A debate is raging at Harvard. If the trend toward outsourcing of critical technologies was a response to quarterly earnings pressure from Wall Street, it would stand to reason that U.S. technology companies’ R&D budgets should fall with rising dependence on outsourced components and processes.
But the opposite is true, which demonstrates that outsourcing is being employed not simply to cut costs, but as a means to direct capital to its most productive long-term uses — the very essence of free-market capitalism. So if all we care about is innovation — as opposed to the direct creation of manufacturing jobs in the U.S. — the market is working fine.
Andy Rappaport at August Capital argues if we are intent on feeding, not killing, the U.S. innovation machine, we need to be very careful about what other incentives we create.
The Columbia Business School’s professor of management Rita McGrath posted last week on board strategy. Namely, she talks about how innovation is key on any board and a stale or unproductive board can significantly hinder an organization.
David Nadler suggested that one key thing boards need is input into strategic decisions when there are still choices to be made, rather than simply being asked to vet decisions that management has already come to a conclusion about. We need, he suggests, to get away from a “review and concurrence” process and instead adopt one in which a board can make meaningful choices. The second key issue that boards need to be engaged on has to do with the question of risk — often the most significant risks don’t show up in the spreadsheets and presentations shown to the boards. What is needed, instead, are candid conversations about what happens if the unexpected happens or if the strategy goes wrong.
Rita argued in such environments, she also proposed that boards can completely kill effective innovations by insisting on the wrong metrics — such as worrying about the rate of failure. She has long said that the rate doesn’t matter if the costs are low. Imposing those requirements will guarantee risk aversion among the staff.
A recent debate at Deloitte looks at the gap in structural costs between the US and offshore manufacturing operations. The profit margins that were once the darling of the offshore industry are quickly eroding. The debate asks, to regain competitive advantage should manufacturing jobs be pulled back to the US?
We recommend checking out all the counter points their article has generated but to summarize the take from Deloitte Partner Dmitri Shiry;
Some companies in some industries are looking hard at jumping on the repatriation bandwagon. This is especially true for those where the intellectual property and quality risks of offshore operations aren’t worth the benefits of lower manufacturing costs. If the U.S. is going to reestablish manufacturing as a catalyst for growth during the next cycle of economic recovery, that trend will need to continue and expand.
And from Principle Tom Morrison;
As companies consider and shift production to U.S. sites, they will face growing challenges in finding and keeping the right set of employees. Skilled technicians, plant operators, and engineers may be hard to find. Innovative approaches to training, development, and retention can help improve the availability of workers with the right skills and the incentive to stay. Relative to many countries around the world, the U.S. and many states do not offer the types of training programs and incentives that can be found in other countries to assist in developing the right skills, exacerbating the shortage. Companies should consider investments and partnerships with local technical schools, community colleges and universities as a means of building talent pools and pipelines. We believe these training and development partnerships will be critical for new skilled workers and ongoing training to keep the workforce up to date. Companies and communities with plans and a commitment to skills development and retention will likely have a leg up.
John Sviokla’s recent post on the Harvard Business Review addresses a favorite subject, disruptive business strategy and design. We have heard the success stories before, how Tata made the $3,000 car. How something as simple as Craig’s List is worth more than Amazon.com. Innovation is value creation. John offers a few ideas on a disruptive design toolkit:
1. Simultaneously simplify a number of advantages together to create a new cost base. When Southwest Airlines launched they flew only one aircraft — the Boeing 737. Today, they still have one aircraft. They have one class of service. They have simple fare strucutures. They sell direct to end customers. They go to the less frequented, second-tier airports. They have broad job descriptions and cross-train so that one person can do many jobs — including pilots handling luggage. The created radical simplicity by simplifying many dimensions. They are not the only business where complexity has stopped adding value. New, radically simple business models can be created in everything from financial services to healthcare.
2. Give away the other guy’s razor! Craig Newmark garnered dominant market share by giving away almost all the blades. Put more formally, every “two-sided market” has a vulnerability — and if you can enter by aiming at that vulnerability, you can win. In China, Google is now giving away MP3′s and sharing the ad revenue with the artists. Paid music is now all marketing promotion. In addition, at Wired magazine’s Disruptive by Design conference, a featured book was Chris Anderson’s Free.
3. Look for new, radically cheaper ways to do the job. Yeh used run-of-the-mill technology — cell phones, video cameras, and even a styrofoam cooler — to create a much cheaper design. Consumer technologies and on-demand services like Amazon’s Mechanical Turk enable new business designs that could have a fraction of the cost to deliver the same services. Imagine a security company that was truly designed around the inexpensive, internet connected, monitoring equipment available today.
4. Think about leveraging a very few individuals with extraordinary talent. It is possible today for a small group of people to make a spectacular movie (think Pixar) or to manage billions in capital (think hedge-funds). Is there a way to create incredible value for your organization by leveraging the power of a small group across millions of consumers or billions of dollars?
Christian Terwiesch of the Harvard Review zeroed in on the Nobel award. This touches on an important aspect of innovation as it is about stopping the attempt to predict the long-term success of new ideas. The focus, Christian argues, should be on ensuring there are enough diverse ideas being generated. We couldn’t agree more.
Christian then puts forward four guidelines when you’re launching your next idea:
• Seek uncertainty and variance in pay-offs. Most parts of management shy away from variance – we prefer things that are stable and in control. As a marketing manager, I prefer to have 10 sales associates with good results as opposed to having one being a star and the other nine being dogs. In tournaments, however, variance is your friend. You seek victory and prefer winning once (and being last several times) over consistently being second or third.
• Kill early and often–even with “good” ideas. Winners of tournaments are not good, they are outstanding. Yet, most processes, recruiting university professors or funding R&D projects, are rewarding good work. Academic journals publish good papers and universities promote good professors. Similarly, stage gate processes in innovation advance good ideas. Nothing wrong with this – except that you fill your tournament with good contestants, contestants that will end up second or third, but will not win. And, as you fill the pipeline with good contestants, you leave no room for the outstanding ones. If you want to win, good is not good enough. Free up capacity, even if that implies killing something that is good.
• Look for contestants from the outside. Some top universities, especially those in sunny regions, have a simple strategy. Wait for the star researchers to emerge and then lure them to town with money and a house close to the beach. Not a bad strategy, and one that has potential in the R&D world as well. Too often, executives in R&D feel that the best ideas come from their internal labs, missing opportunities that could be brought in from the outside.
• Balance near and far horizon. Just like companies can come up with incremental and radical innovations, so can researchers. Many scholarly articles are rather incremental. Unfortunately, many others are what we might politely refer to as esoteric. They are so far at the horizon that they simply are out of touch with reality. And, again like in the corporate innovation world, the weak spot is right in the middle. No company forgets to launch its next line extension and there always exist some engineer dreaming about really wacky stuff. It is the middle ground that remains empty.
Robert Shiller of the Yale School of Management has published an article in defense of financial innovation. This financial innovation, such as mortgage innovations, is the false target of blame for the housing bubble collapse.
It is critical that we take the opportunity of the crisis to promote innovation-enhancing financial regulation and not let this be eclipsed by superficially popular issues. Despite the apparent improvement in the economy, the crisis is not over and so the public continues to support government-led interventions.
Doing this means encouraging better dialogue between private-sector innovators and regulators. My experience with regulators suggests that they are intelligent and well-meaning but often bogged down in bureaucracy. Regulatory agencies need to be given a stronger mission of encouraging innovation.
They must hire enough qualified staff to understand the complexity of the innovative process and talk to innovators with less of a disapprove-by-the-rules stance and more that of a contributor to a complex creative process.
A coincedental tie-in to Shiller’s article exists in the future of IT for the enterprise. While it was intended to relate to the finance industry, it is something I’ve been trying to articulate for a while and I’ve never seen it relate so well to the future role of technology in society.
The advance of civilization has brought immense new complexity to the devices we use every day. A century ago, homes were little more than roofs, walls and floors. Now they have a variety of complex electronic devices, including automatic on-off lighting, communications and data processing devices. People do not need to understand the complexity of these devices, which have been engineered to be simple to operate.
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