innovation. Industry Canada groups innovation into four main categories: product innovation; process innovation; organization innovation; and market innovation. These categories expand the traditional focus on technology innovation to provide a broader perspective.

Industry Canada recently released survey results for SME finance and growth in 2011 which includes data on how Canadian SMEs approach innovation. This survey looked at the private sector, SMEs employing between 1-499 employees, generating between $30K and $50M CAD annual revenue in 2011, stratified by region/industry/size, age, and participation in the Canadian Small Business Financing Program. The sample size was 25,007 and completion rate was 39.8% or 9,977 respondents.

The results revealed that 38% of SMEs introduced at least one type of innovation between 2009-2011. The data indicated that product innovation was the largest category at 24%, followed by marketing innovation at 17%, organization innovation at 15%, and process innovation at 15%. The latter limited focus on process innovation was surprising since it is generally understood that most firms focus on continuous improvement if they spend any time on innovation at all.

The report suggested that for many of these SMEs that the innovation activity resulted in 70% increase in sales and increased their market share by 61%. The overall growth characteristics of the survey respondents in 2009-2011 were: 44% grew by 1-10%; 11% grew by 11-20%; and 8% grew at 20%+ (considered as high growth firms). Interestingly the most common obstacles to growth reported were: cost of inputs at 63%; fluctuations in sales at 52%; and increased competition at 48%.

The report also looked at how the SMEs adopted intellectual property protection in conjunction with their innovation activity. The SMEs used non-disclosure agreements in 9% of cases, trademarks at 8%, trade secrets at 4%, patents at 1.5%, and industrial designs at 1%.

The export behaviour of these SMEs were also explored. Only 10% of the SMEs exported goods and services outside of Canada. From this 10% population, 49% exported goods, 40% services, and 11% goods and services. 33% of SME exporter revenue came from the US, 32% from Europe, 12% Latin America, 10% China, and 12% other Asian countries.

The data suggests that if 38% introduced some form of innovation but only 10% exported their goods/services that the innovation was in response to domestic competition which in Canada is generally understood to be weak. It will be interesting to observe how these results evolve in response to the CETA and TPP trade agreements if they come into being over the next few years.

The 14 Skunk Works Rapid Prototyping Rules

Innovation requires fast learning from rapid prototypes of ideas or new concept alternatives. Innovation is best conducted away from the existing business where new concepts can be explored without restrictions from the current business assumptions and the voices of judgement.

The Lockheed Skunk Works is perhaps the most famous rapid prototyping operation. Indeed Skunk Works name has become synonymous with rapid prototyping. What was their secret to success – 14 Operating Rules.

The fourteen operating rules for the Skunk Works developed by Clarence “Kelly” Johnson in the 1950s serves as great model for setting up a rapid prototyping capability. The 14 Operating Rules are:

1. The Skunk Works program manager must be delegated practically complete control of his program in all aspects. He should have the authority to make quick decisions regarding technical, financial, or operational matters.

2. Strong but small project offices must be provided both by the military and the industry.

3. The number of people having any connection with the project must be restricted in an almost vicious manner. Use a small number of good people.

4. Very simple drawing and drawing release system with great flexibility for making changes must be provided in order to make schedule recover in the face of failures.

5. There must be a minimum number of reports required, but important work must be recorded thoroughly.

6. There must be a monthly cost review covering not only what has been spent and committed but also projected costs to the conclusion of the program. Don’t have the books ninety days late and don’t surprise the customer with sudden overruns.

7. The contractor must be delegated and must assume more than normal responsibility to get good vendor bids for subcontract on the project. Commercial bid procedures are often better than military ones.

8. The inspection system as currently used by the Skunk Works, which has been approved by both the Air Force and the Navy, meets the intent of existing military requirements and should be used on new projects. Push basic inspection responsibility back to the subcontractors and vendors. Don’t duplicate so much inspection.

9. The contractor must be delegated the authority to test his final product in flight. He can and must test it in the initial stages.

10. The specifications applying to the hardware must be agreed to in advance of contracting.

11. Funding a program must be timely so that the contractor doesn’t have to keep running to the bank to support government projects.

12. There must be absolute trust between the military project organization and the contractor with very close cooperation and liaison on a day-to-day basis. This cuts down misunderstanding and correspondence to an absolute minimum.

13. Access by outsiders to the project and its personnel must be strictly controlled.

14. Because only a few people will be used in engineering and most other areas, ways must be provided to reward good performance by pay not based on the number of personnel supervised.

Operating rules honed over many years during a period of great change and uncertainty for a rapid prototyping operation that produced some of the most innovative aircraft of the twentieth century. Although some are specific to the military aerospace domain most remain relevant today.

Delivery vs. Innovation – Getting The Right Balance

Research by Bansi Nagji and Geoff Tuff published in the Harvard Business Review provide some key insight into ‘The Delivery – Innovation Paradox’.

These researchers provide a useful framework to guide business leadership innovation investment allocation decisions to get the balance right. The framework uses three main innovation allocation categories: core, adjacent, and transformational investments. Selecting the best mix for the business achieves superior share price performance. The mix decision is relevant  to ‘The Delivery – Innovation Paradox’ because core initiatives most closely align with a delivery focus that sustains profitability while adjacent and transformational initiatives align most closely with growth and competitiveness although arguably there are some underlying interrelationships.

The article provides some important guidelines to getting the right balance between delivery and innovation. Some of the key ones are:

1) Share price premiums of 10% to 20% can be realized with an innovation resource allocation mix of 70% to core, 20% to adjacent, and 10% to transformational although the authors caution this is based on an averaging of their observations;

2) The long-term cumulative return on innovation investment is inverse of the allocation mix given in 1);

3) Investment in transformational innovation yields blockbuster growth; and

4) Allocations should be optimized for the industry, competitive position, and a company’s stage of development.

The article emphasizes that execution is crucial to achieve intended results but the innovation allocation mix clarifies a key lever for business leadership decision-making.

Necessity The Mother of Invention – Do We Need Any More Big Ideas?

‘Necessity….The Mother of Invention’ expresses clearly a key driver of innovation. Compared with several decades ago it seems that ‘necessity’ and big ideas are not as predominant today. Cold war and the space race, rebuilding post second world war, the energy crisis, faster and higher supersonic air travel, and more recently the genome project were all drivers of significant innovation.

Is there a shortage of ‘necessity’ in our modern world? Do we need anything today or do we have everything? Are we missing ‘necessity’ in the noise of a complex world? Is ‘necessity’ just different or more subtle today? Have we moved from ‘necessity’ to ‘nice to have’? Are we becoming complacent? ‘Invention as the mother of necessity’ has taken root in consumption economies but these inventions have not solved big problems like curing cancer or feeding the world’s hungry.

The Economist recently questioned if the idea machine was broken. The article takes an interesting long term view of major innovation events in world history suggesting a general sense of innovation pessimism has emerged in developed countries. One underlying root cause may be a period of technological stasis resulting in an innovation plateau because we may have run out of big ideas that can change the world. Evidence of the technological stasis was identified threefold as: diminished need to use labour and resources in better ways; reduced level of invention activity; and the observed rate of progress seems to have slowed particularly in our households, transportation speed, and medicine.

The Economist goes on to note that although the information age and the web has taken center stage in technology development economists such as Robert Solow have noted that information technology has not made a significant impact in economic productivity. The Economist also suggests reason for optimism because the 2008 Financial Crisis may have masked the productivity improvements from the burst of information technology in the 1990s. Further reason for optimism along these same lines is the tendency for a lag in results from the introduction of new technology can take up to 15 years and full exploitation can take longer so the impact of the information technology should become more predominant in productivity statistics in the near future. Using electrification as a example The Economist also noted that innovation implementation can be lumpy but in the long term history proves that it will continue to drive productivity improvements.

New drivers of ‘necessity’ may emerge from the resulting dynamics of labour and resource costs as the global economy recovers from the structural break following the financial crisis. Refocus on climate change, water and food shortages with population growth, and repatriation of manufacturing with cheaper energy prices are leading candidates. Another driver may be the re-emergence of ideological competition in the global economy. The competitive political pressures of the cold war have subsided as the world moved from a bipolar world to a unipolar world resulting in a weaker US innovation machine. The absence of government investment like the Apollo program driving innovation is a good example. The debt crisis has certainly diverted developed governments attention away from longer term innovation. As the new multipolar world emerges perhaps new competitive races like seen in the cold war may also foster more ‘necessity with urgency’ to drive fresh waves of innovation.

The ‘Delivery – Innovation’ Paradox

The conflict between the pressure of immediate business demands and activities that position the company for the future is a central tension in most engineering organizations. Engineering leaders have all experienced situations where we feel that we do not have enough time to think, develop better ways of working, or develop new products and services. Not enough ‘head room’!

The ability of the engineering organization to deliver primarily contributes to the profitability of the firm. The ability of the engineering organization to innovate contributes to the growth and competitiveness of the firm. All are critical to the long run sustainability of the business. We call this the ‘Delivery – Innovation’ paradox.

Delivery Innovation Paradox

Getting the balance right is crucial for any business. Focus too much on delivery and profitably go out of business from tired products, a surprise move by a rival, or a market change. Focus too much on innovation and become unprofitable while growing too fast with too many new products or unwisely investing in poor choices for development activities.

This blog will explore the ‘Delivery – Innovation’ paradox in engineering and knowledge work in future posts.