Articles: Carmageddon #3 of 3 (Final)

4.0 Clayton Christensen and the Innovation Dilemma

Harvard University’s Clayton Christensen blames an ever-increasing focus by Governments companies upon Efficiency Innovation and, the almost total absence of focus on Disruptive Innovation or Sustaining Innovation by manufacturers.  The Efficiency Innovation focus also creates Broken Innovation Pipelines.

Disruptive Innovation
Creates Corporate & Economic growth – by making products more affordable and accessible to the great majority.  e.g. the iPhone made communication accessible to the whole world.  Disruptive Innovations always create economic growth and many jobs – but require large amounts of capital.

Sustaining Innovation
Makes existing good products better – it’s usually the main focus of Management. e.g. a new model replaces the old – or a new product replaces someone else’s product.  Sustaining Innovation usually delivers improved margins – but creates little growth, few extra jobs, and requires Capital. Sustaining Innovation typically accounts for most of what we normally call Product Innovation.

Efficiency Innovation (Lean)
Makes existing products (and processes) far more efficient – makes more, with less via Lean Manufacturing type activity:  e.g. typically does not improve the product – but it reduces product or process cost by improving efficiency and eliminating waste. Efficiency Innovation always increases cash-flow for the firm – always eliminates Jobs – and requires no Capital.

The Problem as defined by Christensen
Christensen’s work indicates that Financial ROI or RONA ratios being used by Businesses has distorted the firms’ decision making around Innovation. Disruptive Innovation will always display lower financial returns for the firms than Efficiency Innovation which will always show better short-term financial and cash returns – so firms choose Efficiency Innovation over Disruptive Innovations.

Sustaining Innovations will also always display lower financial returns than Efficiency Innovations – so again firms will almost always choose to do Efficiency Innovation over Sustaining Innovations. Short-term management thinking is therefore driving a dramatic change in Innovation outcomes around the world.  Management is choosing to conduct continual Efficiency Innovation activities over both Disruptive or Sustaining Innovations simply because this makes management look good because of the continual improved cash flow and better short-term annual profit reporting of the firm. But they never ask – “what will we lose” if we focus only on Efficiency Innovation?

Christensen claims that Disruptive Innovations have dramatically declined over the past 25 years (e.g. Japan has only a single Disruptive Innovation in that time) and Sustaining Innovations are now far outnumbered by Efficiency Innovation.

Australia’s additional Innovation Dilemma
In Australia we have compounded this dilemma by incentivizing Efficiency Innovation within the firm via Government Industry support programs over either Disruptive Innovation or Sustaining Innovations.
Perversely, this biased incentive rewards firms for eliminating Jobs from Innovation – rather than creating or keeping jobs as would happen if we were to better incentivize Disrupting or Sustaining Innovations.

The Problem this causes for Australia
Christensen’s Innovation dilemma adds to Australia’s other woes in Innovation – and contributes to the broken innovation pipeline by prioritizing the firm’s management attention away from those activities that will enable the firm to create a competitive advantage – while sadly driving management attention towards actions which lead directly to increasingly Commoditizing their own Manufacturing.
(Clayton Christensen video Link https://www.youtube.com/watch?v=Zn6-KksdOgE

Christensen’s Innovation Dilemma is very real for Australian Manufacturing.  Both Industry and Government have embraced “Efficiency Innovation” as the savior of Australian manufacturing – without understanding that it is also a double-edged Sword, and a poisoned chalice, that will eventually destroy domestic manufacturing by fully commoditizing it.

5.0  The Buffett Rule of Innovation

“Show me the Incentive: and I will show you the Outcome caused by that Incentive ” [This was first stated by Charles Munger- Buffett’s  partner].  If the prosperity outcome from Innovation policy in Australia is not delivering:   1)  What Australia needs from Industry, and  2)  What the politicians and policies have promised…  Then quite simply, the incentives in the current Innovation system are distorted at best, or just plain wrong. Given that Innovation policy in Australia is not delivering on the prosperity promise, the Buffett rule indicates that Australia’s current incentive programs for Innovation are wrongly focused. (and hence contributing to the broken pipelines)

Currently Australia spends around $10B a year on funding Innovation – however most of that funding is actually spent on Research Innovation with University or specialist Research facilities. ( i.e. the creation of ideas).  Australia also spends around $2B a year funding Efficiency Innovation via all governments’ main industry assistance programs which use various forms of Lean Manufacturing principles to improve the efficiency of businesses.

However, Australia currently spends very little on funding Development Innovation within the firm.
Thus, compounding the dramatic collapse of design & development capability within our manufacturing firms and driving a further wedge into the existing Broken Innovation pipeline.

“You cannot solve today’s problems using the same thinking that created it.”  –  Albert Einstein

These distortions to the incentives cause an unprecedented splurge on Research and the creation of ideas – while at the same time de-incentivizing any firm from creating a better, more robust, Design & Development capability within the firm. Thus, contributing to the broken Innovation Pipeline.

~~~  Perverse rewards always create perverse results!

Worse still, these distorted Incentives also distort the conversation going on in the head of our CEO’s – such that Research Innovation (ideas) – or Efficiency Innovations (Lean) – are a ready topic of conversation for a CEO – but a conversation around Development Innovation as a problem is very rarely a ready topic of conversation among CEO’s.

My Research indicates this overwhelming incentive bias towards Research Innovation & Efficiency Innovation, and the bias against Development Innovation, has existed in Australia’s incentive programs for Innovation since the mid-1990s.  This is covered in 2 previous documents on this subject: –
1.0  Why Commercialization of Innovation fails in Australia 2017 V5.pdf (22 March 2017), and,
2.0  Why Commercialization of Innovation is Failing in Australia A Précis V3.pdf (specifically talks about the Bias problem)   [ Contact Gary at garystewart52@bigpond.com]

By focusing Biased Innovation incentives on inputs rather than on outputs – Australia has delivered on Christensen’s Innovation Dilemma in spades because we have ignored the Buffett Rule of Innovation.
If the Incentive is wrong, the output will always be wrong.  Put another way – if the Incentive is biased, the outcome will also be biased.

6.0  Pulling the threads together

Australia has long suffered from poor Outcomes from the Innovation promise.  And that is despite a large increase in the absolute level of taxpayer funding poured into Research Innovation, or Efficiency Innovation. One of the major reasons why these poor outcomes continue is that Australia’s Innovation Pipeline continues to become increasingly broken over the past 20 years – mostly caused by the dramatic collapse of Design & Development capability within the firm in this country. This undeniable change denies Australia the promised prosperity from Innovation.  But such actions by both Government and Industry creates an almost single-minded focus on Efficiency Innovation as the savior of manufacturing (Christensen’s Innovation dilemma) – which simply compounds that problem.

Further it is clear that incentives in existing Innovation policies create a strong bias towards Research and ideas at the front-end on the business – or a strong bias towards efficiency Innovation at the back-end of the business – while at the same time de-incentivizing any firm from creating a better, more robust, Design & Development capability within that firm.  Government policy & assistance is also extremely slow and bureaucratic – exactly the opposite of what is needed to support fast time to market pressures of an agile manufacturing firm that needs to grow under intense competition.

When we combine all of these factors with the Impact of the commodity society – it is clear that Australia has a major on-going problem that prevents delivery upon the National Prosperity promise from Innovation.

These problems are now so well entrenched that they have become the industry “norm” and will be defended by those who win from the current biased policy settings – even if that is not in Australia’s best interests. The existing Efficiency Innovation vested interest groups will always drive their own agenda to maintain the biased status quo based on their mistaken belief that Efficiency Innovation will be the savior of Manufacturing.

The existing Research Innovation Vested Interest groups drive their own agenda to maintain the Biased Status Quo based on their mistaken belief that 90% of what we call Innovation is about the creation of ideas.  But Development Innovation (unseen inside the business) has no vested interest group to argue publicly for the critical role of the translation, and execution, of the idea into the hands of a customer – and create both growth and Jobs.

Worse still, the contents of this document are not part of the ongoing conversation by either government – nor by industry – a “Catch 22”.  Industry does not demand change from the politician – and the politician – claims that industry is not asking the politician for better Development Innovation policies and incentives to rectify the innovation prosperity problem.

It’s time that the Government shows leadership, and decides what is best for the future of Industry in Australia. We need a bold new Industry policy framework that will finally deliver a National Prosperity promise from Innovation.  We must keep in mind Einstein’s earlier quotation regarding for the need for different thinking.

What is making the current Prosperity Promise worse is:

1.0   Collapse of Design & Development – has broken the Innovation pipeline
2.0   The Commodity Society – is rapidly creating commoditized manufacturing
3.0  Christensen’s Innovation Dilemma – the bias towards Efficiency Innovation (with distorted funding incentives)
4.0   The Buffett Rule of Innovation – perverse incentives deliver perverse results
5.0  The belief that the creation of ideas is 90% of Innovation – distorts the funding Incentives

What is making the future Prosperity Promise better is:

1.0  Robust Innovation Pipeline – high ability to Create, Translate & Exploit ideas into the hands of a customer
2.0  Top 10% model – can deliver 50-90% Reductions in total Cost, Time-to-Market, Commercialization delivery
3.0  The actions of the top 10% – can be better emulated by more of Australian manufacturing

7.0  What should Australia do right now?

 1.0:   Accept that the world of manufacturing has changed forever

2.0:   Accept that current Industry Policy Bias is adding directly to the suffering & struggles of our manufacturing

3.0:   Accept that current problems that deliver poor prosperity from the Innovation promise must change

4.0:   Accept that the stakes for this nation’s future prosperity are critically high if nothing changes right now

5.0:   Change from the current losing strategy – to the winning strategy of top 10%

6.0   Adapt Government policy & incentives to emulate the Innovation Pipeline strategies of the 10% who are already winning

7.0   Follow & support the winners who adopt the best methodologies that deliver the best results

8.0   A Better, more prosperous future for Australia is easily attainable – the top 10% are already doing it!

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We thank Gary Stewart, for sharing his knowledge, his unique experience from the front lines,  and for his insights shared through these three Carmageddon articles.  We recognize the Toyota plant below as historic because it was the first plant Toyota built outside of Japan some 54 years ago.  We also thank Gary for his insight into how such transformations occur and for helping us understand the challenges we will fact in the future.  We extend our regret to everyone  negatively impacted by the closure.  Gary can be reached at garystewart52@bigpond.com