• 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 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.