Category Archives: Innovation 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

Economic Development Strategies Need New Perspectives

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Published in the Telegraph-Journal 11th December 2012

Government, business and academia are beginning to recognize the importance of the economic growth even if they are not in full agreement about what to do about it. Canada’s standard response to global economic transformation has essentially resulted in maintaining the status quo but this can no longer be enough. For future generations to continue to enjoy the high standard of living that has become emblematic of the Canadian identity, elements of an economic development strategy may be necessary

What is clear is that some of the policy measures initiated at the provincial or federal level must be integrated into a comprehensive, long-term country-wide strategy. At the same time, this national vision must be incorporated into approaches that respond to local conditions on the ground because not all economic growth is created equal. In Canada, a large number of firms are small and medium size (SME), without the critical mass to compete internationally. While business mythology has it that SMEs are responsible for the creation of the largest number of jobs in Canada, this statistic is not the whole story. The key success factor that underpins whether firms will grow and create jobs is not size but an ability to sustain high levels of growth.

Across industries in Canada, and irrespective of firm size, a small percentage of firms that achieve high growth are responsible for driving a disproportionately high level of economic expansion. A study by the Conference Board of Canada states that more than forty per cent of new jobs come from the fastest growing 5 per cent of all firms. In the U.S., from 1998 to 2008, high growth firms were responsible for significantly higher productivity levels than other firms across size and sector characteristics.

We start off productively enough. Canada has a high level of entrepreneurial activity, but over time several factors – such as risk aversion, low export activity, lack of practical university support and weak R&D spending, have conspired to suppress firm growth. Ensuring that these firms are able to achieve scale and sustain their growth to compete on global markets should be a key priority for government, business and academia. Among OECD nations, Canada produces more than its fair share of fast growing firms under five years old.  But as Canadian firms mature, fewer are able to sustain growth, while firms in countries such as the U.S., Sweden and Israel accelerate their growth.

In recent decades, Canadian productivity has substantially lagged the United States and other advanced economies. Productivity growth in Canadian manufacturing averaged less than one per cent between 2000 and 2008 against 3.3 per cent for the American manufacturing industry. Although 4.5 per cent of American services firms are able to sustain their high growth trajectory, fewer than three per cent of Canadian firms are able to do so. Comparisons with other countries in areas such as the number of trade agreements reveal similar disparities. That Canadians have signed far fewer trade agreements than many of its OECD counterparts illustrates our over-reliance on the American market which ironically was strengthened by the North America Free Trade Agreement.

Firms must aggressively exploit opportunities for growth and continually re-evaluate strategic priorities to address a highly charged competitive environment. Mid-size firms that are competing internationally usually are adept at taking advantage of government and university programs and assistance. But there has been very little research performed on how firms can achieve escape velocity to transition from successful start-ups to becoming viable and competitive global players. Instead, governments and academia remain transfixed by the dynamics of start-up sustainability and competition. For firms that seek to move to becoming more global in scope, there is substantially less capable advice, support and intelligence.

Because demographics increasingly constrain the ability of a reduced workforce to support an aging population, we need bold competitors on the world stage. While some Canadians have shown that they can compete globally, too few of our business leaders go down this path. We know that this needs to change but government and academia need to provide the necessary guidance to minimize risk and uncertainty.

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Have We Started to Consider the End of Outsourcing?

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Published in the Telegraph-Journal 7th December 2012

In recent interviews with business media, Apple revealed that it will begin to manufacture computers in the United States for the first time in years. “Next year we’re going to bring some production to the U.S.,” said Apple CEO Timothy Cook. This announcement comes on the heels of decisions made by companies such as General Electric which are moving some of their manufacturing operations back the U.S. after years of outsourcing their production offshore to countries such as China and India.

Reversing the offshoring trend —insourcing— to bring manufacturing back to the U.S. addresses a number of challenges: transportation is simplified and less expensive, intellectual property is more easily protected and costs can be managed with greater transparency closer to home. Companies are better able to manage innovation and productivity because they are more involved in the key elements of production. But these developments don’t mean that the era of outsourcing to offshore locations is over. Nor does it mean that jobs that have been offshored are coming back to North America in large numbers.

Many offshore outsourcing decisions were based on the single determinant of dramatically less expensive labour. In many cases, offshore labour was so cheap—fifty cents an hour against as much as $20 an hour in North America—that it compensated for higher costs and risks in other areas. Labour arbitrage may have been a determining factor for many firms seeking to reduce costs, but there are other advantages to countries such as India and China. Offshore labour generally lacked troublesome unions, and safety and environmental conditions tended to be less onerous than in the West.

There is another reason that many U.S. companies are reconsidering their commitments to offshore production. Any one of four critical risks can torpedo an outsourcing relationship: economic fundamentals, behaviour, execution and relationship management. Reviews of outsourcing relationships increasingly reveal that many were not well managed. Relationships frequently lacked common, shared metrics which then led to disagreements about quality. Overlapping operational and contract management roles contributed to interpretations of metrics that were overly dependent on management of the day. With no agreed objective measurement of performance, misunderstandings about success were often difficult to avoid. Maintaining an effective outsourcing relationship requires conscious ongoing investment of management expertise as well as financial. Since the rationale for offshoring was cost cutting, some firms were unwilling to contribute to that investment. Poor economic fundamentals often were unresolved.

Changes in the global economy have caused many firms that had been committed to offshoring to reconsider their options. The cost of fuel is one of those key changes. Shipping cargo is much more expensive than even ten years ago as oil prices have tripled. The cost of wages in China has increased exponentially and is forecast to rise at more than 15 per cent per year in the medium term. In the U.S., labour unions have become more compliant if not more acquiescent in the wake of the 2007-2008 financial crisis. Unions are more agreeable to making deals that reduce the costs of wages and benefits to corporations. Productivity has increased substantially in the U.S. largely as a consequence of robotics, computerized inventory control, voice recognition and online commerce. This trend has accelerated during the current recession with the result that productivity increases have compensated for higher labour costs. Labour has become a smaller proportion of the total cost of finished goods.

There is a dawning realization in many U.S. firms that management failures have been chiefly responsible for the reversal of commitment to offshoring and outsourcing of all kinds as the economics have changed in favour of bringing jobs back. Although much of American manufacturing many never return, the rebirth of even a portion of manufacturing will require a rethinking of the critical role of management to the survival of the firm.

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Filed under Economics, Foreign Direct Investment, Innovation strategy, Job creation, Labor force management, Offshoring

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

New York’s Newest Idea Incubator: Cornell-NYC Tech

By Peter Lindfield, published in the Telegraph-Journal 21st September 2012

A longtime myth may soon be discredited. For more than 20 years, conventional wisdom had it that the success of Silicon Valley would never be duplicated. But Cornell University earlier this year won a bid to build a $2-billion graduate school on New York City’s Roosevelt Island.

The Ivy League school partnered with the Technion-Israel Institute of Technology, an Israeli-based public research university, to create the Cornell-NYC Tech campus. This helps fulfill a growing vision of generating a startup boom in Gotham.

The Cornell-NYC Tech project may provide a view into the future where large and complex technical infrastructure provides the blueprints for successful ecosystems of innovation. The development of similar mega-tech centers are underway or in the planning stages in countries such as China, India and Germany.

The joint project is part of New York City’s Mayor Michael Bloomberg’s ambitious efforts to create new businesses in New York and to develop the city’s five boroughs as the technical business capital of the world. The project could be a large as two million square feet on Roosevelt Island, across the East River from Manhattan.

It promises to give other hubs of entrepreneurial science around the world “a run for their money,” said Bloomberg. “It really is a game changer. In fact, the economic impact will be even greater than we originally thought. It will generate more than $23 billion in economic activity over the next three decades as well as $1.4 billion in tax revenues.”

Cornell-Technion’s plans include a high-tech research centre dedicated to attracting brilliant young minds, establishing fresh businesses and powering New York’s post-industrial intellectual economy, beginning in 2017.

For all that to happen, the Roosevelt Island centre will need to be an exciting, urban place and resounding of innovation. To support the right vibe, research towers and sloping lab buildings are oriented for the most efficient capture of solar energy in the proposal for a new Engineering campus. Even more investment will be necessary to connect Roosevelt with Manhattan, but as with most super-initiatives, Cornell-NYC Tech initially will be a cost centre. Profits will not roll in immediately.

“This is a story of connectivity between people and their ideas, between researchers and business people and between students and their dreams,” Cornell President David Skorton said.

New York has yet to establish a reputation in IT innovation in the way that Silicon Valley has but New York possesses some attributes that are vital to rapid growth.

“You’ve got to understand how big we are,” said Bloomberg, noting that “New York City has more undergraduate and graduate college students than Boston has people.”

Henry Etzkowitz, senior researcher at Stanford’s H-STAR Institute, coined the term “entrepreneurial university” to characterize the role universities can play to foster startups in a way that most effectively leverages local advantages. CornellNYC’s Tech graduate curriculum is intended to draw on talent and innovation in the many fields where New York City is already a dominant player, such as in global finance, media, design and fashion.

“This is the strength of New York,” he said. “It has all of these resources but many of them isolated from each other.” Cornell-NYC’s Tech will bring them together under one massive roof.

Etzkowitz calls for targeted investments as well, particularly in creating regional partnerships to create efficiencies and other institutions focused on economic development but cautions that “real success demands patience; economies grow slowly and payoffs come slowly. The powerful impulse to keep score on public spending needs to be weighed against the requirements for investments with uncertainty built into the payoffs.”

Will Cornell-NYC Tech become the model for leading entrepreneurial ecosystems? Even considering New York’s size advantage, or perhaps because of it, at a time of fiscal constraint and diminished expectations, this uncertainty looms largest.

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Filed under Entrepreneurship, Innovation strategy, Universities

What Silicon Valley Can Still Teach Us About Entrepreneurship

By Peter Lindfield, published in the Telegraph-Journal 9th August 2012

The success of Silicon Valley was in no small part because of unintended consequences involving outward-facing research universities building Cold War weapons systems with the assistance of massive U.S. government R&D. In 1979, regulatory change accelerated the involvement of venture capital when changes in the U.S. Employee Retirement Income Security Act resulted in a dramatic increase in pension funds investment.

We know today that we cannot perfectly duplicate Silicon Valley’s success. But there are lessons we can learn about innovation and building startups even without Cold War funding. Many of these lessons are changing our fundamental perceptions of how innovation, startups and entrepreneurship work.

As in the early Silicon Valley days, 90 per cent of startups still fail in their first five years, representing an enormous waste of productive potential. We once believed that creating an innovative product or service, establishing a 5-year financial forecast and executing a business plan was all that was necessary for startups to succeed. Marketing and sales would follow demand. Many universities continue to teach entrepreneurship around these assumptions. There is growing evidence that this process fails because startups are not simply smaller versions of large or established companies.

Steve Blank, author of The Startup Owner’s Manual moved from being a Silicon Valley serial entrepreneur to teaching entrepreneurship at Stanford University. He is emblematic of the new thinking about how startups succeed and fail.

Today we know that many more startups fail from a lack of customers than from a deficiency of innovation, lack of investment capital or failure of product development. Startups are still being built with business tools from the 1950’s. According to Mr. Blank, established companies execute a plan because customer characteristics are known. A startup is a temporary organization designed to search for a repeatable and scalable business model. Discovering and validating customers happens before the development of a business plan and before salespeople are hired.

Companies build value for themselves while delivering products or services to its customers. This is achieved through key partners, resources, customer relationships and segments and appropriate channels. Ultimately, these elements create revenue streams and profit margins. But at the startup stage, much of this is hypothetical. Potential customers cannot easily put a value on innovative products and services and research tells us conclusively that no business plan survives first contact with customers. A key task for startups is to transform these guesses into facts. Universities such as Stanford, the University of California at Berkeley and Columbia have transformed their entrepreneurship teaching programs to reflect this new Silicon Valley model. The results have been encouraging with far fewer failures and stronger growth.

Even under this new Silicon Valley model, government is still a cornerstone of entrepreneurship development. Although the roles of universities, industry associations and venture capital firms remain critical, government is central to the development of a successful entrepreneurship ecosystem. The requirements of this ecosystem also point to what government can do. It can encourage a “fail fast and move fast” culture. It can encourage the growth of private sector-led entrepreneurial centers such as accelerators and incubators. It can review incentives for risk capital to locate in close proximity to these centers.  It can task universities with the responsibility to become more outward-facing and encourage them to develop a 21st century entrepreneurship curriculum. It can rationalize its own policies and processes to encourage small business initiatives – whether startup, early stage or established — to consistently adopt these new entrepreneurship practices. And this approach of government policies, funding and tactics will not cost taxpayers more than they are paying today.

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Filed under Entrepreneurship, Innovation strategy, Universities

Advantage of the Small But Nimble Player in Question

By Peter Lindfield, published in the Telegraph-Journal 1st June 2012

Any discussion about jobs and prosperity inevitably raises the subject of the government’s role in economic development. The ensuing arguments usually revolve around two main groups of thought. The first group is of the view that markets know best and building profitable companies is achieved in the absence of government interference. Regulations, subsidies and excessive rules tend to introduce market distortions and are to be avoided. Their take on Darwin is that he espouses the view of “survival of the fittest”, so it is inevitable that many companies will perish in the heat of competition. This particular version of laissez faire capitalism has become closely associated in the U.S. with the Republican Party ideologies of the Tea Party but has received a warm reception in some quarters in Canada as well. Creating jobs and generating competitiveness are the product but not the goals of profitable companies. In this world, government has no business picking winners and losers.

The second group holds the view that fragile companies need protection. This group also thinks that job creation and competitiveness intrinsically are government objectives. Their rationale is that capital, entrepreneurship and market know-how are often in short supply and may never develop if they are not carefully nurtured by government. In the right context and under controlled conditions, subjecting local industries to external competition is important. However, this requires that the industries have been sufficiently developed so that they do not succumb to the initial blast of foreign competition. This is particularly important since any local firms are likely to be small with few financial resources compared with the multinationals against which they have to compete.

Ironically, both of these perspectives are founded on theoretical models in which governments design finely-tuned optimal interventions and practical considerations. The theoretical language is remarkably similar although the results differ substantially. Both assume government is susceptible to being held hostage by special interests.

For society that has made investments, there is little value in exposing local firms to greater competition if they are most likely to be eliminated and if alternative sources of employment are not available. It is naive to demand market changes designed to produce a so-called level local playing field when competitors are tilting theirs in their own favor.

But at what point does government protection no longer make sense? Do start-ups, small firms and companies in transition merit the subsidies, incentives, inducements and grants that governments lay on every year? Are taxpayers realizing a good return on their investment when they support private corporations? Are we protecting infant industries when they are in their maturity and should either be standing on their own or falling to creative destruction?

Part of the challenge associated with these questions revolves around the mythology of the smaller but more nimble corporation. Laissez faire capitalists contend that small firms can thrive with the right characteristics of management, innovation, strategy and leadership. The objective is to effectively wield that innovation to grow in scope and scale.

Others hold that government must support start-ups. Recent academic research has thrown a spotlight on the critical importance of size and deep pockets in corporate portfolio development. Large multinationals can in fact move very quickly with new models of organization design. Whether economies of scale really matter depends on the industry type, degree of competition among firms, the length and complexity of the supply chain and the maturity of the market. The competitive advantage of the small but nimble player may no longer exist. The key question today is how long companies should huddle under the umbrella of government protection and what return taxpayers are receiving for this protection.

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