Mind The Gap

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

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

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

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

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

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

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

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

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

The Missing M in SME

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

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

Why Is ‘The Missing M’ Problem Important

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

What Is ‘The Missing M’ Problem

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

What Is Causing The Missing M Problem

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

Various causes suggested, but not fully substantiated, include:

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

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

How Does Canada Compare With Other Resource Economies

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

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

Resource Economy Growth Model

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

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

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

Main Conclusions

McKinsey concluded that in 2011:

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

How Does Canada Compare

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

Future of Engineering Education

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How engineer’s are educated in an increasingly complex world is of great importance to developing nations. STEM participation rates are also dropping which will have a big impact on their future competitiveness. Education budgets are under pressure as funds are being directed towards supporting an aging population. At MIT’s Sociotechnical Systems Research Center (SSRC) Professor Daniel Hastings, the Cecil and Ida Green Education Professor of Aeronautics and Astronautics and Engineering Systems at MIT, recently presented Beyond The Engineer of 2020 giving his views on the past, present, and future directions of engineering education in the US which is largely applicable to all developed countries.

Specialism vs Systems Holistic Thinking

The biggest challenge for educating future engineers in a world with rapidly expanding knowledge, complexity, and uncertainty is balancing the tendency to focus in narrower specialty engineering disciplines while still maintaining the a practical understanding of the ‘big picture’ system in a real world context – the “T” shaped person. Industry requires “T” shaped engineers to sustain competitive advantage.  In support of this trend Hastings’ described that the attributes of future engineers should include:

  • Strong analytical skills
  • Practical ingenuity and creativity
  • Good communication skills
  • Business management and leadership skills
  • High ethical standards, professionalism
  • Dynamic, agile, resilient, flexible
  • Lifelong learner
  • Able to put problems in their socio-technical and operational context

Engineering programs are constrained in time, cost, and faculty experience so fully developing a “T” shaped engineer has and will continue to be challenging in a four-year degree without fundamental change. Hastings provides several examples of how change is being implemented at several US universities.  Hastings also described recent recommendations to: introduce engineering students to the iterative design-build-test paradigm earlier in the program (think Lean Startup); hire more industry experienced faculty; and professionally develop existing faculty.

Hastings’ diagram of skills-attitudes-knowledge capture very well how modern engineering education has moved away from skills based practical application to knowledge or science based emphasis degrading most new entry engineer’s practical skills. The trend towards more research oriented universities has supported this trend and expanded the gap between engineering university programs and technical college programs who are much better prepared to enter the work force and be productive from day one.

New Learning Tools

The broad use of digital and mobile technologies has made the mankind’s collective knowledge available to everyone with an internet connection levelling the world’s playing field. The importance of on-line learning as an enabler of change is beginning to make impact.

Less structured and decentralized learning methods were recently explored by Joshua Davis in Wired magazine.  Davis observed that traditional school emphasis on reading, writing, and arithmetic was not preparing students for modern work that place high importance on developing teamwork, problem-solving, and interpersonal skills. Davis also observed that new teaching methods are oriented towards knowledge building from curiosity-fuelled exploration.

Hastings looked at the impact of on-line learning tools on engineering education in terms of rethinking the pedagogy of engineering education, opportunity to share knowledge world-wide, and opportunity to change the cost of engineering program delivery. Hastings observed that on-line education enables alternate pathways for student learning, modular learning packages that does not necessarily fit the semester structure, and increased interaction. He also talks about the seamless integration of learning from under grads to alums, blended education, and demand pull learning.

The importance of reading, writing, and arithmetic will never decline because cases of poor writing skills are well-known in most industries. The key challenge is how to efficiently and effectively develop a broader set of skills in the time and budget available and certainly on-line learning is clearly making this possible.

Gender Demographics Remains a Challenge

Finally, the continued  under representation of women in engineering remains a challenge. Hastings presents some interesting historical trend data (slides 48, 49, 55) suggesting the best ways to improve participation rates are: role models; summer programs; research experiences; professional development activities; academic support & social integration; and mentoring.

Budget pressure on education, global competition, and falling STEM participation rates suggests that engineering education is at a tipping point requiring faculty leadership to chart a radical new course for change based on new approaches, greater interdisciplinary collaboration, far greater industry collaboration, and balanced gender participation if new engineering graduates are to be properly prepared for an increasingly complex world.

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.

Innovation Strategy

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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

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

R&D Spent By Size of Firm

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

Can R&D % Bar Chart

Can R&D % Line Chart

Can R&D $ Line Chart

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

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%).