Category Archives: Business strategy

Start-ups Are the Key to Our Future

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Published in the Telegraph-Journal 19th April 2013

In a province where traditional industries have been in decline, substantial reliance has been placed on new business formation to support New Brunswick‘s economic growth. But entrepreneurship has always been a risky proposition. Whether launching a tech start-up, a small business, or an initiative within a large corporation, the odds are overwhelmingly against the entrepreneur. Harvard Business School researchers have recently estimated that more than 75 per cent of all start-ups fail.

For decades, business founders had been taught that success involves writing a business plan, pitching it to investors, assembling a team, introducing a product and selling it as aggressively as possible. This is the conventional approach and prevailing wisdom of business schools, government economic development agencies, financial institutions and investors.

But recently an new methodology has called into question the logic of business planning and discarded much of what we thought we knew about the process of starting a company. Called the “lean start-up“, this new methodology favours “experimentation over elaborate planning, customer feedback over intuition, and iterative design over traditional “big design up front” development“.

One of the forces behind this new methodology is Steve Blank, a consulting associate professor at Stanford University, National Science Foundation principal investigator at the University of California at Berkeley and Columbia University and extremely successful founder of numerous high-tech start-ups.

Blank holds that business plans are one of the fundamental reasons why failure rates among start-ups are so high. The traditional business plan typically includes a five-year forecast for income, profits and cash flow. The assumption behind writing a business plan is that it is possible to figure out most of the unknowns of a business in advance, before funding is raised and the idea is actually executed.

According to Blank, “no one besides venture capitalists and the late Soviet Union requires five-year plans to forecast complete unknowns. These plans are generally fiction, and dreaming them up is almost always a waste of time.”

Conventional business plans contribute to the likelihood that entrepreneurs who can convince investors to fund them then begin to build the product in isolation from their markets, with little if any customer input. Too often, after months or even years of development, entrepreneurs learn the hard way that customers neither need nor want most of the product’s features. And in today’s fast-moving markets, even good ideas can be made obsolete very quickly.

Blank concedes that business success is predicated on too many factors for one methodology to virtually guarantee that any single start-up will be a winner. But on the basis of hundreds of start-ups, in university programs that teach lean principles, the more important claim can be made that using lean methods across a portfolio of start-ups will result in significantly fewer failures than using traditional methods. In the last five years alone, more than three dozen universities have begun to incorporate the lean start-up methodology in their program portfolios, with immediate and documented success.

A lower start-up failure rate would have profound economic consequences in New Brunswick. The province’s economy increasingly is being buffeted by the forces of globalization and disruption. Its traditional industries are rapidly losing jobs, many of which will never return. To ensure economic viability in the long term, the province must rely on successful entrepreneurship. The growth of jobs across the province will need to come from new ventures, and all New Brunswickers have a vested interest in fostering an environment that helps them succeed, grow and hire more workers. The rapid expansion of start-ups is critical to supporting the transformation to an innovation economy. Universities, government, financial institutions and investors each have a key role to play.

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Filed under Business strategy, Education, Innovation strategy, Job creation, New Brunswick, Universities

Research: Catalyst for Economic Growth

Published in the Telegraph-Journal 2nd October 2012

New Brunswick’s universities have been involved in much of the prosperity and growth in every industry in this province. There is a long history of university-industry partnerships that have supported the successful commercialization of university research as well as the creation of many competitive spin-off firms. The development of innovative products and services in existing companies and the generation of thousands of jobs in New Brunswick has been the hallmark of successful university collaboration with industry.

But in recent years, universities and scientific research centers have not been the catalysts for entrepreneurship and regional economic development in the way that similar and more successful institutions have in other regions. Even though there have been notable successes, New Brunswick’s university-industry collaboration is falling short. University and corporate business leaders need to more aggressively support start-up ventures and mid-size firms.

This represents a huge opportunity for New Brunswick.

There is a need to create new engines of job growth. As the demand for expertise and experience outpaces supply around the world, New Brunswick must take steps to increase its pool of talent. Other countries are already investing heavily in research and development. In Asia, R&D spending is forecast to overtake U.S. levels in the next five years, due primarily to remarkable growth in R&D investment in China.

In New Brunswick, the private sector may have limited capacity to create the jobs and prosperity needed to restore economic stability. The ability of the government to act as the generator of economic growth has become limited because of the province’s fiscal obligations. Essentially, the longer we wait, the more challenging the economic situation will become.

New Brunswick should follow the lead of New York City Mayor Michael Bloomberg to meet this challenge.

In 2011, Bloomberg and the New York City Economic Development Corporation announced that the city was seeking responses from universities, research organizations and related institutions to develop and manage an applied sciences research facility. The city’s objective was to strengthen its practical sciences capabilities in order to maintain a diverse and competitive economy, particularly in fields which lend themselves to commercialization and capture the considerable growth occurring within science, technology and research. Bloomberg committed the city to making a significant capital contribution in addition to providing city-owned land.

“A new, state-of-the-art applied sciences research school would be a major asset for New York City as we develop a 21st century innovation economy,” said Mayor Bloomberg. “The City is committed to finding the right partner and providing the support needed to establish such a facility because research in the fields of engineering, science and technology is creating the next generation of global business innovations that will propel our economy forward.”

A substantial applied sciences research centre with similar objectives of creating global business innovations is needed in New Brunswick, even if the financial commitment would be substantially less than the US$3 billion of New York City’s total expenditure. Rather than re-purposing New Brunswick’s current universities’ budgets to serve corporate objectives, creating additional world-class capacity to New Brunswick’s existing science and technology communities would allow the province to stay globally competitive. As with Bloomberg’s model, a substantial percentage of the costs will be carried by a consortium of collaborating universities, international applied science and technology organizations, as well as private sector partners.

This capacity would not only substantially enrich the province’s research capabilities, but would lead to greater commercialization and expand the province’s economy. While some of the development would be for academic use and would include teaching space and laboratory facilities, much of the focus would be on providing the business acumen needed to drive commercialization in startup and early stage firms.

We know that investing in innovation is the key to creating a robust and expanding economy. This initiative would be a strong demonstration of the province’s commitment to making these critical investments.

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Filed under Business attraction, Business strategy, Education, Entrepreneurship, Innovation strategy, New Brunswick, Universities

Patience and Discipline Necessary for Shale Gas Industry Development

By Peter Lindfield, published in the Telegraph-Journal 5th June 2012

The views of oil and gas company executives and industry analysts have converged to support the proposition that the extraction of natural gas – both conventional and unconventional – will soon realize an enormous potential. There is also a dawning realization in the industry that this potential will require that a key condition be met – that a significant proportion of the vast resources of unconventional gas can only be developed profitably in a way that is environmentally acceptable. Technological advances have led to an increase in the production of unconventional gas in North America in recent years and these advances hold out the prospect of further increases in production in the U.S. and Canada.

A bright future for unconventional gas is far from certain. Industry needs to do more to project the benefits without minimizing or ignoring the liabilities. Industry needs to face up to the fact that it has been the major obstacle to the acceptance of shale gas drilling. Many hurdles need to be overcome, especially the social and environmental concerns associated with the extraction of shale gas which is the most prominent of unconventional gas resources. Shale gas extraction imposes a significantly more expansive environmental footprint than conventional gas development. Industry admits that a larger number of wells are often needed for extraction to be financially viable for the drilling companies.

Hydraulic fracturing techniques themselves, necessary to boost the flow of gas from the well, remain controversial and opposition to shale gas drilling has not declined. The scale of development has major implications for local communities, land use and water resources. More serious hazards including the potential for air pollution, the contamination of surface and groundwater and the management of greenhouse gas emissions are of major concern to the public. If these concerns are not properly addressed, the development of unconventional resources could be restricted.

Industry experts consistently claim that the technologies and knowledge exist for shale gas to be extracted and processed in a way that meets these challenges. However, there is gathering evidence that both governments and industry will need to dramatically improve their performance if public confidence is to be earned. This will require that governments and industry take two important steps.

First, industry must publicly commit to applying the highest reasonable environmental and social standards at all stages of the development process. The key word that will cause most irritation among concerned parties is “reasonable”. Governments across North America are in the process of creating appropriate regulatory structures based on a foundation of high-integrity science and its corresponding data. Experts are useful at this juncture – the public will want to know the facts and what is possible. But ultimately, the public will make its own decisions about what constitutes what is reasonable. This is something that some industry supporters have had difficulty grasping.

Second, governments will need to hire and train compliance staff in sufficient numbers with authority to provide enforcement based on accepted regulations. Public and ubiquitous access to information will need to be provided.

Full transparency, the measuring and monitoring of environmental impacts and engagement with local communities will be critical to addressing public concerns. Patience and discipline on the part of industry will be necessary even if drilling companies are driven to exasperation by their critics. Governments and industry will need to adopt consistent but flexible responses to social and environmental challenges. Industry will be evaluated based on its actions against agreed-upon environmental and social standards but there will be little tolerance among the public for failing to measure up to those standards.

Confidence building measures will be most critical in those early days as a record is being created and where industry and a skeptical or even cynical public will need to reach an accommodation.  Here, the facts will be less important than the actions of individuals. Industry has an unprecedented opportunity not only to develop confidence but to wield this as an investment to build trust in its communities.

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Filed under Business strategy, Shale Gas

A Cautionary Tale of the Limits of Innovation

By Peter Lindfield, published in the Telegraph-Journal 27th April 2012

An innovative product and proposal does not always guarantee a successful bid. That hard lesson was learned in no uncertain terms by an automobile manufacturer recently. Its unsuccessful proposal calls into question the business model used by smaller players in a fiercely competitive bidding environment, even if they are fast followers.

New York City Mayor Michael R. Bloomberg recently announced that Nissan had won that city’s Taxi of Tomorrow competition. The Nissan NV200, a light commercial vehicle already in use on streets in Asia and Europe, beat contenders from Ford and Karsan, a little-known Turkish vehicle manufacturer. Over a three year period beginning in 2013, the NV200 will replace the current vehicles and carry the official New York taxi designation for 10 years.

New York’s yellow cab fleet numbers more than 13,000 official vehicles, the majority of which are Canadian-made Ford Crown Victoria sedans. Crown Vics are an impressive transportation incongruity in the world’s most famous city. Crashing over the thousands of craters that disfigure the city’s road network, passengers can enjoy a full madrigal of squeaks, groans and rattles that is emblematic of Gotham’s taxis.

Although it lost out against its Nissan rival, Karsan’s V1 arguably was the most innovative solution in the competition. Its rear-mounted 2.4-liter 4-cylinder engine contributed to a more efficient and space-saving platform and a Karsan spokesperson stated that it could run on compressed natural gas or accommodate a hybrid or purely electric powertrain. The firm showed off the V1’s ability to load and carry a wheelchair passenger by utilizing a ramp mounted under the taxi’s body, which could be deployed to either side of the vehicle. Neither the Ford nor Nissan models were designed to meet the New York Taxi and Limousine Commission’s request to make their vehicles compliant with the Americans With Disabilities Act.

Promises of economic development benefits were intended to reinforce the value of its proposal. Karsan received substantial support for its bid in Brooklyn where the company had committed to building a factory that potentially would have created hundreds of jobs.  Nissan, which has its American headquarters in Tennessee, plans to build the NV200 in Mexico.

So on the face of it, Karsan’s bid had the twin benefits of an innovative design and the promise of job creation. What went wrong?

Karsan is a relative newcomer to vehicle manufacturing. Founded in 1966, the firm builds vehicles in Turkey for Peugeot, Citroën, Renault and Hyundai. But the Karsan model was rejected after officials decided that the risk associated with awarding the contract to a company with little experience in the American market would be too great. New York City commissioned the global automotive consulting firm Ricardo Inc. to conduct an analysis which concluded that while Karsan had demonstrated “the will and technical capability” to build its proposed taxi, the company was “a new manufacturer, with a new manufacturing paradigm, not familiar with the U.S. regulatory framework, with no current sales, service or support infrastructure” in the United States.

Karsan’s bid was dealt a further blow when Mr. Bloomberg stated that he was not optimistic about whether Karsan’s proposal for a Brooklyn taxi factory was even feasible. “I don’t think between now and two years from now we could site a new school, much less a new industrial plant,” Mr. Bloomberg said.

An overreliance on its innovative product figured prominently in its losing proposal. Could Karsan have mitigated the perception that it was not yet ready for prime time? Auto industry analysts will question why Karsan did not choose to forge an alliance with Hyundai, with which it was already doing business and which has the necessary sales, service and support infrastructure.

Rather than choosing to go it alone, firms in every industry increasingly are leveraging joint ventures, consortia and other alliance arrangements to compensate for operational shortcomings. Doing so could have helped to address New York’s concerns about whether Karsan had “fully evaluated the risks and countermeasures required to ensure that their product will deliver and maintain the same level of maturity as that of their competitors over the life of the contract.”

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Filed under Automotive, Business strategy, Innovation strategy

Corporate income tax is not the critical investment factor claimed by the right

Published in the Telegraph-Journal 28th February 2012

More than 20 per cent of the capital delivered over a six year period by Business New Brunswick was contributed to companies that declared bankruptcy or ceased operations, according to the Canadian Press. The response by BNB Minister Paul Robichaud to news that about $150 million in repayable loans, loan guarantees, equity investments and grants was disbursed to companies that no longer are in business was that his department is going to improve the selection of future investments to increase BNB’s investment success rate.

University of Moncton academic Donald Savoie took the opportunity to advance his thesis that New Brunswick can no longer afford to subsidize business in this province. Because New Brunswick has a deficit it cannot sustain and federal transfers are almost certain to decline in future, “some tough decisions need to be made,” Savoie said.

To Savoie, one of these tough decisions should result in the elimination of economic development agencies such as Business New Brunswick in favor of promoting New Brunswick’s per cent corporate income tax rate which at 10 per cent is tied with British Columbia and Alberta for the lowest in Canada.

What assumptions underpin this solution and do they hold water?

The first assumption is that the corporate income tax is the critical or most powerful factor in business investment decisions. In fact, business investment decisions do consider tax impact as well as labour, management and infrastructure as part of a cost evaluation strategy. But investment evaluation criteria also involve other key factors: the availability and cost of real estate and physical structures; the quality of information technology infrastructure including the presence of technology vendors, bandwidth scalability, last mile reliability and coverage and the cost of redundancy; the availability and reliability of power, water, gas and other utilities; availability and provision of basic services and the cost of living; and the quality of public and private transportation. Of critical importance are human resources factors such as the size, availability and education and experience characteristics of the workforce, labor costs and soft issues related to work performance and attitude. When considered together, tax policy is only one factor among many for businesses to consider. Those jurisdictions that have chosen lowest tax as their sole business investment attraction feature have, without exception, never possessed any lasting competitiveness advantage.

The second assumption is that government has little or no role to play in determining regional competitiveness or prosperity. But key advantages such as receptive and collaborative government policies involving competitive incentives and subsidies are often an important component of location decisions when firms consider their investment options. Today, government is heavily involved in virtually every business location success story whether through the provision of workforce training, support for innovation networks or the development of technology parks. Whether analyzing business successes in Finland, Ireland, France or Silicon Valley, government has been prominently involved in providing the physical and in some cases intellectual infrastructure that underpinned their success. Closer to home, the achievements of Ontario’s Technology Triangle, the emergence of burgeoning health care and biotech clusters in London, Hamilton and Toronto and the surging oil and gas centers in Calgary all have government inducements, incentives and subsidies at their core.

The profound challenge for government is to ensure that it does not contribute to distortions in markets at the same time that it ensures that public investments are transparent and accountable. But every successful business area in the world has an organization with BNB’s mandate at its core. The government needs to ensure that it engages the mechanisms to make that BNB and others in its orbit operate effectively and efficiently. If relying on corporate income tax as the sole inducement for business investment has any chance of working, it is incumbent on its proponents and supporters to prove evidence that it represents a desirable solution with measurable benefits to New Brunswickers.

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Filed under Business attraction, Business strategy, economic development, Tax policy

Innovation Challenges Investment Paradigms

Published in the Telegraph-Journal 20th January 2012

A critical factor responsible for the failure of many companies is that managers don’t have effective or efficient tools to help them to understand markets, analyze competitors, develop brands, select employees and develop strategy. In the absence of reliable knowledge, other tools are brought to bear to fill in the gaps. This is particularly true with firms that are seeking to finance innovation.

Raising capital is an ongoing and unending challenge for corporations. It is particularly difficult when financing innovation, in part because of the highly uncertain nature of the breakthrough or disruptive technologies that innovation may present. This is an increasingly well-known problem for start-up entrepreneurs but the investment challenge also exists for established firms.

At the outset, a fundamental problem is that proposals to create growth by exploiting potentially disruptive technologies or products cannot often be supported by hard numbers. Markets for these technologies or products can be small initially, and substantial revenues may not materialize for an extended period of time. Too often, when the financing of disruptive technology projects are pitted against incremental sustaining innovations in the battle for funding, the incremental projects receive approval while the seemingly riskier projects get delayed or die.

But an additional and more vexing problem is that managers in established corporations traditionally have used financial analysis tools and methods that can make innovation investments very difficult to justify. The most common system for green-lighting investment projects only reinforces the flaws inherent in these tools and methods.

This constellation of problems has come under the analytical microscope of Harvard University School of Business professor and author of The Innovator’s Dilemma, Clayton Christensen. His recent research asks why “so many smart, hardworking managers in well-run companies find it impossible to innovate successfully”. His team’s investigation has concluded that a misguided deployment of three financial-analysis tools is involved in what he calls “the conspiracy against successful innovation”. According to Christensen, the application of discounted cash flow and net present value to evaluate investment opportunities is “responsible for management underestimation of the real returns and benefits of investments in innovation”. In addition, his research reveals the way that fixed and sunk costs are reflected when evaluating future investments confers an unfair advantage on challengers and encumbers incumbent firms that attempt to respond to competition. Finally, his team claims that an excessive emphasis on earnings per share as the primary driver of share price and hence of shareholder value creation diverts resources away from investments whose payoff lies beyond the near term. This has resulted in an investment shortfall in business models where liquidity events are beyond the immediate horizon.

Christensen’s view is that the way these financial tools are commonly used in evaluating investment opportunity creates a systematic bias against innovation. He blames the commonly used stage-gate approval process— feasibility, development and launch—for much of the analytical distortion. His research reinforces that project teams generally know how good the financial projections need to appear in order to successfully win funding. Alternative methods, such as discovery-driven planning challenge some of the paradigms of financial analysis but they can help managers innovate with a more accurate projection of future value, and with less cost and risk. Christensen’s wider claim is that some of the tools typically used for financial analysis and decision making about investments distort the value and likelihood of the success of investments in innovation. Although he identifies business schools as laggards when teaching finance and investment, he states that there’s a better way for management teams to grow their companies. This involves paradigmatically different thinking about organization, planning, control and leadership and points to the critical importance of universities in determining the future of innovation.

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Filed under Business strategy, Innovation strategy, Suboptimality equillibrium

Discontinuity is the new equillibrium

My May 10th, 2011 column in the Telegraph Journal “Bricklin saga has a lesson for province” outlined how the New Brunswick government’s experiment with direct investment in the manufacturing of Bricklin automobiles was a public policy failure. But the column also highlighted that it is important to ensure that as a consequence of that failure that we don’t diminish our capacity to support aggressive and ambitious initiatives that are outside our historical legacy. Entrepreneurs can break the mold to create a competitive enterprise in ways that is wholly unanticipated. My examples of Colin Chapman, Erik Buell and John Britten were textbook cases of individuals who developed world-class products and organizations when virtually everyone was telling them that it could not be done.

Entrepreneurship relies in part on the ability of individuals and teams to recognize paradigm shifts in advance of their occurrence. Apple designed and engineered a product before there existed a market for it. In many ways, Facebook, eBay, Amazon were swimming against the current. For years the business press published articles about how Amazon was not generating revenue and how that constituted its failure. Today, we know better. These firms were all operating on the basis of their ability to identify discontinuities and capitalize on them. Their bets were on how the world was changing, not on its stability.

Could companies achieve success in New Brunswick outside the mainstream? While we don’t have a definitive answer to that, it’s important to not say that it is impossible. We have pockets of capability and expertise and even natural resources in industries not currently on our radar that may bear fruit tomorrow. Thirty years ago, no-one thought that the Annapolis Valley could be the location for a growing group of grape growers and wine makers that would capture gold medals in wine competitions around the world. New Brunswick’s Kennebecasis Valley may have many of the necessary natural characteristics that exist in Nova Scotia. Whether there are sufficient heat units to grow current grape varieties is a key question, but viticultural expertise exists to potentially address that issue. In Nova Scotia, the wine making industry is transforming small centres such as Wolfville, New Minas and Gran Pre in large measure in relation to the tourism industry that has grown around it.

So yes, from an economic development perspective we should focus on what we are good at. My point is that decisions about what we are good at should not be left to committees, whether government or private sector. Funneling scarce resources into a half dozen industries that are prominent today is not the answer. Neither is picking potential winners based on the views of today’s business leaders, many of whom have vested interests. The government has a role to play to provide a competitive infrastructure and adjustment programs for industry to grow. Trade, industry and professional associations have another role to support their members within their industry. The rest of the energy, initiative and ambition needs to come from corporations and emerging entrepreneurs.

Let’s not hold anyone back.

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Filed under automotive industry, Business strategy, economic development, Innovation strategy, Uncategorized