Category Archives: SME Innovation

Explores how SMEs innovate versus large or multinational brands innovate.

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.

 

Innovation Demand Side Research Matching

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Matching the supply side of innovation with the demand side can be difficult for university research. TEC Edmonton has hosted a series of  Reverse Trade Shows with the Glenrose Rehabilitation Center for university entrepreneurs to understand practical rehabilitation problems in need of new solutions.

The reverse trade show approach demonstrates how to improve economic outcomes for university research stuck in the lab.  Researchers often have difficulty: connecting with industry; identifying where to direct their commercialization focus; and understanding industry needs. By bringing the innovation demand and supply sides together entrepreneurs can refine their product development thinking, target pivots, and ultimately shorten the time-to-market while governments can improve their return on research investments with better economic outcomes.

For Alberta’s early stage Advanced Technology Sectors broader application of the reverse trade show approach should be encouraged to improve alignment between Alberta university research and each of the province’s jurisdictional advantages in: energy; the environment; petrochemicals; forestry; agriculture; and healthcare leveraging research strengths in biotechnology, nanotechnology, and ICT.

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.

Strategies To Manage Uncertainty In R&D Projects

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Canadian firms spend very little on R&D. Risk adversity is a leading reason for business leader’s preference for investing profits in M&A activities rather than growing the core through R&D, innovation, and new product development. R&D projects or projects with development work almost always suffer from schedule and cost overruns so business leaders avoid the trouble and invest profits in ways that they understand and feel are more predictable. The problem is that no new value is created and is quite often destroyed with M&A. Firms that can effectively manage uncertainty in R&D projects can achieve higher profits, growth, and improved competitiveness.

How can firms better manage uncertainty in R&D, new product development, and innovation?  The project constraint triangle is a helpful tool for R&D project managers to develop proactive strategies to manage uncertainty in R&D allowing business leaders to make wise investment decisions with effective risk mitigation and achieve their strategic business goals.

Product Development Project Constraint Triangle

The product development project constraint triangle helps to understand how to manage the impact of uncertainty in R&D projects, new product development, and innovation. The project constraint triangle is illustrated below:

Product Development Project Constraint Triangle

Most project managers understand this constraint triangle very well – project outcomes are constrained by scope, resources, and schedule.  Project outcomes are viewed simultaneously both externally, from the market’s perspective, and internally, from the firm’s perspective. The market wants value (performance, quality), at a good price, and when they need it. The firm wants profitable projects (efficient expenses) at acceptable risk leveraging their resources (core competencies in people, process, tools, and intellectual property).  Project managers continually trade-off cost and schedule to achieve project outcomes in normal projects with low to moderate risk in the application of normal project &risk management methods with schedule buffers and budget risk contingencies.

In the case of R&D projects, new product development, and innovation uncertainty and the resulting risk is much higher.  Development uncertainty occurs in scope with effects impacting schedule (schedule overruns) and resources (cost overruns). Firms with low risk tolerance usually stop here. The project constraint triangle though helps us to clarify management approaches for lowering uncertainty in R&D projects and insight into how firms can better manage uncertainty.

Uncertainty Management Strategies

The project constraint triangle define the trade-off space for project managers and reveals several strategies for managing uncertainty in R&D projects. The strategies are:

  1. Fix Resources + Fix Scope -> Vary Schedule
  2. Fix Scope + Fix Schedule -> Vary Resources
  3. Fix Schedule + Fix Resources -> Vary Scope
  4. If Able Contractual Relief Valves: Scope Relief, Schedule Relief, Resource Relief.

We often implicitly understand these alternatives but don’t explicitly state them nor proactively exploit them to their full potential for their improved business outcomes through better mitigation. Our business assumptions also can impede how we might exploit them to their full potential. We also need to consider the market context for how we might exploit these strategies in business-to-consumer, business-to-business, and business-to-government markets.

These strategies ultimately decide where the impact of uncertainty is absorbed in mitigation. This is the key to proactively managing the impact of uncertainty rather than just reacting too late.

Strategy #1: Fix Resources + Fix Scope -> Vary Schedule

This is the default strategy for most firms where uncertainty in R&D projects is absorbed when schedule buffers are exceeded by extending the schedule (ie. schedule overrun). The schedule overrun may then cause cost overruns from the continued involvement from the ‘standing army’ assigned to the project who must deliver the fixed scope beyond the budget risk contingency. Inexperienced firms fall into this trap and further reinforcing their risk adversity.

Resources are fixed in R&D projects because R&D staff are often constrained by the finite and limited number of internal staff with unique knowledge, skills, and experience and labour market constraints from engineering or specialist shortages. Cost savings by reducing R&D staff levels further constrains R&D project managers during difficult times.

Scope is fixed by the market requirements process leading to a product specification and customer needs definition.  Project planning processes require a precise scope definition to permit solution definition, estimation, and scheduling resources.

Implicit assumptions in this strategy are that R&D teams can’t find additional productive resources when needed to deliver the project and the project scope is sacred. When uncertainty arises we need to wait for our fixed resources to become available and if their work is on the project critical path a schedule delay results. R&D project managers often become the ‘scape goat’ when all available project buffers are gone.

Strategy #2: Fix Scope + Fix Schedule -> Vary Resources

This strategy is based on the assumptions that the scope can’t be changed and the project deliverables must meet a certain date. Uncertainty is absorbed by adding more resources and therefore cost to the project. Market driven firms in highly competitive industries are extremely sensitive to schedule so must fix the schedule so are more likely to adopt this strategy. Firms realize that they can’t go it alone to achieve their strategic goals.

Additional resources can be added by several methods:

  • Subcontracting R&D work packages to access productive resources with specialist knowledge.
  • Partnering with another firm with applicable core competencies.
  • Collaboration with university or R&D institutes to access resources.

The suitability of these approaches is determined by the project profitability (and profit sharing), responsiveness and alignment with other business entities, and understanding the critical path of the R&D project schedule. Internal resistance often impedes outsourcing R&D as does the ‘not designed here’ behaviour driven by the belief that specialist knowledge does not exist in other firms.

Strategy #3: Fix Schedule + Fix Resources -> Vary Scope

This strategy is based on challenging the assumption that scope can’t be changed. The schedule date is fixed and limited R&D resources are fixed so uncertainty is absorbed by backing off of the scope promises tied to where uncertainty is impacting the project critical path.

Scope reduction methods that can absorb the impact of uncertainty are:

  • Minimum viable product approaches.
  • Spiral product development approaches that offer future upgrades based on solutions to uncertain elements of the product concept.
  • Differentiating between must-haves and nice-to-haves.
  • Prepare upfront alternative ‘plan Bs’ for uncertain elements of the product.
  • Specify functions not solutions to provide technology trade-off spaces for design decisions.

Unfortunately R&D projects often get locked into contracts that drive precise scope definition without building in scope reduction mechanisms.  Firms become fixated on certain solutions and become blind to alternatives.  Firms also assume that customers won’t want a partial product even though the customers may not even be aware of the product concept.

Strategy #4: Contractual Relief Valves: Scope Relief, Schedule Relief, Resource Relief

In certain markets, such as government defence markets where novel scope is required, contractual relief valves are used.  Scope is also often added to defence contracts after contract award as security threats change in response to world events resulting in opportunities for schedule and cost relief.  Rarely is scope reduced to meet budget and schedule when uncertainty threatens to use up project buffers.

Contractual relief is also employed in business-to-business markets as customer needs change after contract award.  For consumer markets though contractual relief is not applicable requiring R&D project managers to proactively provide trade-off margins to work within the project constraint triangle long before market launch.

In a rapidly changing world relief valves are becoming increasingly important to build into R&D projects upfront in order to achieve business objectives.

Lessons For Proactive Management of Uncertainty in R&D Projects

How can we use the insight provided by the project constraint triangle to manage uncertainty in R&D projects better? Firms should develop a hybrid application of these strategies appropriate for your firm and your market and consider the following:

  • Draw out and challenge underlying assumptions influencing uncertainty mitigation methods in R&D projects in your firm. This may point to the need for broader cultural change as these may be deeply rooted in your employee’s underlying beliefs.
  • Build mechanisms for scope relief up front in the R&D project plan by recognizing that uncertainty may exceed original plan or the market may have changed since the project was started. Don’t default to strategies that default to absorbing uncertainty by schedule and cost overruns.
  • Adopt project risk management methods for novel projects.
  • Activities with high uncertainty need to be removed from the critical path of the project either through the solution choice or realistic technology road mapping that can underpin a spiral development path.
  • Higher percentage of reuse to achieve the scope. Focus new development areas that limits uncertainty to 10-20% and build in schedule buffers and risk contingency to fit the selected percentage.
  • Investment of time and effort to develop productive subcontractors well ahead of the R&D project because firms can’t go it alone in today’s markets. Invest in familiarizing them in your work processes, building personal connections with R&D staff to understand strengths, and improving communications.
  • Early development of partners with compatible strategies well ahead of the R&D project.
  • Building solution alternatives (plan B and C) to achieve the scope into the R&D project plan.
  • Early collaboration with university and R&D institutes off the critical path of the project.
  • Schedule buffers and budget risk contingency need to fit the level of uncertainty present in the project.

These approaches speak to the need for a broader and more holistic approach to how R&D, innovation, and new product development support your firm’s business strategy. Failing to develop partnerships and supplier relationships in advance doesn’t position R&D projects for success. Constraining the proportion of development activity to manageable levels while taking a longer term perspective also frees up R&D project managers to make effective trade-offs in the project constraint triangle. Experienced firms tend to understand these trade-offs better and build these strategies into their R&D, new product development, and innovation investments.

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%).

Regulatory Burden On SMEs

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The cost of regulatory compliance is often identified as an obstacle to innovation and growth such as was observed in the 2009 Industry Canada SIBS study. The Small Business Branch of Industry Canada recently shed further light on regulatory compliance cost issue in a small business regulatory compliance cost report.

Small Business Regulatory Compliance Cost Report Conclusions

The SBB study was based on a survey of  10,477 Canadian SME respondents in 2011 looking at the regulatory compliance costs from federal, provincial, and municipal regulations. The main conclusions were:

  1. Regulatory compliance cost was $4.76B in 2011 or $3,500 per business, $370 per employee, or 0.29% business sector revenues.
  2. The real cost of regulatory compliance decreased by 0.3% since 2005 as a share of economic resources.
  3. 6% of SMEs considered regulatory compliance to be a serious obstacle to success.
  4. 72% of SMEs did not even consider it to be a moderate obstacle to success.
  5. On average SMEs submit two government forms per month taking them on average 3 hours per month to complete or less than an hour per week.
  6. Firms consider paperwork to be the most time consuming with tax related requirements remaining the biggest challenge.
  7. Small businesses continue to bear a disproportionate share of the national burden of regulatory compliance and regulatory burden initially increases as a firm grows and hires employees before decreasing once economies of scale are reached.
  8. 65% of firms indicated cost of regulatory compliance was at an acceptable level in 2011 and 8.5% that cost was much higher than an acceptable level.

Compliance cost categories used were: payroll remittances; record of employment; T4 summary/Individual T4s; Workers Compensation Remittances; Workers Compensation Claims; Federal/Provincial Business Income Tax Filing; Federal/Provincial Sales Taxes; Corporate Tax Installments; Corporate Registration; Mandatory Statistics Canada Surveys; Municipal Operating Licences and Permits; Provincial Operating Licences and Permits; and Other Federal , Provincial, and Municipal Regulations.

Regulatory Issues Impeding Innovation

The regulatory compliance cost study is useful to understand the regulatory internal cost of taxation, permitting, and labour related regulations, particularly for labour intensive service industries, but really does not help to understand the market specific regulatory costs facing product/service SMEs that could impede innovation.

In terms of innovation, regulatory costs of certification, safety, and environmental compliance are not faced by most of these SMEs who are business-to-consumer and business-to-business service industries. The sectoral distribution of respondents were: 10.7% manufacturing; 19.5% retail trade; 45.7% professional, scientific, and technical servicers; 7.9% accommodation and food services; and 16.2% other services.  Potential high growth SMEs who would face market facing regulatory costs impeding innovation would fall within the manufacturing (10.7% of respondents) and possibly some percentage of the professional, scientific, and technical services (45.7% respondents) but even these are likely not end market facing.

Unfortunately the study did not look deep enough into innovation impeding market regulations or the impact were averaged out from the disproportionate number of service companies. The cost category ‘Other Federal, Provincial, and Municipal Regulations’ either does not appear in most tables of results or are a negligible amount of the total which may have been due to the survey structure.

The root cause of innovation impeding regulations are market segment specific (ie. air transportation, rail transportation, medical devices, personal telecommunications, etc) with complex interactions and market dynamics requiring a very different survey to the one prepared by SBB pertaining to the internal costs of taxation, permitting, and labour related regulations. Although useful, these internal regulatory costs are likely only a small portion of regulatory costs of market facing firms who adopt innovation as a strategy.

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.

Facing and Overcoming Innovation Uncertainty and Risk

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Business growth requires leaders to identify opportunities, evaluate their potential and risks, decide amongst the most promising, and executing for results. Growth strategy options include: organic growth, growth through acquisition, or growth through alliances.  Growth can be achieved through product / market choice (concentrated, vertical/horizontal, diversification), white space, or incremental/substantial/breakthrough innovation.

Uncertainty and risk associated with innovation opportunities are often cited as barriers to growth. The inability to overcome uncertainty and risk when innovating was cited as the leading reason for slow Canadian SME growth as confirmed by the 2009 SIBS study and recently by Deloitte.

The 2009 SIBS study reported uncertainty and risk as the largest obstacle (47% of firms) to innovation regardless of the type of firm. Steps taken to overcome uncertainty and risk as an obstacle were also reported to be one of the least effective (38% of firms reporting uncertainty as an obstacle).

The Deloitte study reported that “Canadian business leaders were substantially more risk averse than U.S. leaders, and more reliant on government assistance to pursue new projects” and that Canadian firms “seem unable to deal with these factors successfully” moreover “as Canadian firms mature, they become less likely to engage in the kind of activities that contribute to rapid growth”. The Deloitte study suggests that to deal with risk “firms have the power to mitigate these obstacles by hedging and compensation tactics”. The study also reported that low R&D spending, poor export intensity, lack of market diversification, low access to market diversification, and attitudinal preferences were also major inhibitors to growth.

Innovation though is a non-linear process where the value of success can be much higher than the cost of failure. Global markets are increasingly uncertain.  What approaches beyond hedging and compensation tactics can be used to deal with uncertainty to improve Canadian business leaders confidence?

Adaptability

An interesting view of how to grow in the face of uncertainty comes from Max McKeown who wrote Adaptability: The Art of Winning in an Age of Uncertainty. In this book the author identifies a number of rules for winning in the face of uncertainty.  Chief among these applicable to Canada is that stability is a dangerous illusion. He defines failure as the failure to adapt and success as successful adaptation to cope or win – defining degrees of adaptation outcomes being collapse, survival, thriving, and transcendence.

The author observes that there are three steps to adaptability:

  1. Recognizing The Need To Adapt – The ability to feel or know something is wrong, timeframe of change depends on the situation and can be long or extremely fast, and some find out too late by missing signals or are simply complacent.
  2. Understand The Adaptation Required – Observing that there is often no agreement on adaption requires, culture/rules/tradition can be barriers, learn what works from failure, imagination is needed to see alternatives.
  3. Do What Is Necessary To Adapt – Sometimes adaption must be provoked, strong action to overcome barriers, need to focus on changing the nature of the game, and build influence to make changes.

The rules for winning in the face of uncertainty organized by the three stages as suggested by the author are:

Recognize The Need to Adapt

  • Play your own game – If losing find a way to change the game – no one way to win
  • All failure is a failure to adapt – didn’t recognize it, didn’t understand what adaption required, did not do what was necessary to adapt.
  • Embrace unacceptable wisdom – speaking opposite to the prevailing wisdom creates opportunities.
  • Know when to break the rules – rules contain knowledge & experience, rules also contain prejudice or mistaken beliefs, rules may no longer be applicable.
  • Stability is a dangerous illusion.
  • Stupid survives until smart succeeds – ‘we were wrong’, biases to remain on course of action.

Understand Necessary Adaption

  • Learning fast is better than failing fast.
  • Plan B matters most – adaptability doesn’t kick in automatically.
  • Free radicals – radicals influence the group – stir the pot – counter complacency.
  • Think better together – collective support important.
  • Get a strong partner – diverse skills and talents increases adaption effectiveness.

Adapt as Necessary

  • Never Grow up – organizations get old, grow up, and lose edginess – remain curiosity driven.
  • Hierarchy is fossil fuel – Locks people in boxes, resists learning, and institutionalizes self-interested behaviours.
  • Keep the Ball – reduce the game down to its fundamental components that captures the most important features of the system to improve – compete outside the game.
  • Swerve and swarm – Combining swerving, avoiding dominance of the obvious idea, and swarming, to bring mass participation to finding non-obvious answers is powerful.
  • Get Ambition on – the future gives direction and unlimited energy to change – ambition is a way of seeing the future – ambition gets us started.
  • Always the beginning – Advantage from adapting first, winners acquire resources and knowledge.

Creaction Method

The creaction (short for creative action) method to move forward in the face of uncertainty was proposed by Leonard Schlesinger, Charles Kiefer, and Paul Brown in Just Start: Take Action, Embrace Uncertainty, and Create The Future. These authors observed that most business leaders have worked in a world where the world was predictable and that the future could be forecasted, plans made, resources gathered, and then execute the plan to make it happen.  The core assumptions being that the future will behave like the past so plans can extrapolate current reality moving forward. The authors suggest that the world that is changing fast will become increasingly unpredictable so business leaders need a new way of thinking to drive business growth.

Borrowing from entrepreneurial behaviours, the authors propose the creaction method to succeed when markets are unpredictable. The creaction method is:

  • Act (with a modest goal as a guide);
  • Learn (from the action); and
  • Build (off learning) and then act again.

Creaction starts with a desire to achieve a goal with a purpose no necessarily a passion. The authors suggest acting quickly with the resources have at hand and never more than you can afford to lose if things don’t work out defined as an acceptable loss. A small bet rather than betting the firm. When considering acceptable loss the authors suggest assets at risk are: money, time, professional reputation, personal reputation, and missed opportunities and bounding the investment so that if the option fails it fails cheaply. Enlist the support of other like minded people who share interest in the goal and purpose. When learning from the results of the small step the authors note that “creation is all about exploiting the contingencies and leveraging the uncertainty by treating unexpected events as an opportunity….treating surprises as a gift….running headlong into a problem and then solving it can give you a barrier to the competition”. The book provides useful implementation advice.

Implications For Canada

Max McKeown’s observations on adaptability are particularly poignant for Canada as many SMEs that have stopped growing may have not recognized the need to adapt given the predominance of the resource industries in the overall economy. The implication being that stability is not only a dangerous illusion but that the voices that oppose the prevailing wisdom are potentially being ignored. SME business leaders should stress test their business assumptions and consider potential avenues for change and adaptation. The creaction method provides a means for SME business leaders to take small steps, learn, and adapt to develop growth strategy. Future posts will explore other approaches to overcome risk and uncertainty.

SME Innovation Benchmarking

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SMEs interested in benchmarking their innovation performance should evaluate the IMP3rove Assessment methodology. The IMP3rove methodology is particularly useful if SMEs want to adopt innovation as a strategy but don’t have a structured framework to decide where to make investments when resources are tightly constrained.

IMP3rove Innovation Model

The IMP3rove Assessment methodology uses an innovation model based on the A.T. Kearney ‘House of Innovation’ as illustrated below.

ATKearney House of Innovation
A.T.Kearney ‘House of Innovation’

IMP3rove Innovation Benchmark

Interested SMEs can either perform an un-assisted or assisted innovation assessment. The un-assisted assessment uses an on-line tool. An assisted assessment is supported by a certified consultant who can provide a validated assessment report and improvement opportunities to deliver results. The assessment is benchmarked against a growing database of SMEs in a variety of industry sectors.

Benefits of IMP3rove

A key benefit of this approach is the direct applicability of the IMP3rove assessment results to SMEs because it is targeting SMEs and quite a few SMEs have participated in this survey already. In the absence of a mature innovation management approach innovation benchmarking can be susceptible to unrealistic or ideal models of innovation that will just leave SME management frustrated.  A minor down side of IMP3rove is that it is tied to one form of innovation model where others exist such as Scott Anthony’s Growth Factory innovation model but this model is optimized for large corporations who have the budget for big innovation investments.

SME innovation is relevant today because of slow economic growth and high unemployment in developed countries.  SMEs drive growth and job creation more than large corporations. SMEs should therefore evaluate if IMP3rove meets their needs if they adopt innovation as a strategy.