Wednesday, January 26, 2005

Innovation, How Could That Be Questioned?

As mentioned in previous posts, I regularly read CIO magazine and its regular newsletter. My interest is not usually the technology but the business management and leadership articles that are placed there to help round out those readers who have been mainly technologists.

This month an article by Christopher Koch named “Innovation Ships Out” puts forth the fact that in the technology value chain outsourcing has incrementally grown ( see “Strategic Incrementalism” in the Jan 19, 05 post of this blog) to include product development. The supposition that is added to the fact is with product research and development outsourced, “Could this be the end of America’s innovative edge in electronics?”

“Some economists say the outsourcing of manufacturing – and now design – is the leading edge of a longer-term trend toward reduced innovation and competitiveness among U.S. companies.” … this could have a “withering effect on these companies’ ability to create the next breakthrough, …”

What is innovation? A straight definition from Merriam-Webster is “the introduction of something new”. In business innovation is a systemic approach to hitting targets, goals, objectives, new products, new processes that no one else even sees.

To Live-The-Dream, innovation means getting in the weeds and driving the details of piloting, modeling and simulation to create value for the customer. The SINGLE MOST VALUABLE item a business has is its customer’s order (See Jan 11 05 post, Rule #2). If you believe that your battle is to stay focused on that order and continuously improve that order, and you model, pilot and simulate that order you will innovate that order.

The ability to create, change, and improve is not something you just do, it is something a business must live and nurture. Many innovations come from the unexpected or are counterintuitive and those situations come from knowing your basics and responding to changes in customer’s requirements with speed, efficiency and flawless execution.

In other words, push the envelope. In the last 240 years where have the risk takers, the explorers, the entrepreneurs, the capital creators in business been from? Right here in the United States of America. “…the American archetype. ….energetic, brash, hugely ambitious, money-conscious, none to scrupulous, far sighted and ahead of his time, with a passion for the new and, not least, a streak of idealism which clashed violently with his overwhelming desire to get on and make a fortune” (Paul Johnson, “A History of the American People”). This is who we are, and there are few like us.

What is the mainstay of the U.S. economy? Productivity. Our productivity has grown by 4.2%, 1.9%, 4.8%, and 4.5% from 1999 -2003 respectively (2004 numbers will be out in Feb. 05). For years the U.S. has been among the leaders in productivity each and every year. That is innovation!

Consider that 20+ years ago logistics costs in America were at 20% of GNP. That meant that nearly 20 cents of every dollar was spent on inventories, transportation, warehousing and distribution. For several years now logistics as a percentage of GNP in the United States has been below 10%. When you consider the growth and the size of our economy through that period, run the numbers and the savings has been and continues to be ENORMOUS. That has and is continuous innovation.

The CIO article continues noting that spending on R&D by US companies and the portion of the spending targeted toward innovation have and are declining. Gregory Tassey of NIST ( ) states that this country has the view that private industry is capable of making the necessary investments in R&D to keep the U.S. competitive while other governments are funding research into private businesses for innovation. Could our view be right and all the rest of the world be wrong?

Alexander Hamilton was probably the one individual most responsible for the financial and commercial system we have lived under for over 200 years. He said, “The maxims of the United States have hitherto favored a free intercourse with all the world. Commercial enterprises have only desired to be admitted to it upon equal terms. The United States has nothing to fear from commercial engagement with the rest of the planet."

“How long can U.S. companies continue to innovate when they no longer manufacture or update products?” asks Koch.

How did we get here and how do we keep going I would ask? Capital and capacity are key ingredients of innovation. We are the world leader in capital formation and when anything has become a commodity we send it somewhere else (outsource). That is where our capacity to innovate comes from.

People who believe that breakthrough product development requires manufacturing and research to be physically together have missed several things. Technology and the internet have reduced the value of geography such that multiple activities can function together without being in proximity to each other. Simulation can create things in peoples homes while wearing pajamas that are to be the next generation of innovations.

Thinking must move beyond the industrial age.

The United States is the most innovative economy in the world. Our culture is change (though individual human nature resists it). We have always created the new to replace the old. There is pain in doing so, there is cost in doing so, and there is risk in doing so.

Anyone not prepared to take risks cannot win (a war) says Winston Churchill.

Are we about to lose our innovative edge? Only if we let our pain, our costs,, our risks and our challenges become our fears.