Why Innovation Ain’t So Easy Mr. President – Look to Google, not GE


Summary:

  • The President has called for more innovation in America
  • But American business management doesn’t know how to be innovative
  • Business leaders focus on efficiency, not innovation
  • America has no inherent advantage in innovation
  • To increase innovation we need a change in incentives, to favor innovation over efficiency and traditional brick-and-mortar investments
  • We need to highlight leaders that have demonstrated the ability to create jobs in the information economy, not the “old guard” just because they run big, but floundering, companies

It was good to hear the U.S. President call for more innovation in his State of the Union address this week.  And it sounded like he wants most of that to come from business, rather than government.  But I’m reminded the President is a lawyer and politician.  As a businessman, well, let’s say he’s a bit naive.  Most businesses don’t have a clue how to be innovative, as Forbes pointed out in November, 2009 in “Why the Pursuit of Innovation Usually Fails.”

Businesses by and large are not designed to be innovative.  Modern management theory, going back to the days of Frederick Taylor, has been dominated by efficiency.  For the last decade businesses have reacted to global competitive forces by seeking additional efficiency.  Thus the offshoring movement for information technology and manufacturing eliminated millions of American jobs driving unemployment to double digits, and undermines new job creation keeping unemployment stubbornly high. 

It is not surprising business leaders avoid innovation, when the august Wall Street Journal headlines on January 20 “In Race to Market, It Pays to Be Latecomer.” Citing a number of innovator failures, including automobiles, browsers and small computers, the journal concludes that it is smarter business to not innovate. Rather leaders should wait, let someone else innovate and then hope they can take the idea and make something of it down the road. Not a ringing pledge for how good management supports the innovation agenda! 

The professors cited in the Journal article take a fairly common point of view.  Because innovators fail, don’t be one.  Lower your risk, come in later, hope you can catch the market at a future time.  It’s easy to see in hindsight how innovators fail, so why take the risk?  Keep your eyes on being efficient – and innovation is anything but efficient! Because most businesspeople don’t understand how to manage innovation, don’t try.

As discussed in my last blog, about Sara Lee, executives, managers and investors have come to believe that cost cutting, and striving for more efficiency, is the solution for most business problems.  According to the Washington Post, “Immelt To Head New Advisory Board on Job Creation.” The President appointed the GE Chairman to this highly visible position, yet Mr. Immelt has spent most of the last decade shrinking GE, and pushing jobs offshore, rather than growing the company – especially domestically.  Gone are several GE businesses created in the 1990s – including the recent spin out of NBC to Comcast.  It’s ironic that the President would appoint someone who has overseen downsizings and offshoring to this position, instead of someone who has demonstrated the ability to create jobs over the last decade.

As one can easily imagine, efficiency is not the handmaiden of innovation.  To the contrary, as we build organizations the desire for efficiency and “professional management” impedes innovation.  According to Portfolio.com in “Can Google Be Entrepreneurial” even Google, a leading technology company with such exciting new products as Android and Chrome, has replaced its CEO Eric Schmidt with founder Larry Page in order to more effectively manage innovation.  The contention is that the 55 year old professional manager Schmidt created innovation barriers. If a company as young and successful as Google struggles to innovate, one can only imagine the difficulties at traditional, aged American businesses!

While many will trumpet America’s leadership in all business categories, Forbes‘ Fred Allen is correct to challenge our thinking in “The Myth of American Superiority at Innovation.”  For decades America’s “Myth of Efficiency” has pushed organizations to streamline, cutting anything that is not totally necessary to do what it historically did better, faster or cheaper. Innovation inside businesses was designed to improve existing processes, usually cutting cost and jobs, not create new markets with high growth that creates jobs and economic growth.  Most executives would 10x rather see a plan to cut costs saving “hard dollars” in the supply chain, or sales and marketing, than something involving new product introduction into new markets where they have to deal with “unknowns.”  Where our superiority in innovation originates, if at all, is unclear.

Lawyers are not historically known for their creativity.  Hours spent studying precedent doesn’t often free the mind to “think outside the box.”  Business folks have their own “precedent managers” – internal experts who set themselves up intentionally to block experimentation and innovation in the name of lowering risk, being conservative and carefully managing the core business.  To innovate most organizations will be forced to “Fire the Status Quo Police” as I called for last September here in Forbes.  But that isn’t easy. 

America can be very innovative.  Just look at the leadership America exerts in all things “social media” – from Facebook to Groupon! And look at how adroitly Apple has turned around by moving beyond its roots in personal computing to success in music (iPod and iTunes), mobile telephony and data (iPhone) and mobile computing (iPad).  Netflix has used a couple of rounds of innovation to unseat old leader Blockbuster! But Apple and Netflix are still the rarities – innovators amongst the hoards of myopic organizations still focused on optimization.  Look no further than the problems Microsoft – a tech company – has had balancing its desire to maintain PC domination while ineffectively attempting to market innovation. 

What America needs is less bully pulpit, and more action if you really want innovation Mr. President:

  • Increase tax credits for R&D
  • Increase tax deductions and credits for new product launches by expanding the definition of what constitutes R&D in the tax code
  • Implement penalties on offshore outsourcing to discourage the efficiency focus and the chronic push to low-cost global resources
  • Lower capital gains taxes to encourage wealth creation through new business creation
  • Manage the deficit by implementing VAT (value added taxes) which add cost to supply chain transactions, thus lowering the value of “efficiency” moves
  • Make it much easier for foreign graduate students in America to receive their green cards so we can keep them here and quit exporting some of the brightest innovators we develop to foreign countries
  • Create more tax incentives for investing in high tech – from nanotech to biotech to infotech – and quit wasting money trying to favor investments in manufacturing.  Provide accelerated or double deductions for buying lab equipment, and stretch out deductions for brick-and-mortar spending. Better yet, quit spending so much on road construction and simply give credits to people who buy lab equipment and other innovation tools.
  • Propose regulations on executive compensation so leaders aren’t encouraged to undertake short-term cost cutting measures merely to prop up short-term profits at the expense of long-term viability
  • Quit putting “old guard” leaders who have seen their companies do poorly in highly placed positions.  Reach out to those who really understand the information economy to fill such positions – like Eric Schmidt from Google, or John Chambers at Cisco Systems.
  • Reform the FDA so new bio-engineered solutions do not follow regulations based on 50 year old pharma technology and instead streamline go-to-market processes for new innovations
  • Quit spending so much money on border fences, DEA crack-downs on marijuana users and giant defense projects.  Put the money into grants for universities and entrepreneurs to create and implement innovation.

Mr. President,, don’t expect traditional business to do what it has not done for over a decade.  If you want innovation, take actions that will create innovation.  American business can do it, but it will take more than asking for it.  it will take a change in incentives and management.

 

 

Who “gets it”? – Employment, investing and IBM

"IBM authorizes another $5Billion for share buybacks" is the Marketwatch.com headline.  This brings the amount available for buying the stock to $9.2billion – or enough to buy about 73.6million shares.  But it begs the question, what value will this bring anyone?

"The U.S. Workplace: A Horror Story" is the CIOZone.com headline. A survey by Monster.com and The Human Capital Institute of more than 700 companies (over 5,000 workers) discovered that by and large, employees are mad at their employersThey don't trust business leaders, and think those leaders are exploiting the recession for their own purposes (and gains).  79% of workers would like to find a better employer – to switch – but only 20% of employers have a clue how many workers have become disillusioned.

Simultaneously, "Many vanished jobs might be gone for good" is the Courier-Journal.com headline.  Historically, increases in manufacturing (usually led by autos) and construction (primarily housing) caused recessions to diminish.  But nobody expects either of those sectors to do well any time soon.  Manufacturing is showing no signs of improving, in any sector, as we realize that all the outsourcing and offshoring has permanently reduced demand for American labor.  And quite simply, very few investments are being made by business leaders that will create any new jobs.

"ALL BUSINESS:  Innovation Needed Even in a Recession" is the Washington Post headline.  The article points out that almost all recent improvement in profitability – boosting the stock market – has been through cost cutting.  But that has done nothing to help companies improve revenues, or improve competitiveness It's done nothing to bring new solutions to market that will increase demand.  Quoting the former Intel CEO Gordon Moore – "you can't save your way out of a recession" – the article cites several consultants who point out that companies which earn superior rates of return use recessions to invest in new technologies and innovations that create new demand.  And eventually new jobs.  But today's CEOs aren't making those investments.  Instead, they are taking short-term actions that dress up the bottom line while doing nothing about the top line.

Which brings me back to IBM.  Who benefits from $9.2billion being spent by IBM on its own stock?  Only the top managers who have bonuses and options linked to the stock price.  The shareholders will benefit more if IBM invests in new products and services that will increase revenues and drive up long-term equity.  Employees and vendors will benefit from creating new solutions that generate demand for workers and components.  Almost nobody benefits from a stock buyback – except a small percentage of leaders that have most of their compensation tied to short-term stock price.

What new innovations and revenues could be developed if IBM put that $9.2billion to work (a) at its own R&D, product development labs or innovation centers, or (b) at some young companies with new ideas that desperately need capital in this market where no bank will make a loan, or (c) with vendors that have new product ideas that could meet shifting markets? 

That's the beauty of an open market system, it supposedly funnels resources to the highest rate of return opportunities.  But this doesn't work if managers only cut costs, then use the money to prop up stock prices short term.  It's a management admission of failure when it buys its own stock.  An admission that there is nothing management can find worth investing in, so it will use the money to artificially manipulate the short-term stock price.  For capitalism to work resources need to go to those new business opportunities that generate new sales.  Money needs to flow toward new health care products and new technologies – not toward keeping open money-losing auto companies and failed banks that won't make loans.

If we want to get out of this recession, we have to invest in new solutions that will increase demand.  We have to seek out innovations and fund them.  We cannot simply try to Defend & Extend Success Formulas that are demonstrating their inability to create more revenues and profits. Laid off workers do not buy more stuff.  We must put the money to work in White Space projects where we can learn what customers need, and fulfill that need. That in turn will generate jobs.  And only by investing in new opportunity development will workers begin to trust employers again.    IBM, and most of the other corporate leaders, need to "get it."