New HBS competitiveness survey

Last month, the Harvard Business School released the findings from its 2012 Survey on U.S. Competitiveness, Competitiveness At A Crossroads. Directed by Michael Porter, Jan Rivkin and Rosabeth Moss Kanter, this survey updates their earlier October 2011 survey of HBS alumni (Prosperity at Risk) and includes a survey of the general public. (Additional information both surveys is available here).
The survey reports a what it believes is a basic consensus:

Across the political spectrum, business leaders and the general public strongly called on the President and Congress to:
• put the federal budget on a sustainable path by increasing revenue and controlling spending;
• reform the corporate tax code, reducing statutory rates and eliminating loopholes;
• enact a multiyear program to improve America’s infrastructure;
• address distortions of the international trading system that disadvantage the U.S.; and
• craft a responsible framework for developing newly accessible gas and oil reserves.
Both liberal and conservative business leaders strongly supported moves by Washington to:
• streamline regulations; and
• ease immigration for high-skill workers.
Streamlined regulations won majority support among the general public but not across the political spectrum. High-skill immigration won a majority among liberal members of the general public but not among all members.

While corporate tax reform was high on the list, a shift to a territorial tax code was not ranked as highly. (See a recent WSJ story on the differences between sectors on taxes.)
The survey was generally pessimistic about the future of U.S. competitiveness, although not as pessimistic as before. Respondents identified a number of areas that are weak and deteriorating: the tax code, K-12 education. The political system, legal framework, regulation and macro policy were also seen as weak and generally deteriorating, but not as badly as before. Skilled labor and the logistics infrastructure were categorized as strong but deteriorating. Areas such as universities, entrepreneurship and innovation were seen a strong and improving.
Of special interest was the survey of what companies said they were doing to improve competitiveness:

Internal training was overwhelmingly the most common action. But it was not necessarily accompanied by other, external steps to ensure a strong talent pool.
Fully 89% of respondents reported that internal training applied to their enterprises, and 86% of these said their firms offer training. But only 43% of firms with internal training also had apprenticeships, which provide vocational education for new workers, and only 36% also had partnerships with community colleges or others for workforce training.

One has to wonder what they consider internal training and how much they are actually investing in it. Our lack of accounting measures that treat investment in human capital (intangibles) is once again on display.
The report closes with a set of recommendation the authors believe flow out of the findings:
• Accelerate action to build skills collaboratives that ensure a work-ready talent pool
• Mount a national campaign to engage companies in mentoring high-potential American suppliers
• Enhance the role that education and healthcare institutions, especially higher education and major medical centers, play in U.S. competitiveness. This includes the proposal for 20 “manufacturing universities” (see yesterday’s posting)
• Create a national “Census of Business Actions to Enhance Competitiveness” that provides an inventory of actions businesses are undertaking, region by region.
Based on the earlier finding on worker training, I would add one recommendation: conduct a detailed survey of what companies are doing with respect to worker training. While almost all business leaders say they are doing internal training, it is not at all clear what is actually happening and how effective it is. On the face of it, it appears there is no problem. However, we know from basic observation that this is not the case. In order to craft a workable policy on worker training and human capital in general, we need better information.

Expanding engineering and d. schools

My friends Rob Atkinson and Stephen Ezell have floated a proposal to designate 20 universities as “manufacturing universities” (see their Brookings paper and Rob’s ITIF blog posting). The idea is that the U.S. needs to put a renewed emphasis on manufacturing as part of engineering education. Their concern: “engineering departments at most major U.S. universities have shifted to a ‘science based’ model of engineering, which focuses more on publishing abstract scholarly papers than on working with private-sector firms to solve real-world problems.” To remedy this problem, they propose 20 leading universities be designated as “manufacturing universities” with a $25 million annual grant from NSF. To qualify for the funding, these universities would have to revamp their engineering teaching and research activities toward manufacturing and engage in greater joint industry-university research projects.
I think this is an intriguing idea, but would like to hear more about how it would work in practice — and what the deans of some of the engineering schools thought. As a graduate of the University of Michigan School of Engineering (many years ago), I know that there was always an emphasis on working closely with industry. In any event, additional funding for joint industry-university research would certainly be welcomed.
I do think that the proposal is incomplete, however. As I’ve noted before, “manufacturing” is a rapidly changing activity. The game is no longer “manufacturing” in old sense of the word, but “production” in the broadest sense. And all forms of production are becoming more knowledge intensive. The old narrow definition also leaves out an important component: design. So my expansion of this proposal is to also fund at least 5 d.schools.
The linkage between design and manufacturing is well established. Both are key elements in sustaining competitive advantage. As the recent MIT report on Production in the Innovation Economy (PIE) notes about leading manufacturers, “the greatest strength is a combination of design and fabrication capabilities.” The National Academy of Engineering (NAE) report last fall of a workshop on Making Value: Integrating Manufacturing, Design, and Innovation to Thrive in the Changing Global Economy makes a similar point. As one workshop participant said, “The new model is that we are all producers, we are all designers.”
That new model calls for people trained in the interface of design-engineering-business. Which is exactly what the Stanford (Hasso Plattner Institute of Design) does:

The is a hub for innovators at Stanford. Students and faculty in engineering, medicine, business, law, the humanities, sciences, and education find their way here to take on the world’s messy problems together. Human values are at the heart of our collaborative approach. We focus on creating spectacularly transformative learning experiences, and inevitably the innovations follow. Along the way, our students develop a process for reliably producing creative solutions to nearly any challenge. This is the core of what we do.
In a time when there is hunger for innovation everywhere, we think our primary responsibility is to help prepare a generation of students to rise with the challenges of our times. We define what it means to be a student broadly, and we support “students” of design thinking who range from kindergarteners to senior executives. Our deliberate mash-up of industry, academia and the big world beyond campus is a key to our continuing evolution.

Other examples include the Rotman School of Management at the University of Toronto and the Institute of Design at the Illinois Institute of Technology. As the Wall Street Journal reported last summer, “Forget B-School, D-School Is Hot.” More and more business schools are incorporating courses on “design thinking.”
It is time to push the envelope on this integration of manufacturing and design. Creating 5 new d.schools is not the only way to accomplish that goal. In addition, one of the new Institutes in the National Network for Manufacturing Innovation should be devoted to the embedding of design thinking in the product development and production process (see earlier posting).
Advancing manufacturing through “manufacturing universities” is a good idea. But we need to take our game to a new level. Funding 5 new d.schools would be a start.

Manufacturing and services – the fusion

In my posting of new reports back in January, I included Bill Bonvillian’s article “Reinventing American Manufacturing: The Role of Innovation”. The piece is a good discussion of the state of policy on manufacturing, including a number of excellent recommendations. I would like to highlight step #4 of his 9 steps toward manufacturing innovation: the fusion of manufacturing and services:

The 21st-century firm increasingly fuses services, production, supply-chain management, and innovation. Many of these capabilities are knowledge intangibles rather than fixed assets, and will require learning to tie advanced manufacturing (including new technologies, equipment, and processes) with IT-informed service models.
IBM was probably the first large firm to create the modern fused model. When CEO Lew Gerstner arrived at IBM to pull it out of a financial crisis, the prevailing approach at the time was to carve up firms into smaller focused units and sell them off.52 Gerstner decided to do the opposite, electing a unified firm with great breadth, keeping its historically strong R&D with a range of IT hardware offerings, and tying both to a new services effort, which offered customers not only technology but what IBM called “solutions” to IT challenges. The result was one of the great business turnaround stories in the late 20th century. IBM’s fused model subsequently was emulated throughout the IT sector.
It should be noted that the fused production/services model doesn’t have to be vertical and integrated into single firms; it can be horizontal and include links between firms that have a range of services and production capabilities, thereby leveraging specialized capabilities from particular partner companies. Moreover, the model is not only about business organization; there are increasing numbers of merged products with both hardware and services features. Apple’s iPod is emblematic of this approach, as it combined a capable MP3 player with a new highly efficient and low-cost system for delivering music, and now other applications. When the “business model” stage of advanced production is being planned, the fused services/production approach must be considered.

Well said.

2013 Economic Report of the President

The 2013 Economic Report of the President came out last week covering many of the economic issues that the Obama Administration is likely to concentrate on. The Report had sections on macroeconomics, fiscal policy, tax reform, immigration (as part of labor markets), energy and climate change, and health care. But I am much more interested in what the Report said, and didn’t say, about our changing economy.
In contrast to some previous years, the section on trade and competitiveness is heavy on manufacturing, with a nod to the growing trade in services. This was a welcome change — especially the discussion of the importance of manufacturing and the linkage between manufacturing and innovation. As I pointed out in our Policy Brief–Intellectual Capital and Revitalizing Manufacturing, manufacturing is an knowledge and intangible asset based activity with a emphasis on “production” beyond “manufacturing.” Much of the discussion in the Report, however, was about the issue of the shifting location of manufacturing activity, as captured in the out-sourcing/in-sourcing debate. I wish the Report had at least touched upon the changing nature of manufacturing and on the growing fusion of “manufacturing” and “services.” It is good that the Administration’s economists now recognize the need to strengthen the “industrial commons.” But they need to also understand and support all the ways in which the government can make sure we build the industrial commons of the future, not try to recreate the past.
I’m also not a optimistic as the Report about the trade prospects of pure services (i.e. stand alone business services). While the U.S. maintains, as the Report notes, a current competitive advantage in business services, our imports of such services are also growing (as my monthly analysis shows). And the trade data does not capture the knowledge provided by many of those high-skill business services that are imbedded in products. On that score, our large and persistent deficit in Advanced Technology Products indicates a lack of competitiveness.
One other disappointment and concern. The labor market section in Report on “Government as Partner in Human Capital and Skill Formation” was all about higher education with one small subsection on worker training at the end. Nothing about the President’s call for early childhood education programs. We need a human capital policy that goes beyond an education policy and well beyond a higher education policy.
In somewhat of a surprise, there was a long section on agriculture. In all the talk about innovation and the shift to the knowledge based economy, many tend to dismiss agriculture as not part of the future. This part of the Report very deliberately sought to tie agriculture to the rest of the economy and current economic issues. For example, there is a section on start-up costs and succession planning (touching on the estate tax), a discussion of agriculture and the environment/climate change, passages on both trade (markets) and immigration (labor force), and even linkage to Dodd-Frank via the derivatives market. What I found most interesting was the section on productivity and R&D. The Report places agriculture squarely in the middle of the knowledge-based economy:

Persistent gains in efficiency have defined American agriculture. Public and private investments in agricultural research and development (R&D) have helped U.S. farmers find ways to grow more with less. While growth in U.S. industrial output over the past 50 years has come primarily from increases in capital and labor, agricultural output growth mainly has come from substantial increases in total factor productivity. American farmers have continually found ways to grow more with less; new seeds are less susceptible to disease and produce higher yields, new tractors are guided by satellites and spread fertilizer optimally across the field, and animals’ diets are optimally calibrated to grow larger animals with less feed. These innovations have caused improvements in farm productivity to outpace improvements in non-farm productivity over the past 25 years.
. . .
Increasing productivity on U.S. farms stems largely from the rapid and widespread adoption of a continuing series of biological, chemical, mechanical, and organizational advances. Formal research programs are carried out in universities, government labs, and private firms. Agricultural innovations building on that research are developed by input suppliers in the private sector or by public institutions.

Interestingly, the Report did not mention the National BioEconomy Blueprint released last April.
This positioning agriculture in the knowledge-based economy is an important recognition of how the dynamics of the economy works. Yes, it is true that employment in agriculture has declined over the past century or so. But the U.S. did not abandon agriculture in the 20th Century. We did not outsource food production to other nations (although we did increase some food imports). We transformed the farming sector in America. We industrialized and mechanized it.
Getting the agriculture narrative right is important. Too many people for too long have used agriculture as an example of what should happen to manufacturing. They are correct in that sense — even though they are completely wrong in their conclusions. We aren’t transitioning out of manufacturing, just like we didn’t transition out of agricultural production. We are transitioning manufacturing processes themselves — just like agricultural processes were changed. The distinction is important.
So, let us look to the transformation of agriculture into a more knowledge-based activity as something we can both support and learn from. Those lessons will be especially useful as we see manufacturing transforming itself and melding with services.

How innovation works – lesson of Bell Labs

I’ve just finished The idea factory: Bell Labs and the Great Age of American Innovation by Jon Gertner (see also his YouTube interview) which contains a great description of the role of interaction and serendipity:

Luck seems to matter, and so does timing, for it tends to be the case that the right answers, the right people, the right place — perhaps all three–require a serendipitous encounter with the right problem.

He points out that Bell Labs greatest invention might have been the process of invention that focused on that interaction. Physically, Bell Labs was designed to foster that interaction:

By intention, everyone would be in one another’s way. Members of the technical staff would often have both laboratories and small offices–but these might be in different corridors, therefore making in necessary to walk between the two, and all but assuring a chance encounter to two with colleague during the commute.

The system was not the classic linear model — although it might be described by some as that. Rather it was a critical mass of scientists, engineers technicians etc — interaction between fundamental and applied science — and between disciplines. While the official description was a flow from research (science) to development (engineering) to manufacturing, the system was deliberately more organic and interactive. Interestingly, in his YouTube video, he talks about the important link between innovation and manufacturing. He also made the distinction between innovation in the platform (which was Bell Labs end goal) and innovation in end-use products.
He notes the difference between Bell Labs which could (and had to) share its findings and the current tech companies like Google and Apple:

Such companies don’t exist as part of a highly regulated public trust. They exist as part of our international capital markets.

He notes in the interview that 1-1.5% of telephone users bill went to subsidize R&D.
The pressures on Bell Labs were very different from what exists today. Research was focused on the specific needs of refining and expanding the telecommunications system. Contrary to the perception of many, the overriding objective of Bell Labs was the practical improvement of the Bell System – not “blue-sky” invention. The goal was “Better, cheaper or both.” Blue-sky was a part of getting to that outcome and only occupied a fifth of the workforce.
Bell Labs practices a form of open innovation from the beginning. For example, Bell Labs sought to further develop the transistor by licensing to others. They realized that they would benefit from improvements made by others, both for their own use in the Bell System and from increased licensing revenue as the technology become better and therefore more widely used in more applications. This open innovation system was formalized in the 1956 consent decree where AT&T agreed to license all patents.
When the breakup of AT&T happened, it was thought to be good for the Labs. The idea was that the breakup would free Bell Labs from the consent decree and allow them to commercialize its own discoveries – rather than share them. It didn’t work that way. Rather it became a standard –industrial lab.
This is not to say that we can return to the Bell Labs model of a monopolistic industry subsidizing research. Bell Labs might be more of an anomaly. But the model of multiple levels of interaction–across disciplines and across the development process–is one to be emulated. Silicon Valley is often seen another version of that model. But this model may not be able to attack the big problems of energy, for example. Thus, there may be many paths to this goal. The key in all cases, however, is organic and interactive.

Canadian SMEs: innovation and IPR

Here are a couple of interesting factoids from a recently released report on Canadian SMEs: Survey on Financing and Growth of Small and Medium Enterprises, 2011. The study of companies between 2009 and 2011 indicated that 38% introduced at least one type of innovation. Product innovation was the most common at 24% of the companies. Marketing innovation occurred at 17%, organizational innovation at 15% and process at 15%. The detailed tables show that larger companies were more likely to innovate that smaller companies. Only about 30% of companies with 1 to 4 employees were innovators whereas 56% of companies between 100 and 499 employees were.
While those numbers may seem good, it means that 62% of Canadian SMEs engaged in no innovation during the time period. Almost 75% of the companies that were not innovators said that innovation was not important. 50% of the non innovators (31% of the total) responded yes to the question that their “Business doesn’t need to innovate/ innovation is not part of the business plan.” Another 25% of the non-innovators (15.5% of the total) said “Market doesn’t require new product/process.” That over 46% of the companies think innovation is not important is rather shocking. And the result was relatively constant across different sized companies and industry types. Most shocking is that 50% of “knowledge-based industries” were non-innovators and over 77% of them (38.5% of all “knowledge-based industries”) said either their business or the market didn’t need innovation.
When it comes to protecting those intangible assets, 16% of the SMEs held some type of intellectual property protection. Non-disclosure agreements where used by 9% of the companies, trademarks by 8% and trade secrets by 4%. Only 1.5% of the SMEs held patents and 1% held registered industrial designs. Not surprisingly, the results varied greatly by size and industry type. Only 11% of 1-4 person companies had some form of intellectual property, mostly trademarks or non-disclosure agreements. One the other hand, 45% of companies between 100 and 499 employees had some intellectual property, again mostly trademarks and non-disclosure agreements. In these larger SMEs there is much greater use of patents and trade secrets. This is understandable given the additional costs of patenting and formally protecting trade secrets. Not surprisingly, knowledge-based industries have the highest use of intellectual property protection (42%), mostly non-disclosure agreements. Manufacturing is next at 36% with a mix of trademarks and non-disclosure agreements. Manufacturing has the highest level of patenting at 6.5%. Interestingly 4.2% accommodation and food services SMEs had patents.
This means that 84% of the SMEs had no formal IP protection. Of those, 83% (almost 70% of the total number of SMEs) believed that intellectual property protection was not relevant to their business. This finding of non-relevance by non-IP holders was relatively constant across company size and types of industries.
In other words, it is not barriers that prevent companies from formally protecting their IP – it is a perceived lack of relevance. This points to a public policy of education as the most important step — rather than “fixing the system.”
[Note: the survey gets in to more detail about how companies formally protect their IP, where they get advice on IP protection and other related issues.]
On financing, there is one interesting point. That data indicates that in almost 10% of the cased for company over 100 employee, the lender ask for some form of intellectual property as loan collateral. Unfortunately the data is too thin to do any more detailed analysis.

January trade in intangibles – and annual revisions

So much for last month’s good news on trade. This morning, the BEA announced that the January trade deficit jumped by $6.3 billion to $44.4 billion. Exports were down by $2.2 billion while imports were up by $4.1 billion. The problem was oil (petroleum goods). Imports and exports of non-petroleum goods both dropped slightly, but the trade balance in that category was about the same as December. Imports of petroleum goods jumped and exports fell — causing the larger deficit. Economists had expected an increase in the deficit of between $42.6 billion to $43 billion.
Once again, our intangibles surplus increased ever so slightly by $119 million to $14.66 billion. Exports of business services rose faster than imports and royalty receipts (exports) rose more than royalty payments (imports).
The bad news was a $1.78 billion jump in the deficit in Advanced Technology Products. The change was due to a decrease in aerospace exports and an increase in life sciences imports. The deficit in information & communications technology actually improved as imports dropped more than export. The last monthly surplus in Advanced Technology Products was in June 2002 and the last sustained series of monthly surpluses were in the first half of 2001.
This month’s data also contained minor revisions to the 2012 numbers — which are reflected in the new annual charts below.
Intangibles trade-Jan13.png
Intangibles and goods-Jan13.png
Oil good intangibles-Jan13.png
Intangibles trade-2012.png
Intangibles and goods-2012.png

Note: we define trade in intangibles as the sum of “royalties and license fees” and “other private services”. The BEA/Census Bureau definitions of those categories are as follows:

Royalties and License Fees – Transactions with foreign residents involving intangible assets and proprietary rights, such as the use of patents, techniques, processes, formulas, designs, know-how, trademarks, copyrights, franchises, and manufacturing rights. The term “royalties” generally refers to payments for the utilization of copyrights or trademarks, and the term “license fees” generally refers to payments for the use of patents or industrial processes.

Other Private Services – Transactions with affiliated foreigners, for which no identification by type is available, and of transactions with unaffiliated foreigners. (The term “affiliated” refers to a direct investment relationship, which exists when a U.S. person has ownership or control, directly or indirectly, of 10 percent or more of a foreign business enterprise’s voting securities or the equivalent, or when a foreign person has a similar interest in a U.S. enterprise.) Transactions with unaffiliated foreigners consist of education services; financial services (includes commissions and other transactions fees associated with the purchase and sale of securities and noninterest income of banks, and excludes investment income); insurance services; telecommunications services (includes transmission services and value-added services); and business, professional, and technical services. Included in the last group are advertising services; computer and data processing services; database and other information services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; industrial engineering services; installation, maintenance, and repair of equipment; and other services, including medical services and film and tape rentals.