Innovation and the development of new markets are the two imperatives for any Canadian manufacturer or exporter determined to succeed and grow in today’s challenging and intensely competitive economy.
The two go hand in hand. Companies innovate when they develop new or improved cost competitive solutions for customers or for their business. At the same time, business growth and expansion in new markets both depend on being able to deliver quality solutions to customers on time and at competitive costs. It takes much more than getting product out the door today to be a successful manufacturer or exporter. The business is really one of providing competitive solutions to enable customer success.
From my perspective, innovation has to be understood in this broad business context. It needs to be seen as pervasive. And it involves much more than R&D. Don’t get me wrong. R&D is a critical element of the innovation process. But, in my mind, research is about transforming money into knowledge. That’s an activity that goes on within business, universities and colleges, and research organizations all around the world. Innovation, on the other hand, is about transforming knowledge into wealth – into products, services, and processes that add value to customers and to business.
Without this broader perspective, we frequently underestimate both the scale of innovation activity in business and the risks involved in innovation. We also need a broader perspective to understand what affects innovation in business. The latter is particularly important for public policy makers whose goal it is to encourage the development of a highly innovative, high value-adding business sector in order to boost productivity and ensure economic growth, but who often limit the scope of their involvement to pumping billions of dollars into academic research.
If innovation is the process of commercializing knowledge, then it certainly depends on access to R&D results. Many Canadian companies are leaders in their fields of research. However, that doesn’t necessarily mean that every business has to conduct its own research and development. Knowledge and research capabilities can be obtained today from around the world. Even world leaders like Procter & Gamble now find that open source access to research delivers significantly greater benefits than keeping R&D a totally in-house effort.
What is important is that businesses are able to acquire the knowledge they need to develop the new and improved products and processes they require to create value for their customers. Some of that knowledge may not come from formal R&D activities at all. It often comes from the creativity, entrepreneurship, expertise, and experience of employees whose job it is to solve problems on a daily basis. After all, the most valuable output of academic research is not research results, or the new technologies brought to market by entrepreneurial professors, but the students – the highly qualified people who graduate into the workforce.
NEEDED: BUSINESS, STRATEGIC LEADERSHIP
What are some of the other essential components of innovation? Well, I would start with business and strategic leadership. No new product or process will be successful if it does not fit into a well executed business plan. No new product or business will succeed if it is not successfully managed.
Then there are all of those activities involved in successful product commercialization – from the identification of customer requirements in marketing, to product design, engineering, prototyping, and scaleup, and of course to the financing required to sustain the process until new products realize commercial returns. Canadian manufacturers report that for every dollar spent in R&D, $10 is spent in design, engineering, and prototyping activities, and close to $100 in invested in re-engineering and scale-up. That’s a lot of investment to finance – and a lot of risk to manage – in the course of commercialization.
The successful commercialization of new and improved products also depends of course on the design and implementation of cost-efficient business and production processes, investment in supporting technologies, ongoing education and skills development among employees, and continuous improvement. It requires the development of new and improved skills and material procurement processes. It also depends on building new and improved capabilities in marketing, sales, distribution, customer financing and service.
Businesses look at innovation in this broader way. That explains why manufacturers and exporters polled in CME’s Management Issues Survey report that the top 12 factors affecting their innovation performance are (in order of importance):
- Customer expectations;
- Availability of skilled personnel;
- Senior leadership;
- Product design and development;
- Relations with suppliers;
- Employee training;
- Manufacturing processes;
- Internal processes;
- New market opportunities;
- Supportive organizational structure; and,
- Capital investment;
- Access to working capital.
Over one-third of businesses surveyed mentioned these factors. Access to R&D was mentioned by 12 percent of companies – and ranked 18 in a list of 25 factors.
MANY VARIABLES, ONE GOAL
So what does all this mean? First, it tells me that R&D is an important but far from an essential precondition for successful business innovation. It also tells me that companies have to manage a broad range of technical, financial, market, and business risks if they are to become successful innovators and run a successful business. Leadership, effective management, education and sharing of best practices, continuous improvement, business partnerships, and collaboration are essential for risk mitigation.
There are also lessons for public policy makers. Government support for R&D is important but by itself will not serve to improve the innovative performance of business or the economy as a whole. Other framework policies are essential – including tax measures that encourage investments in new technologies, training, as well as research and development. That is why CME is urging federal and provincial governments across Canada to:
- Make the two-year depreciation for manufacturing and processing technologies permanent or introduce a refundable tax credit for investments in new productive technologies;
- Introduce an employers’ training tax credit that can be credited against EI premiums;
- Make existing Scientific Research & Experimental Development tax credits refundable;
- Provide increased support for collaborative research and technology transfer between universities, colleges, government labs, and industry; and,
- Use public procurement to support Canadian innovation.
It’s why we are working with regulators to streamline regulatory approval processes and reduce unnecessary costs of regulatory compliance. It’s why we are focusing attention on access to skilled and technical workers and on workplace training. And, it’s why we are working with government research organizations, trade departments and agencies, to secure access in international markets for Canadian exports as well as to sources of scientific research and technology.
The future of Canada’s manufacturing and exporting sectors will depend on their ability to specialize, customize their products and services in the form of specific solutions for clients, streamline operations and logistics processes, and integrate knowledge and service into every aspect of their business. Innovation and continuous improvement will play critical roles. But, they have to be coupled with entrepreneurship new business opportunities. Innovation must lead to commercialization and competitive financial returns at the end of the day. That’s the nature of business success.
Jayson Myers is president, Canadian Manufacturers and Exporters, Canada’s largest trade and industry association, promoting the continuous improvement of Canadian manufacturing and exporting through engagement of government at all levels. For information visit www.cme-mec.ca.