Tuesday, September 21, 2010

Innovation-A National Mandate

By: Kenneth L. Greenberg, CEO KLG Consultants, LLC

The last century was described by many observers such as Harold Evans as the American Century. In his work of the same name, The American Century, Evans make a persuasive argument that American cultural, political and economic dominance in world affairs could not be denied in the 20th century. Through a combination of events, including the industrial revolution, two world wars and various technological revolutions, America and its people led the world in GDP, per capita income, living standards and growth.

This article submits these questions for American corporate and political leaders:

1.      How will America maintain that leadership in this new century?
2.      How can our corporations, institutions, and the American people survive a quickly changing world economic landscape?

Thomas Friedman in his book, The World Is Flat, describes a changed globalized world at the end of the last century. He keenly observes that the effect of low cost labor  (in some cases multiples lower than US labor rates), open access to technology and shifting world demographics made the presumption of continued American dominance improbable if not unlikely. The book, Making Innovation Work defines innovation as not only technological change but also change in business process and model. If one accepts this definition, without innovation, the change necessary for American companies, organizations and institutions to not just grow but to survive in Friedman’s new flat world, will not happen. Even if one does not accept Friedman’s macro conclusions, another phenomenon is occurring, exponential technological change.

There is evidence that the hyper growth phenomenon of China, India and other former third world economies may, according to some observers, be unsustainable. Chinese leaders have even expressed this concern in an interview with The Financial Times of London. One could also deduce that a number of former third world countries that rely on non free floating fiat currencies and labor rates tantamount to slave labor, ultimately cannot evolve and change and will therefore implode. Notwithstanding the arguments for or against a sustained rate of change and the resultant impact on growth in former third world country economic activity, there is an undeniable demographic shift in favor of the current and former third world as evidenced by an 2006 IMF study.

However, even if one were to refute Friedman’s observations of the new world macro environment as merely notations of temporary conditions in an unstable world, fundamental exponential change has firmly taken hold in  free enterprise capitalist systems across the world.  Jack Uldrich, in his book Jump the Curve, describes the phenomenon of this rate of change, as it relates to technological change, as exponential change.  While industrial and technological change, the business cycle, and poor management have ended the life of many  US based organizations, Uldrich argues that the modern environment is unlike anything we have ever seen in past business cycles.

Even without exponential change, in Making Innovation Work, the authors cite a number of examples of companies, that, in the last century, the American Century, struggled with innovation, fell behind and are now playing catch up or worse. Some observers argue that the seeds for the demise of General Motors or the second or third coming of Chrysler were planted over decades in the last century partly by the failure to invest in successful innovation projects. Some may say, the failure of American auto manufacturers was inevitable simply due to the labor cost structure in competing countries. However, investments in innovative manufacturing and business model processes may have countered that seemingly insurmountable cost advantage. Mass migration to competing cars made outside the United States or by foreign manufacturers here in the US, appears to be the main statistical reason for loss of market share and revenues by American manufacturers. Simply put, fewer and fewer Americans want to buy cars made by American domiciled manufacturers.

There are many other examples of American companies in the last century that failed to change either business model, process, or technology and hence are gone or going that way: See Blockbuster, The Rocky Mountain News, and Circuit City to name a few. Even in one of the most advanced of industries, the telecom and internet industry, the market landscape is uncertain. Even though certain companies may have held a technological advantage at some point in recent history, companies that fail to find the winning business model combined with technological advantage may not survive. The final determinant of the winners, consumer taste, makes it even harder to ferret out who survives in the telecom space.

Across industries, Uldrich argues that this phenomenon only will accelerate. Without a culture of innovation surrounding business models and technology,  many companies risk becoming a vinyl record producer. Using an example from his book , Jump The Curve, but turned upside down to demonstrate the risk posed to companies by exponential change (a doubling rate of change), a company with 5.2 million customers that starts by losing 1 customer on day one, then 2 the next, and then 4 the next, etc. will lose all of its customers by day 24 (if the loss occurs in months, the total loss of customers occurs on month 24).  In our example, at day 20, the company lost less than 10% of its customers.  The loss of customers on day 20 is almost immaterial on a nominal basis, but it represents an exponential trend that will cascade in only 4 more days to destroy the company.  Think again of the Rocky Mountain News or other defunct newspapers.  How steep was their ad revenue diminution due to what started as an imperceptible decline in readership? With exponential revenue loss due to lack of innovation in business model and technology, cost cutting measures can never keep up. It is like applying a tourniquet to a heart attack victim. Who in these newspaper companies was managing innovation, if anyone? One can imagine while Craig’s List, E-Bay, and others grabbed revenues from traditional newspapers and reinvented want ad markets, the leaders of these now defunct newspapers were running to HR to determine proper severance policy for junior reporters. Perhaps the same junior reporters who were caught during work hours checking in with their MySpace and Facebook accounts.

Not all news related media companies imploded in the last decade; certainly not Rupert Murdoch’s News Corporation, at least not so far. They continue to innovate and take advantage of the new media evolution, thus continuing to employ thousands of media and journalism professionals. However, our country has lost and will continue to lose many more media and journalism jobs unless more media companies or new media companies emerge, survive and thrive.

Ulrich argues that all industries must “Jump the Curve” or find the innovation that is five to ten years out and invest in that technology now. As described in Making Innovation Work, this innovation effort will require not only tremendous capital investment but leadership and management to increase the probability that these investments will become commercially viable. The authors of   Making Innovation Work are in agreement with Friedman and other observers, by pointing out, that without a culture of innovation, companies, and organizations and by implication, our society as we know it, cannot survive.

All is not lost. There is an upside. Two Denver based school teachers have created an ever evolving set of power point slides called, Did you Know or Shift Happens. Their ongoing presentation in its various iterations, tracks both the phenomenon of global demographic changes and the exponential speed of technological change. Rather than seeing the end and demise of our society as result of these two phenomena, they advocate instilling a culture of evolution and innovation in our educational system in order to enable our future leaders to expect exponential change and major shifts in world demographics and thrive in its wake. Their presentation can be a lesson to current corporate and national leaders. See change, expect it and plan to position your organization, company and our country to take advantage of it.

Absent innovation, more American companies are bound to fail. With record unemployment for this generation, bankruptcy rates at historic highs, and mortgage defaults at alarming rates, many economists believe job creation is an urgent national priority.  We cannot expect nor do many economists believe that it is economically sustainable for the federal government to continue to run record deficits trying to bail out these failed business models and antiquated product lines.

We must find ways to incentivize and motivate an ongoing culture of corporate innovation that takes advantage of exponential change and rapidly shifting world demographics and as a result stimulates growth. Many experts believe that this is the only way to create the millions of new jobs to replace the ones that have been lost over the last few years. Many statistical analyses show that it is a critical matter of corporate and national survival and renewal. Without economic growth and the job creation that comes with it, this century is just as likely to be the century of America’s undoing, rather than another “American Century”.

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