Employees work inside the newly inaugurated plant for the Tata Nano car at Sanand in the western Indian state of Gujarat June 2, 2010.AMIT DAVE
Ontario Premier Dalton McGuinty in the province to step up to the productivity challenge that we face. There is no doubt it is a significant challenge. Labour productivity in the business sector in Canada has fallen to 76 per cent of the U.S. level, from 90 per cent of the U.S. level in 1984.
One of the key factors in our poor productivity growth is a lack of innovation in many sectors of the Canadian economy. While there are no hard statistics to precisely track the pace of innovation, we see the issue play out in terms of business investment. Innovation generally requires investment - and less innovation requires less investment. We see this, for example, in our aggregate investment in information and communications technology, which is about 63 per cent of that in the U.S. per employed person.
Roger Martin, dean of the Rotman School of Business at the University of Toronto, has noted there is often confusion between "invention" and "innovation." Innovation must be viewed broadly. To quote the 2009 Expert Panel on Business Innovation, "Innovation is new or better ways of doing valued things. Innovation is not limited to products but includes improved processes like the assembly line, and new business models like web-based commerce".
We have a number of companies that are leaders in their global markets. Companies such as Research In Motion, Four Seasons Hotels, SNC-Lavalin Group, and more recently our banks, have grown and prospered from innovation, not only in products and services but also through their understanding of customer needs (and in the case of the banks, from innovation in risk management).
Why don't we see more innovation in Canada? One reason is that many of our industries don't face the competitive pressures that spur innovation, such as intense rivalries or demanding customers. Perhaps companies in these industries are "buying" exactly the right amount of innovation? While this may be sadly true, we must hope that as our markets become more open and global, Canadian businesses will become better innovators. If not, we will continue to see our productivity, and with it our prosperity, erode.
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What must business do to drive innovation? Here are four imperatives:
1. Develop strategies and approaches to serve your "hardest" customers. By hardest, I do not necessarily mean the most sophisticated. Rather, it is those customers who are not profitable to serve with existing products or services. India and other emerging markets offer many examples of what has been termed "frugal innovation"- finding ways to reduce the cost of products and services to profitably serve the vast market of low-income consumers. Tata's Nano car retails for about $2,200, a game-changer in the Indian market. These kinds of innovations come not from incremental change focused on existing customers, but rather from a top-down vision and focus on doing things differently. We see some evidence of this happening in the Canadian wireless market, as new entrants focus on customers who were once seen as overly price-sensitive by the incumbent players. Whether these new entrants will be able to drive costs down enough to make a sufficient profit remains to be seen. Ultimately, successful innovation must be rooted in a strong understanding of customer needs, and a relentless drive to serve those needs more efficiently and effectively.
2. Connect with universities, research centres and entrepreneurs focused on your industry. With some notable exceptions, Canadian companies often fail to tap into sources of expertise that can be found in our universities and among startup businesses looking to translate an innovative idea into a viable business. The University of Waterloo's $214-million Research and Technology Park is an excellent example of an initiative that will bring together technology firms and university researchers in close proximity to further innovation in the Kitchener-Waterloo high-tech cluster. As another example, Royal Bank of Canada's Venture Partners group has focused on investments in startups that provide innovations in the financial services business, which RBC can then leverage in its core business.
3. Drive an innovation mindset into all levels of the organization. The most innovative companies tend to have one thing in common: a corporate culture that prizes and nourishes innovation and good ideas at all levels of the company. They create ways to foster innovation (such as cross-functional design groups at BMW, or employee brainstorming sessions at Southwest Airlines) to incubate and harvest great ideas for new products and new ways to deliver products and services. General Electric has placed a huge emphasis on what it calls "imagination breakthroughs" across all of its business units, as the key driver of profitable growth. It has developed toolkits and formal processes to evaluate, finance and monitor innovation and has seen significant breakthroughs in its health-care and green-technology businesses.
4. Make innovation a board-level priority and an explicit part of management's scorecard. Most fundamentally, the innovation agenda must be elevated to a board-level issue, because it is an integral element of a forward looking, robust corporate strategy. The board should expect management to identify new ways to achieve competitive advantage over competitors and to drive profitable growth by entry into new geographies, products or customer segments. The board should work with management to identify key metrics that can be reviewed regularly to assess the innovation agenda. Relevant metrics could include measures such as percentage of revenue from new products or new customer segments, impact of process innovations on costs, speed to market, and many others.
While there is no doubt that Canada is punching above its weight economically, with a relatively strong fiscal position and growth that is the envy of the rest of the developed economies, this is not a time for complacency. Our poor productivity growth is perhaps the major issue we face in driving future prosperity. We simply must raise our collective game and ensure that in every sector, and among both small and large companies, fostering innovation is seen as a key imperative.
John Armstrong is a member of the Ontario Task Force on Competitiveness, Productivity and Economic Growth.
He will take reader questions in a live discussion on Wednesday July 21 at 1 p.m. ET.