Innovation in Crisis

Innovation in CrisisOver the weekend I was enjoying my cappuccino and suddenly it started to taste bitter, not from the actual coffee but from what I was settling down to read.

I enjoy a lot of what Steve Denning writes and his series in nine parts on “Why Amazon Can’t Make a Kindle in the USA” (start here http://onforb.es/oK1Cxh ) has really hit home on the seriousness we are facing in Western countries over innovation capabilities.

He mentions the “decades of outsourcing manufacturing have left U.S. industry without the means to invent the next generation of high-tech products that are key to rebuilding its economy”, as noted by Gary Pisano and Willy Shih in a classic article, “Restoring American Competitiveness” (Harvard Business Review, July-August 2009).

The pursuit of profit is killing innovation

Last Friday, 18th November, he followed this series of articles with a further one on a talk given by Clayton Christensen entitled “How Pursuit of Profits Kills Innovation and the U.S. economy” (http://onforb.es/rZ7l8U )  and that so much of our basic thinking taught in business schools and promulgated by consultants is partly the cause.

So I was faced with a ‘double sit up’ not a double latte, of Denning and Christensen, and that did more to wake me up than the caffeine intake I was having.

The bottom line is that major segments of the US Economy have been lost, in many cases, forever and that equally applies in Europe.

On the other side of the Pond- the EU and its Innovation Union.

Máire Geoghegan-Quinn, Commissioner for Research, Innovation and Science and Vice- President Antonio Tajani, responsible for industry and entrepreneurship have said: “As we emerge from crisis in the teeth of fierce global competition, we face an innovation emergency. If we do not transform Europe into an Innovation Union, our economies will wither on the vine while ideas and talent go to waste. Innovation is the key to building sustainable growth and fairer and greener societies. A sea change in Europe’s innovation performance is the only way to create lasting and well-paid jobs that withstand the pressures of globalisation. “

With an ageing population and strong competitive pressures from globalisation, Europe’ s future economic growth and jobs will increasingly have to come from innovation in products, services and business models. This is why innovation has been placed at the heart of the Europe 2020 strategy for growth and jobs.

The long list of ‘must do’s’ suggested within the EU recommendations all are shouting after the horse has bolted from the barn. In both Europe and the US we are losing our capacity to innovate as we are rapidly losing our knowledge and experience built up and we are facing a ‘knowledge deficit’ exported over many years to developing countries. This will place these countries even in more a dominating position in years to come.

We may be in a series of financial crisis but the ‘knowledge deficit’ one will be even more damaging to our future prospects.

The real crisis is not the current financial one; it is knowledge application for job creation.

We are simply losing our knowledge to create things close to home we are being ‘forced’ to seek global collaborations as knowledge simply is found and extracted where it is best served. How can we reverse this for many nations needing revitalization as knowledge leads to jobs. For many, we need a massive bailout plan, not for our financial debts but for our growing knowledge deficits.

Any declines, closures and more importantly, as the business firms continue to push to go overseas and chase low cost manufacturing places simply sets off a powerful chain reaction. Expertise is lost, advanced research suffers as more trained people seek meaningful work that relates to their skills and qualification overseas, increasingly in countries outside the US or Europe.

In manufacturing, in significant decline in Europe and the US for many years, those daily interactions between process and engineering leads to new design, fresh thinking to solve problems so knowledge builds up in locations closer to the manufacturing point and then, more businesses are ‘forced’ to locate closer to where the action is. As Pisano and Shih state in their HBR article “In the long term an economy that lacks an infrastructure for advanced process engineering and manufacturing will lose its ability to innovate.”

The argument is we adopt a more strategic approach to innovation.

This I couldn’t agree more with. Innovation must become more of the overarching policy objective, it needs to go well beyond leveraging our strengths, and it needs to draw back in lost knowledge before it is too late. We need to reverse the outsourcing policies driven by short term gain and not accounted for in the total ‘cost and benefits’ that society eventually pays.

We need to alter not only the measuring criteria spoken off with Clayton Christensen’s phenomenon of “driven by the pursuit of profit” in the above mentioned article, it lies in calculating a different ‘rate of return’ (IRR) so well put within this article.

This last article from Steve Denning (re Pursuit of Profits) sums it up

“Thus when a firm calculates the rate of return on a proposal to outsource manufacturing overseas, it typically does not include:

  • The cost of the knowledge that is being lost, possibly forever.
  • The cost of being unable to innovate in future, because critical knowledge has been lost.
  • The consequent cost of its current business being destroyed by competitors emerging who can make a better product at lower cost.
  • The missed opportunity of profits that could be made from innovations based on that knowledge that is being lost.

The calculation of the IRR based on a narrow view of costs and benefits assumes that the firm’s ongoing business will continue as is, ad infinitum. The narrowly-defined IRR thus misses the costs and benefits of the actions that it is now taking that will systematically destroy the future flow of benefits. The use of IRR with the full costs and benefits included would come closer to revealing the true economic disaster that is unfolding”

Different mindsets and different solutions are needed for a better Innovation Union.

At a time when the external environment is highly dynamic, businesses that exist today (irrespective of where they locate) may be gone tomorrow. To survive in this world, a different kind of mindset is needed and if I may say- imposed.

The traditional ways we see our business, in isolation of the dynamics going on around us where profit maximization driven by management’s preoccupation on efficiency at often the cost of real innovation. The drive for cutting costs to meet the quarter and thus losing more knowledge that resides within, and then the consistent outsourcing, this relocating chase, is an eventual death-spiral for many economies. Whole communities that had previously built around ‘knowledge clusters’ suffer and go rapidly into decline and over the long run, simply die and fade away, not relevant any more- gone overseas!

Our real loss of knowledge is beginning to hurt innovation

Our continued loss of knowledge, with our continued uneven recognition of the real value of innovation, will continue to feed this death-spiral unless we can somehow reverse these trends.

Moving more knowledge and the associated assets away from the US and Europe might seem sensible for today’s managers and financial backers but this is exporting knowledge and experience and this makes up innovation, it is where improvement, breakthroughs and future competitiveness come from. We are rapidly losing know-how, it is what is happening that give me greater cause to worry for our long term prospects than the financial crisis. We are losing our competitive positions as any growth in the economy is in investing in knowledge for people to innovate.

How far can we go on this slippery slope as money does quickly follows where knowledge resides, and this is rapidly moving overseas, located increasingly in Asia. Until we recognize this, we can ‘shout’ long and loud but the (knowledge) horse is fast galloping away from us and we will be left with simply pockets of incremental innovation, while others lead, we will simply follow along in their dust.


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Paul HobcraftPaul Hobcraft runs Agility Innovation, an advisory business that stimulates sound innovation practice, researches topics that relate to innovation for the future, as well as aligning innovation to organizations core capabilities.

This entry was posted in Build Capability, Innovation, Leadership, Management, The Economy and tagged , , , , , , , . Bookmark the permalink.

2 Responses to Innovation in Crisis

  1. David Delong says:

    This post is right on! The question is what can leaders actually do to reverse this trend of knowledge loss that undermines innovation? The first is to identify the specific knowledge at risk that is needed to support innovation. This is a triage problem. Organizations can’t retain everything and, lord knows, they shouldn’t. In my book, “Lost Knowledge: Confronting the Threat of an Aging Workforce” I provide a strategic framework for knowledge retention.
    Second, leaders must become more disciplined in identifying the actual costs of knowledge loss. To learn more download the report “Diagnosing the Costs of Lost Knowledge on Organizational Performance” from my website at http://tinyurl.com/7qr6m7h. Hope this helps. — David DeLong, http://www.SmartWorkforceStrategies.com.

  2. Peter Doyle says:

    We have to move to a stakeholder model of capitalism, we have to stop this madness of having companies meet the the quarter estimates and constantly downsizing and moving capabilities overseas.
    The only way for that to happen now is for companies to show moral leadership. A traitor tax would be good start

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