Innovation and Design: Keeping America Competitive

a Congressional briefing luncheon
with

 

Roger Martin, Professor of Strategic Management and Dean of the Rotman School of Management, University of Toronto

John W.
Leikhim, Director, Corporate Innovation Capability, Procter & Gamble


Moderated
by Congressman Dave Hobson (OH-7)


hosted by
Athena Alliance and
the Congressional
Economic Leadership Institute

Held at the Rayburn House Office Building, Washington, DC
June 14, 2006

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Click here to view Dr. Martin’s full remarks.

Click here to view Mr. Leikhim’s full remarks.

 

The
session began with welcome and preliminary remarks by Dr. Kenan Jarboe,
President of Athena Alliance, followed by David Klaus, President of CELI, who
introduced Congressman Hobson.

 

Rep. Hobson opened the seminar by noting the large number of young
people in attendance, saying that America’s
future is in science and it is important that more young people become involved
in science. After briefly describing what Congress was doing to fund science
and technology, he turned to the focus of the seminar: what makes American
companies fertile ground for innovation, design, and product development and
the policies and programs Congress should consider to support them.

 

Rep. Hobson introduced Professor Roger
Martin, Dean of the University of Toronto’s
Rotman School of Management, who is leading a ground-breaking effort to
redefine business education for the new design-based economy. Dr. Martin is a
leading expert in using design as a way of approaching and sustaining
innovation. Rep. Hobson then introduced John Leikhim, Director of Corporate
Research and Development Innovation and Capacity at Procter and Gamble. Mr.
Leikhim has served as the company’s Director of International Technology
Coordination, Director of New Business Development Organization, and Director
of Corporate Innovation Capacity. Rep. Hobson said Mr. Leikhim would share how
design and innovation really happen in the corporate setting and what types of
policies can strengthen America’s
leadership.

 

Dr. Martin began by talking about challenges to the competitiveness
agenda, especially in a world that is becoming more focused on innovation and
design, and suggested how the agenda could be improved.

 

He said he is especially fascinated
by the difference between the approach scientists take to their work and the
approach they take in the world, where they are less scientific—if not
superstitious—in their thinking about the American economy. If we are to have
an innovation policy that best serves the nation, he asserts that we need to
think more factually about what is happening in the economy.

 

As an example, Dr. Martin
challenged the National Academy of Science report called Rising Above the Gathering Storm. The report asserts that emerging
countries are catching up to the United States
in scientific and technological know-how. To prevent the United States from
falling behind, the report calls for greater
government support for science and math education, more federal funding for
science and engineering research, greater support for higher education, and
more generous tax credits for corporate R&D.

 

This presents a vision of the U.S.
economy as losing ground economically, where the high-tech sector is key to economy vibrancy.

 

The report contends this vibrancy
is threatened because each year China
produces 600,000 engineers, India
produces 350,000, and the United States
produces just 70,000. Dr. Martin said it is true that the Chinese and India
economies have grown as a percentage of the world economy, as their populations
have grown. However, he said, the real numbers of scientists and engineers at
the undergraduate level are closer to 350,000 for China,
112,000 for India,
and 137,000 for the United States.
So rather than the United States
being way behind at the index as the percentage to population, we see the United
States. at 100, China
at 58, and India
at 22. In addition, America
employs one-third of the world’s science and engineering researchers; 35
percent of science and engineering articles are published in America;
and the United States
spends 40 percent of the world’s R&D dollars. So it is hard to argue that
the United States
is not strong and leading the world in science and engineering.

 

Second, Dr. Martin argued that,
contrary to popular opinion, in the United
States the high-tech sector is tiny compared
to the overall economy. The six sectors of information technology,
communications technology, aerospace vehicles, aerospace spending, medical
devices, and pharmaceutical and biotech account for about 1.96 percent of U.S.
jobs.

 

This
compares to one single sector—financial services—which at its narrowest
definition is 3.23 percent of all jobs (which is 65 percent bigger than the high-tech
sector) and at a broader definition is actually 6 percent of jobs (or three times bigger than all the high-tech
sectors combined).

 

There
is also the widely held belief that high-tech sectors are important because
they provide high-wage jobs. In fact, financial services wages are 13 percent
higher than high-tech sector wages.

 

In addition, there is the concern
that government funding for R&D is declining. Absolute government R&D
spending has actually increased since 1953, but has fallen as a percentage of
the economy. Private-sector spending has increased and become the real driver
of R&D.

 

Thus, it is hard to support the
conclusion that the United States
is way behind in science and technology and that increased support of the
high-tech sector is needed.

 

Rather than focus on high tech, Dr.
Martin said, broad-based innovation is much more important to the economy.
Research show that the largest increases in productivity in the 1990’s came
from six industries: wholesale trade,
retail trade, securities (financial sector), semiconductors, computer
manufacturing, and telecommunications. He noted that wholesale trade, retail
trade, and securities cannot be defined as high-tech sectors. He also noted
that productivity research shows these sectors are highly competitive and that
this competition is a key feature for productivity growth.

 

Another factor for innovation is
producing business leadership. Among America’s
seven global leaders that are high-tech companies, only two of their CEOs have
any scientific training of any sort. According to Dr. Martin, people outside America
recognize better than we do our massive investment in business education, with
22 percent of undergraduate degrees and 25 percent of master’s degrees in the
discipline of business.

 

Thus, Dr. Martin sees the policy
recommendations of the various pieces of innovation legislation as incomplete. Investing
in R&D is fine, but more needs to be
done to meet the competitiveness challenges.

 

He specifically cautioned against
the recommendations on R&D tax credit. For many years, he said, Canada has
had one of the world’s most generous R&D tax credit regimes, returning 25
percent of R&D spending compared to just 6 percent for America. Yet Canada’s
amount of corporate spending on R&D is among the worst in the OECD. He said
there is absolutely not a shred of proof anywhere in the world that increased
R&D spending is based on the R&D tax credit.

 

What
would be more helpful for policy is the explicit recognition that innovation is
in the other 98 percent of the economy, not the 1.96 percent of the economy represented
by the high-tech sector. Given this, innovation policy needs to focus on companies
like Procter and Gamble, which are in that 98 percent that we believe is
responsible for economic prosperity. Business model innovation is as important
as R&D-driven innovation. Many innovation companies, such as Wal‑Mart,
Dell, Federal Express, Southwest Airlines, and Vanguard Financial, are not seen
as innovative companies because they don’t do a lot of what is traditionally
seen as R&D. But this is the kind of innovation that makes a difference.

 

Rather than focus on R&D, tax
policy should focus on business investment. America
is a low-tax country (the third lowest in the OECD), but has a shockingly high taxation of business investment
(second highest in the OECD—only
Canada is higher). Right now, the U.S.
and Canadian tax systems discourage business investment. Sweden actually has a much smarter tax system than the United States or Canada, with a margin effective tax rate on business
investment of 12 percent.

 

Dr. Martin closed by stating that
he thought the overall U.S.
competitiveness agenda was good, but dominated more by superstition than fact.
The United States
could create a much better policy if people would take a closer look at what
the economy actually is like and base their policies on those facts.

 

 

top

Mr. Leikhim opened his presentation by pointing out that innovation
is not just a good idea, but rather ideas that consistently translate into
great products and services that improve lives and win in the global
marketplace. Systematic, sustained innovation is the foundation of our economic
engine—not only for P&G, but also for America
overall.

 

Mr. Leikhim described P&G’s
innovation as “a kind of magic that becomes part of people’s lives”; that is why, even though P&G is a
knowledge-based company, it does not spring to mind when people think of
cutting edge science and technology. Innovation is P&G’s life blood of
growth, and the company invests over $2 billion in R&D each year—placing
its R&D spending in the top 15 U.S.
companies outside the pharmaceutical industry. While P&G taps the
innovation source of the globe, the United
States is the heart of its R&D
enterprise. P&G’s R&D
competencies include chemistry, engineering, material sciences, biological sciences,
medicine, veterinarian science, and mathematics—a breadth driven by the
company’s purpose of providing consumers with a range of products that improve
the quality of their lives.

 

Mr. Leikhim used the example of
Crest White Strips, explaining that to develop the product P&G worked
backwards from the consumer need for a convenient, affordable solution to
whiter teeth. Their R&D solution resulted in a new product category that
went from zero to $300 million in two years—launched from the United
States to the global market. P&G’s growth from this and other product
innovations fuels growth across the U.S.
economy, generating business for its domestic suppliers totaling $8 billion a
year.

 

According to Mr. Leikhim, P&G
believes the key to success in today’s global marketplace is using
innovation—not only in products and technology, but also in the supply chain
business model—to decrease the time it takes to bring a product to market. The
global marketplace is characterized by rapid change, the elimination of
geographic boundaries, and fluid global-based abilities—and founded increasingly on models of open
innovation.

 

As Tom Friedman described in The World is Flat, many countries with
low-income markets are now an excellent source of quality, low-cost manufacturing,
but these markets are also showing rapid geographic growth in
innovation-support industries. And beyond manufacturing and services, these
markets are providing new pure innovation services in material, products, and
manufacturing processes.

 

Mr. Leikhim said the harsh
reality is that if U.S.
companies don’t keep sustaining innovation at the forefront, economic growth is
going to happen somewhere else. Other nations are investing in both leading
edge research and on expanding their talent pool. We need to form collaborative alliances in
which academia and industry, enabled by government, drive innovation together.
He said the National Science Foundation has the potential to be the premier
federal resource for creating high-tech products and stimulating our nation’s
innovation leadership.

 

For example, Mr. Leikhim said,
the development of biologically derived raw materials from renewable
resources—biopolymers and biofactors from plants—provides a win for both U.S.
agriculture and consumers seeking sustainable materials. For a large commercial
enterprise like P&G, the present and future are driven by such creative
scientific thinking. However, the National Academy of Sciences, in Rising Above the Gathering Storm, and
the Council on Competitiveness, in Innovative
America
, outline problems facing the United
States that P&G believes need to be
addressed to maintain our leadership in innovation.

 

Mr. Leikhim said the NAS report
makes a compelling case for the decline in U.S.
science, technology, engineering, and math capabilities, reflected in K-12
education, a shortage of university graduates and basic research staff in these
fields, and somewhat decreased attention to these fields in society as well as
public policy. NAS recommended changes to education, research, higher
education, and economic policy that are captured in several bills before
Congress. P&G supports these initiatives because investment in innovation
will boost the economy and strengthen the company’s ability to succeed
effectively in the rapidly changing global environment.

 

According to Mr. Leikhim, we need
new approaches to collaboration among academia and industry, enabled by
government policy, which maximize the strength in the university and the
corporate R&D communities. Business input can mean studying the correct
target, increasing the probability of pulling emerging technology into the
economy.


Mr. Leikhim concluded by defining
three major shared responsibilities for addressing the innovation challenge:

 

·       
Creating interest and passion in physical
science and mathematics through high-quality education.

·       
Sustaining the creation of important new
technology platforms in order to create “new-to-the-world” businesses through
leadership and basic research.

·       
Bringing innovative talent and innovative
research together to transform scientific advancement into practical new
products and services, launched through the creation of knowledge-based
businesses.

 

top

Rep. Hobson then opened the session to questions. He began by
commenting that over the last 25 years there has been a shift among
corporations away from the research portion of R&D toward more of just the
development part. Corporations are on a much shorter timeframe. The federal
government has to pick up that research, in the national labs and in
collaboration with the universities. But even government research, such as the
Defense Advanced Research Projects Agency (DARPA), which was a premier
long-term research agency, have shifted to a shorter-term view. He thinks that
is the basic problem for the future of competitiveness in this country: how we
fund it. His congressional committee has taken on that challenge and
dramatically increased the investment in science.

 

A participant said the number of
business degrees coming out of China
and India may
be more important than the number of science degrees. He asked the speakers to
comment on the fact that India
and China are
increasing the number of business graduates—and whether the increase in trained
managers is a threat to U.S.
competitiveness, given the earlier comments on the importance of business
leadership.

 

Dr. Martin replied that the
Chinese are revving up very quickly, increasing from zero not too long ago to
about 12,000 a year with a goal of 33,000 in three years. America
is at roughly 140,000. He thinks China
and India
absolutely are getting their economies together and increasing their investments.
But he is nervous about the United States
investing in generic science-based research or education as the answer. The
answer is in creating more people that can do the kind of conceptual, creative,
design-oriented thinking which will be needed in the future—not in playing the
old game.

 

Rep. Hobson said it would be
interesting to know how many of those people earning degrees in foreign
countries are trained by people who received an MBA in the United
States. Dr. Martin noted that the Chinese
government’s policy for Executive MBAs is that 40 percent of the courses must
be taught by non-Chinese professors. The schools are thus required to form a
joint venture with business schools outside China
to bring in outside knowledge.

 

Dr. Jarboe expressed concern that
we need people who are not only trained in business and technology, but also
have a creative side. He mentioned the new Stanford
Design School
(D-School) and the Illinois Institute of Technology and asked how the Rotman
School is combining those areas.
Dr. Martin said we have to meld together the best of design education,
engineering education, and business education. He is doing that right now along
with David Kelly, the Design Engineering Professor at Stanford, and Patrick
Whitney, the Director of the Institute
of Design at the Illinois Institute
of Technology. They are working together to forge a relationship between those
disciplines. He thinks we need to produce people who have design business and
technology capabilities wrapped into one—the new 21st Century
skills—and it will be a long time until China and India will be able to catch
up with us in this area.

 

Another participant commented on
some of the dramatic changes occurring in business schools and asked what can
be done to derive innovation generally from higher education, considering the
reductions in science and engineering funding. Dr. Martin said funding things
like the Stanford D-School—an actual integrative effort—would be one. At the Rotman
School, all the funding to do
integrative thinking comes from the private sector because public funding tends
to be based on peer review, and therefore funds only what has already been
done. He added that money for the D-School comes from the founder of the German
software company SAP. So he thinks the government can get in the business of providing
funding for integrative activities at the intersection of technology/design/business.

 

A participant asked about the
significance of a German company funding the D-School and whether there were
institutional mechanisms for this type of funding—which led one participant to
make a comment about Congressional earmarks.

 

Dr. Martin responded that one of
the most important things was to provide encouragement for these types of activities.
Concerning innovation in business schools, he believes that there is innovation
because the schools get ranked by a number of sources, such as Business Week, US News & World Report, and The Wall Street Journal. This type of information—such as requiring
airlines to post on-time departures and lost baggage statistics—is always a
spur to innovation.

Rep. Hobson commented on how the
initial requirement for MBAs and PhDs drives over-specialization. He noted that
when he was a young mail boy at P&G, the company had a program—called
Diamonds in the Rough—to identify outstanding and innovative thinkers who might
not have strong formal credentials. He said the military tries to do that now,
giving an opportunity to people who don’t fit the normal criteria. But this
requires management with the foresight to recognize these special talents.

 

A discussion followed about how hospitals
in Cleveland working together in a new general medicine program—made possible
by funding from a Congressional earmark—brings together people who normally do
not come together except in a competitive role.

 

In response to a question about
patents and patent reform legislation that would remove the automatic
injunction penalty for patent infringement, Dr. Martin questioned whether
patents had gone too far. He said it was a huge step, and an error, when the
patent office decided you do not have to actually deliver a thing to its office
and have the office figure out whether it is patentable; all you have to do is
deliver a concept paper. The result is patenting of concepts and business
models based on incredible vagueness. He also is concerned about the
development of “patent trolls” and the shrinking of the public domain.

A participant asked about what P&G’s
practice of “tapping into more talent pools” means for the United
States in terms of local economic opportunity
and success. Mr. Leikhim described its three dimensions. First, he said P&G
has a large R&D presence outside the United
States and is tapping selectively into areas
where there is the greatest strength of innovation, especially in specific
markets and products. Second, looking at the United
States, with the major scientific pool
facing retirement, P&G sees relatively small pools of candidates and must
choose from a dozen people versus 50. Finally, he said over the next decade we
have the ability to develop the pool here; if we do not, P&G may we be
forced to go overseas.

 

Rep. Hobson added that international
marketing is as important as R&D. He noted that one of P&G’s greatest
marketing successes was to penetrate China’s
beauty market. He believes that P&G probably has one of the best marketing
strategies in the world.

 

The session’s co-host, Mr. Klaus,
wrapped up the meeting by mentioned another P&G marketing success,
Pringles—which were available at the head table. With that, he thanked the
speakers and the moderator and adjourned the meeting.

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