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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

3) Investment in transformational innovation yields blockbuster growth; and

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

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

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

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

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

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

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

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

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

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

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