Countries moving up the value chain

Steven Pearlstein’s column in Friday’s Washington Post – “In West Cork, an Economy Made of Stout Stuff” – has a great line about the Irish economic “miracle”:

The thing you notice here is everyone seems to have gotten the economic strategy memo about “moving up the value chain” and decided to take it seriously. I don’t just mean business executives and economists. I’m talking about undergraduates, call-center operators, cab drivers, bartenders, civil servants, union officials and university presidents. All of them realize that an economic boom based largely on cheap labor, tax breaks, knowledge of English and a backdoor into European markets can take you only so far. Now, with labor and land costs approaching Western European levels, tax incentives limited by new European Union rules, and India and Eastern Europe coming on fast, they know they need a second act.

The problem is that lots of other people have read the same memo. For example, the very next day, the Post ran a front page story about “In China, Dreams of Bright Ideas”:

Instead of millions of Chinese youths assembling somebody else’s inventions, the party leadership has concluded, the time is right for China to come up with its own ideas and sell them to everyone else. The question of whether China can pull off this transformation — from workshop of the world to cradle of invention — is key to the giant country’s future.

In a world where comparative advantage is created, not reliant on natural endowments that create advantage in wool versus wine (see Gomory-Baumol and Samuelson), everyone wants to move up the value chain.
But if everyone one does, no one does. As Michael Porter taught us a long time ago, you compete on either price or difference. It is just as important to differentiate where on the value chain a company or country can be competitive. The broad strategy of “innovation” on the national level is the same as every region wanting to be the next Silicon Valley. That leads to a strategy of flitting from semiconductors to biotech to nanotech to the next big thing.
A better alternative to this hyperactivity is to build on your jurisdictional advantage – to use Mary Ann Feldman’s term (see her paper on the Athena Alliance website). Jurisdictional advantage (akin to Porter’s corporate competitive advantage) is build on existing local strengths. But just as companies refine, improve, expand and adapt their competencies, so must localities and countries.
This is what Ireland appears to be doing – not simply moving up the value chain in a generic fashion. They began by leveraging a well-educated, low-cost English-speaking workforce in an EU country to become the American platform for entry into Europe. Now they are looking to build on the competencies that they have created. As the Enterprise Ireland strategy for 2005-2007 states, part of their vision is:

Being strongly positioned in key niches both in the emerging technology-driven sectors such as applied software and life sciences, and in knowledge-intensive segments of longer established sectors such as consumer foods, where significant opportunities for growth exist.

For China, the game is different. They are so large that their jurisdictional advantage will shift from region to region (as it does in the US). It remains to be seen, however, whether the central government will allow the localities the autonomy and flexibility to pursue their unique advantages under a general national innovation and economic development rubric. If China tries to force feed all regions to follow the same exact strategy, their drive to innovation will falter. They will need to craft a strategy for hot spots in certain localities in certain areas.
After all, while “the world is flat” is a great metaphor for increased global competition, Richard Florida has shown that the world is actually spiky. Creating your own unique spike is what a locality’s comparative advantage is all about.

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Getting to know your customers

Apropos my previous posting on Wells Fargo’s customer-focused retail approach comes this discussion by web design guru Gerry McGovern – The greatest skill of the 21st Century:

Technology invariably reduces the touch points between customer and organization, thus reducing the transaction cost. Up to a point, that’s a good thing. Do you want to go to your local store, have limited choice, pay higher prices, but have a nice conversation with the check-out clerk? Or do you go to Wal-Mart?
The problem is that when you close down too many touch points, you blind yourself to what your customer needs.
. . .
In twelve years of working in 35 countries I have found an extraordinary lack of genuine customer focus among web teams. Technical and design skills abound, and content skills are on the increase. However, customer skills are rare.
I told a web team recently that they needed to develop a customer-focused culture. “Great!” was the reply. “Let’s do a survey. I wonder who we could hire to do a survey for us?”
Hello? Outsourcing the understanding of your customer is not how you develop a customer-centric culture. You can outsource coding, design and writing if you want. You cannot outsource understanding your customer. It is the most important skill of the 21st Century.
Those who have a deep understanding of customer needs and behaviour, and translate these needs into effective websites will command high wages. Why? Because that’s how you create value.
Get to know your customers. The more technological society becomes the more important is such knowledge.

The key is linking knowledge and technology. As many of us have been saying for some time – it is not a high-tech economy, it is a high-tech/high-touch economy. Information technology is only as a good as how you use it to put information to use. Gerry McGovern constantly applies that rule to website design. The same rule can and should be applied to all areas of technology/information policy.

Innovation in banking

The latest issue of Business 2.0 has an interview with Dick Kovacevich, CEO of Wells Fargo, about their innovative approach to banking – “Bank different”. Their approach is to emphasize the retail. Branches are called stores and while others are scaling back on brick and mortar, Well Fargo is expanding:

Q: Branches – sorry, stores – are an expensive way to conduct transactions. Why are they still important?
A: Every transaction is an opportunity to engage a customer – both to satisfy a transactional need and also to sell him something. And the transaction actually gives you an understanding of customer needs or another new opportunity. If you come in and cash a check from Fidelity, one of our tellers or someone should ask “Could we introduce you to an investment consultant to see if we can do a better job for you than Fidelity?” and so on. So store traffic is good even though it can be more costly, because transactions give us an opportunity to understand and satisfy a customer’s need, and therefore make new sales.
And I would just ask two rhetorical questions: Who over time have been the better merchandisers, retail stores or banks, in terms of their ability to attract customers and serve them well? Most people would say retailers have been more effective than banks. And I’d ask the second rhetorical question: How many retailers don’t want customers in their stores?
Q: I’ve banked with Wells Fargo for a long time, and I remember when the branches were like mausoleums. Now they’re buzzing. What are all those people doing?
A: Besides what you might call traditional bankers, you’re seeing a mortgage consultant, an insurance agent, and brokers. We’ve also roughly doubled the number of bankers in our stores over the past four or five years.

But that doesn’t mean that they are shying away from the Internet and new technology:

Q: You’ve recently introduced some new Internet-based tools, like a report that categorizes spending whether it’s done through a checking account or credit card and scanners that let small businesses deposit checks electronically. Why don’t we see that kind of innovation in banking more often?
A: You know, I started in business working at General Mills (Research). I don’t think the banking industry is particularly at the leading edge. We probably learn more from other industries than we teach them. That’s why I’m on the Target (Research) board. I think retailers are 20 years ahead of banks in their thinking.
Please don’t tell your readers, but our checking accounts aren’t really much different than Bank of America’s (Research), OK? It’s the way we distribute our products that’s different. We have a lot more in common with other distributors of commodity products than we do with other banks. Most of the products that Target and Wal-Mart (Research) carry are similar, and the way you buy them is similar. Or take Home Depot. The products aren’t what distinguishes Home Depot (Research); it’s the way they put a plumbing store and a paint shop and so on under one roof.
And so we’re doing that with financial services. We’re taking what were commodity products delivered through multiple sales forces and putting them all under one roof so the consumer can come in and choose which products make sense. Before, you had to go to a banker, a broker, or an insurance agent for a CD, a mutual fund, or an annuity, and yet they were all trying to satisfy some sort of a long-term savings need. The risks and rewards are different, and you had to pay three different salespeople to bring those to you, and then you had to decide which one made sense because you figured the salespeople were all biased, right?
Now you can come to a Wells Fargo and we can talk to you about the costs and benefits of a mutual fund vs. a CD vs. an annuity and give you some advice – and we’re agnostic because we’re not just selling CDs. We can say “OK, what’s best for you?” Other businesses have figured out how to do that in retail, and we have now figured out how to do it in banking. Eventually, maybe some of our competitors will too.

As this story illustrates, innovations in how products are delivered are just as important in differentiating a company as innovations in the products themselves. The power of these changes in business models and processes have been demonstrated over and over again as, for example, Southwest Airlines re-wrote the rules for airline routes, Federal Express created a new industry, and e-Bay made the flea-market the center of the Internet revolution.
As we set our national innovation policy, we need to keep in mind these innovations. And look to the laws and regulations that can help or hinder them. Well Fargo’s all-in-one retail activity would not have been allowed under the regulations a few decades ago.
This is not to say that all regulations should be swept aside in the name of innovation. That is a formula for chaos not creative destruction. But innovation policy must look to a broad scope of areas to be successful – not concentrate on science and technology. Only with a broad vision can we see and understand where innovation is truly occurring in this I-Cubed Economy.

The decline of the image of America

The follow obituary was published in the most recent edition of The EconomistYasser Talal al-Zahrani

Yasser Talal al-Zahrani, a prisoner in Guantánamo, died on June 10th, aged 21
Nonthing much distinguished Yasser Talal al-Zahrani from the 500 or so other prisoners held by the Americans at Guantánamo Bay, in Cuba. In his loose-fitting orange clothes and flip-flops, he spent the long days sitting or lying in his wire-mesh cell. He washed with water from one bucket, made water in another.
Five times a day, when the call to prayer came over the camp PA system (sometimes overlaid, or garbled, with announcements in English), he would spread a towel on the cement floor and pray. At least it was not hard to determine Mecca’s direction. The sun blazed in through the mesh and baked the roof of corrugated iron. If he left his cage to be escorted, in leg shackles, to interrogation or the hospital, humidity quickly soaked his shirts with sweat.
. . .
On June 10th, near midnight, he made his bed to look as if he was in it, wrote a suicide note, pushed a wad of cloth into his mouth, then hanged himself among the laundry drying from the ceiling. His colleagues did the same.
As he had hoped, his death led voices around the world to demand that the camp be closed. One senior American official, immovable, called his suicide “a good PR move”. She may have been right; Guantánamo, alas, remains wrong.

When a magazine such as the Economist feel compelled to make such a statement, something is very wrong. What is happening to that very important intangible asset: the American brand – the image of America? What ever happened to the “shining city on the hill” that Ronald Reagan talked about?

1st quarter 2006 current account

The quarterly current account data for the US came out this morning and the numbers were better than expected – specifically a rise in income payments. According to the BEA:

The balance on income shifted to a surplus of $1.9 billion in the first quarter from a deficit of $2.2 billion in the fourth.
Investment income Income receipts on U.S.-owned assets abroad increased to $140.1 billion from $130.4 billion. “Other” private receipts (which consists of interest and dividends) increased strongly, and direct investment receipts also increased.
Income payments on foreign-owned assets in the United States increased to $136.6 billion from $131.0 billion. A strong increase in “other” private payments (which consists of interest and dividends) and an increase in U.S. Government payments (which consists of interest) more than offset a decrease in direct investment payments.

From the point of view of our pure intangibles trade, there was nothing new in the report – since royalties and business services are already reported monthly as part of the trade figures.
The rise income payments did spark a minor renewal of the dark matter debate. Brad Selzer re-iterated is view that the dark matter thesis doesn’t hold up:

But the big gains came from foreign direct investment. The earnings of US firms abroad increased by $2.6b in the first quarter (v. q4). But even more importantly, the earnings for foreign firms fell by $3.7b. The net swing was $6.3b or so — overwhelming the US interest bill.
Dark matter (though not from Disney)?
Continued gains from the export of US intangibles (just not by Disney)?
Or bad data?

Mike Mandel touted the “Return of Dark Matter”:

What a nice surprise this morning. I looked at the latest current account data, and discovered, lo and behold, that in the first quarter the U.S. earned more money on its foreign investments than foreigners earned on their investments in the U.S.
Not bad for the world’s biggest debtor, eh?

As those of you who have been reading this blog know, I take Brad’s side on this.
Sorry, Mike, but I didn’t hear your talk about the $2.2 billion income deficit in the 4th quarter. And simply asserting that the greater inflow of income over the outflow of payments is due to some mysterious “dark matter” doesn’t make it so. There are just too many more plausible explanations for this occurrence.
I agree that our data is bad and we don’t really have a handle on the flow and the values of intangibles. But we can’t wish away our huge current account deficit and our grow indebtedness on some dark matter.

McCain almost gets it

On Monday, Senator John McCain gave a major economic speech to the Economic Club of New York. While the speech focused on the standard macroeconomic issues of the Federal budget and trade issues, there were a few lines at the end that really caught my eye:

My friends, in the course of my lifetime our economy has undergone unbelievable changes. When I was a kid, our economy grew by producing more and more of the same. We now have an “ideas economy” where growth comes from making new things, not larger quantities of the old things.
If you walked into my house when I was twenty years old, my parents would have proudly displayed the same appliances they had when I was ten years old. Today I walk into my own house and am awestruck by the marvels my family uses – flash drives, Ipods and Tivos, things we never could have dreamed of, have become part of our every day lives.

Close, but not quite. Senator McCain, like most of Washington, is still thinking of innovation and ideas as making new things — not as solving problems better and doing things in new ways. In this I-Cubed Economy where much of our innovation comes in the services and intangible goods area, the focus on “new things” misses the point. Unfortunately, this gadget mentality still plagues our policy debates.
However, I am extremely heartened by the Senator’s understanding of how the economy has changed. And I do heartily agree with him when he stated, “as our economy has changed, too often, Washington has not kept pace.” I may not agree with some of his solutions – which imply that all we have to do is get government out of the way. But that is the debate we should be having. Hopefully the Senator’s remarks will help start that debate.

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

Click here to download a PDF
version
of this report.

You
don’t have the ability to read PDFs? Get Acrobat now by clicking
here
.

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.