Instigating Innovation: Accelerating Experimentation in industry

When innovation centers, technology transfer centers, applied research platforms and other similar organisations want to help industry with innovation, one way could be to assist companies to experiment with new ideas. I will simply refer to these centers from here onward as innovation and technology support centers. In most of the places where I work these centers are often hosted by or associated with universities, applied research organisations or with technology transfer organisations.

One way to support industry to experiment is through various technology demonstration-like activities, allowing enterprises access to scarce and sophisticated equipment where they can try new ideas. In its simplest form, facilities allow companies to order samples to a certain specification, allowing a company to see whether a particular process can meet a specification or performance criteria. A slightly more intensive form of tech demonstration allows in visitors and a technology and its application is demonstrated (eyes only, no touching!). Very often equipment suppliers play this role, but in many developing countries equipment suppliers behave more like agents and can not really demonstrate equipment.

In Germany I saw demonstration facilities where the pro’s showed the enterprises how things works, and then they stood back allowing teams from a company to try things themselves.

A critical role of innovation support centers is to provide industry with comparative studies of different process equipment. For instance, in an innovation center supporting metal based manufacturers, providing industry with a comparison of the costs and uses of different kinds of CAD systems could be extremely valuable to industry.

Maker labs, Fablabs and similar centers all make it easier for teams that want to create or tinker with an idea to gain access to diverse technologies, reducing the costs of experimenting. However, the range of equipment in these labs are often not so advanced, but it can often be very diversified. In my experience these centers are very helpful to refine early idea formation and prototyping. However, to help manufacturers experiment with different process technologies, different kinds of materials, substitute technologies, etc. is the a binding constraint in many developing countries. The costs of gaining new knowledge is high, and due to high costs of failure, companies do not experiment.

Innovation support centers must be very intentional about reducing the costs of various kinds of experiments if they want manufacturers, emergent enterprises and inventors to try new ideas. These innovation centers can play a role by:

a) assisting companies to internally organize themselves better for experimentation internally

b) assisting many companies to organize themselves better for experimentation collaboratively

c) conducting transparent experiments on behalf of industry collectives

In my experience, graduates from science disciplines often understand how to conduct experiments because their coursework often involve time in a lab. They know basics like isolating variables, managing samples, measuring results, etc. However, engineering graduates often do not have this experience (at least in the countries where I am working most). For many engineering graduates, the closest they will ever get to an experiment is a CAD design, or perhaps a 3D printed prototype.

Therefore, it is necessary for a range of these innovation and technology support centres to assist companies at various hierarchical levels to experiment.

At the functional or operational level, organising for experimentation involves:

• creating teams from different operational backgrounds,
• creating multiple teams working on the same problem,
• getting different teams to pursue different approaches
• failing in parallel and then comparing results regularly
• failing faster by using iterations, physical prototypes and mock ups
• According to Thomke, results should be anticipated and exploited – even before the results are confirmed

At a higher management level, organising for experimentation involves:

• Changing measurement systems to not only reward success, but to encourage trying new things (thus encouraging learning and not discouraging failure).
• moving from expert opinion to allow naivety and creativity
• Preparing for ideas and results that may point to management failures or inefficiencies elsewhere in the firm (e.g. improving a process may be hampered by a company policy from the finance department)

Getting multiple companies and supporting organisations to experiment together is of course a little bit harder. Management of different organisations have many reasons to hide failures, thus undermining collective learning. One way around this could be to use a panel or collective of companies to identify a range of experiments, and then these experiments are conducted at the supporting institution in a transparent way. All the results (success, failures and variable results) are carefully documented and shared with the companies. However, to get the manufacturers to use these new ideas may require some incentives. In my experience, this works much better in a competitive environment, where companies are under pressure to use new ideas to gain an advantage. In industries with poor dynamism and low competition, new ideas are often not leveraged because it simply takes too much effort to be different.

Promising ideas from experiments can be combined and integrated after several iterations to create working prototypes. Here the challenge is to help industries to think small. First get the prototype process to work at a small scale and at lower cost before going to large scale of testing several variables simultanously. An important heuristic is to prototype at as small as possible scale while keeping the key mechanical or scientific properties consistent. More about this in a later post. (Or perhaps some of the people I have helped recently would not mind sharing their experience in the comments?)

I know this is already a long post, but I will add that Dave Snowden promotes Safe2fail probes, where teams are forced to design a range of experiments going in a range of directions even if failure is certain in some instances. In my experience this really works well. It breaks the linear thinking that often dominates the technical and manufacturing industries by acknowledging that while there may be preferred solutions, alternatives and especially naive experiments should be included in the overall portfolio. To make this work it is really important that the teams report back regularly on their learning and results, and that all the teams together decide which solutions worked best within the context.

THOMKE, S.H. 2003.  Experimentation Matters: Unlocking the Potential of New Technologies for Innovation. Harvard Business Press.

 

Instigating innovation in traditional industries

The average manufacturer in a developing country grapples with the notion of innovation. That is why they are often called “traditional”, although almost each industry would have one or two outliers. While governments, like South Africa, offers incentives to stimulate innovation, most manufacturers do not identify with the term the way the governments use it. For instance, when governments use the word “innovation” they often mean “invention“, in other words something that can be protected, copyrighted and owned (more about the differences between innovation and invention here). While I understand the argument for patenting and protection I think this narrow definition of innovation is inhibiting many industries from increasing their productivity and competitiveness by copying what works from elsewhere (catching up). It also fails to recognize that in many value chains the manufacturers themselves make components or sub-systems that goes into overarching architectures (defined by standards, compliance, specifications), so their design authority is limited in scope.

Herewith a list of synonyms from thesaurus.com for innovation that I have assessed to see how enterprises might understand or respond to these words:

• Modernization – lots of enterprises dream about this but often do not have the many nor the organizational capability to pull it off (one day, next time)
• contraption – many innovations and most inventions result in one of these. You can see them standing in the corners in most factories
• Mutation, addition, alteration, modification – this is what most innovations in traditional industry would look like. They are doing this all the time as their machines gets older, but this behavior is mostly not recognized nor accelerated
• newness, departure, deviation – the bolder enterprises with more financial and organizational capability might try these, but it takes capital to maintain.

Most people understand innovation as an outcome, but the word itself is a noun that implies change and novelty. It is about a shift, even if it is often incremental. The reason why so many of our enterprises here in South Africa are not deemed to be innovative is because they struggle (or perhaps do not have the organizational capability) to manage several simultaneous change processes. As Tim Kastelle posted some years ago, change is simple but not easy. Although this is often described as a technology problem it is really a management problem (see some older posts here). I would go even further and state that in many industries the margins are so thin that even those enterprises that have a reasonable management structure would struggle to finance many innovations at the same time.

However, in my experience of visiting more than 50 manufacturers every year I am always stunned and awed by how ingenious these companies are. They keep old machines running, often modifying them on the fly. They operate with fluctuating and unreliable electricity, inconsistent water pressure and often hardly any specialist support. What policy makers often do not recognize is that in developing countries it takes a lot of management time and capacity just to keep the throughput going. The time and effort to go explore “change” beyond what is necessary in the short to medium term is very expensive. The costs of evaluation new ideas, new technologies, new markets and better suppliers are all far more expensive in developing countries than elsewhere. Yet, at the heart of innovation is the ability to combine different inputs, different knowledge pools, different supporting capabilities with different market possibilities.

There are two implications for innovation promotion practitioners.

1. The process of instigating innovation must start with recognizing how companies are innovating NOW. How are they modifying their processes (and products), and how much does it cost? What are the risks that are keeping them from introducing more novelty? Perhaps use the Horizons of Innovation (my next post) to create a portfolio of innovation (change) activities that can be identified at the enterprise or industry levels.
2. It is hard if not impossible for different manufacturers in most countries to figure out what others are struggling to change at a technological level. Use your ability to move between enterprises to identify opportunities to turn individual company costs into public costs (this is often cheaper). Do not take the innovation away from enterprises, but use your meso level technology institutions to try and accelerate the learning or to reduce the costs of trying various alternatives. Be very open with the results to enable learning and dissemination of ideas.

The process of instigating innovation must start with recognizing where manufacturers are naturally trying to change, just like a change process in an organization must start with understanding current behavior, culture and context. Somehow innovation have become so associated with a contraptions and narrow views on technology that the organizational development body of knowledge and management of change have been left behind.

Innovation systems in Metropolitan Regions of developing countries

During 2015 Frank Waeltring and I were commissioned by the GIZ Sector Project “Sustainable Development of Metropolitan Regions” (on behalf of the German Federal Ministry for Economic Cooperation and Development (BMZ), Division 312 – Water, Urban Development, Transport) to write a discussion paper about a hands-on approach to innovation systems promotion in metropolitan regions in developing countries. The discussion paper can be found here.

Frank (left) and Shawn (right) in front of the Berlin Wall Memorial

This assignment was a great opportunity for us to reflect on Frank’s experience on structural change in territorial economic development and my experience on industrialization and innovation systems in developing countries. We also had to think hard about some of the challenges of using a bottom up innovation systems logic in developing countries, as such an approach would rely heavily on the ability of local public management to coordinate strategic activities aimed to improve the dynamics between various public and private stakeholders. It was great to reflect on our past Local Economic Development experience and our more recent work on innovation systems, industrial upgrading and complexity thinking.

A key aspect of this discussion document was to think long and hard about where to start. We know many economic development practitioners in cities are often overrun by demands from both politicians and industries for support. We also know that by selecting promising sectors based on past data and assumptions about job and wealth creation often end in little impact and much frustration. We agreed that an innovation systems approach must be aimed at stimulating the innovative use of knowledge, so we decided to not start with a demand focus (assuming the officials are already responding to some of the demand) or with statistics but a knowledge application focus. The use, generation and recombination of knowledge is central to the technological upgrading of regions, industries, institutions and societies. From our experience in promoting innovation systems and our recent research into non-consensus based decision making (this is where you do not select target sectors based on consensus or assumptions about growth potential, but you look at emergent properties in the system) we decided to start with three questions to understand the dynamics of knowledge flows in the region:

1. Which enterprises, organisations and even individuals are using knowledge in an innovative way? Obviously this question is not simple and can only be answered by reaching out in the local economy to institutions, firms and individuals.
2. Which stakeholders are actively accumulating knowledge from local or external sources? Again, this is an exploration.
3. Who are individuals or organisations that know something about unique problems (challenges, demands, constraints) in the region? These could be buyers, supply chain development officials, public officials, engineers or even politicians that are willing to articulate unique demands on the regional economy that might not have been responded on by local (or external) enterprises.

These three questions are treated as an exploration that will most likely be most intensive at the start. In our experience economic development practitioners should constantly be asking themselves these questions when working on any form of private sector upgrading.

A second dimension is about assessing the interplay between institutions and industries and its effect on innovative behavior within regions. Who is working with whom on what? Why? What are the characteristics of the life cycles or maturity of various kinds of stakeholders in the region? Thus we are trying to understand how knowledge “flows” or is disseminated in the region. While some knowledge flows are obvious, perhaps even formal, some knowledge flows could be more tacit and informal. For instance, while knowledge flows from education is quite formal, the informal knowledge exchange that takes place at social events is much more informal, yet very important.

Apart from the identification of the dynamics and interrelations between the industries and the different locations, one other key factor is to identify the drivers of change who want to develop the competitive advantages of the region.

We also present our technological capability upgrading approach as six lines of inquiry, some of which have been covered in earlier posts on this weblog:

1. The company-level innovation capability and the incentives of firms to innovate, compete, collaborate and improve, in other words the firm-level factors affecting the performance of firms and their net-works of customers and suppliers. These include attempts within firms to become more competitive and also attempts between firms to cooperate on issues such as skills development, R&D, etc.
2. The macroeconomic, regulatory, political and other framework conditions that shape the incentives of enterprises and institutions to develop technological capability and to be innovative.
3. Investigation of the technological institutions that disseminate knowledge.
4. The responsiveness and contribution of training and education organisations in building the capacity of industry, employees and society at large.
5. Investigation not only of the interaction and dynamics between individual elements in the system, but of the whole system.
6. Exploring poorly articulated needs or unmet demands that are not visibly pursued by the innovation system.

We, and of course our GIZ colleagues of the Sector Project Sustainable Development of Metropolitan Regions, are very keen to engage with the readers on these ideas? Please post your comments, questions to this weblog so that we can have a discussion.

Best wishes, Shawn and Frank (Mesopartner)

 

 

New series: Instigating Innovation

I have been developing a new capacity building method and training approach that brings together my work in innovation systems promotion  and my work on improving technology and innovation management. I call it “Instigating Innovation”.

I chose “instigating” because it has a more positive ring to it than provocation or incitement. While it is a noun with mainly a positive tone, it is a bit more aggressive than support, enable or encourage or even stimulating. I have been referred to in my past as an instigator of change so I thought this was a good idea.

Why was this effort firstly necessary and secondary so rewarding?

My work on innovation systems is mainly aimed at assisting meso-organizations such as technology transfer centres, research centres and universities to be more responsive to the needs of the private sector. While it only takes a few interviews by a senior decision maker from one of these institutions to a few leading enterprises to get the organization to improve its offering to the private sector, it does not solve the problem that these institutions often needs a continuous process of innovation itself. So while they can respond to the needs of the enterprises (for instance by launching a new service, or making a key technology available, etc), they often are not able to innovate constantly in order to anticipate what they private sector might need in the future.

With my other hat on, working in the private sector to improve the management of technology and innovation is focused on helping individual and on rare occasions, groups or networks of enterprises to formalize or improve their management of innovation. Here my challenge is that most enterprises innovate by accident, or have elements of an innovation management approach in place without knowing it. But it is not systematic nor is it consistent.

So both supporting institutions and enterprises lack some very basic frameworks to focus their existing development and learning processes to ensure not only short term results (new products & services, process improvements, cost reduction, etc) but to also ensure longer term success (playing in the right markets, selecting the right technologies, investing in the right kind of knowledge, partnering with the right people, etc). Furthermore, most enterprises and supporting institutions have something else in common: they often face resource constraints with the most versatile of their staff being involved in problem solving and not thinking about the future and what may be possible sometime down the line.

I set aside most of March and had great fun reading through my collection of articles, books, reports of past missions, and speaking to entrepreneurs and development practitioners I trust. Based on this investigation I decided on the following criteria for instruments to include in the Instigating Innovation module:

1. Each instrument or concept must be relevant to both enterprises and meso-level organizations
2. Each instrument must provide a very simple framework that can be illustrated on a flipchart
3. The simple framework must be usable as a workshop format that allows people to reorganize or explore their current and future practices
4. The frameworks must be scalable, both in depth (allowing pointers for a deep dive into an issue) and in width (useable for a product, issue, portfolio or the strategy of the organization as a whole).
5. Lastly, I did not want to be the consultant with a project, I want to be the facilitator that enables change and that builds long term sustainability into the organizations that I work with.

This was a very rewarding exercise. Not only do I love reading about innovation, change and technology, I love finding better ways to explain these concepts. It was also great to find a way to connect my work on innovation systems, which often seems abstract, with the tough decisions that the enterprises that I work with must confront and address. I tend to work in the more technical domains dominated by academics, engineers, scientists and manufacturers, so finding a simple yet convincing way to add value to what these clever people do was important.

I will in the next few posts reveal a little bit more of the tools I selected and how it can be used.

Thank you for the EDA team in Bosnia and Herzegovina who motivated me to turn this idea into a capacity building format and who agreed that I try “Instigating Innovation” on their team during my visit to Banja Luka in May 2015!

Instigating Innovation in Banja Luka with the team from EDA

Industry development under conditions of complexity

Most economic development projects have a tendency to separate analysis from intervention or implementation. This follows on an engineering approach where you must first understand a problem or issue before you can design interventions which is then logically followed by implementation and later on evaluation. I will not now go off on why this logic is questionable as I have written about this before and we have dedicated the Systemic-Insight.com website to this topic.

But complexity thinking is challenging this norm of separating analysis and intervention.

Authors such as Snowden argues that under conditions of complexity, the best approach is to diagnose through intervention, which means that there is no real separation between diagnosis and intervention. Practically, you might have to spend some days and a little bit of effort to analyze who is interested in a particular issue so that you know where to start, but you have to recognize that even asking some simple questions is in itself already an intervention. Furthermore, the objective of working under conditions of complexity is to introduce more variety so that different approaches to overcoming constraints can be tried out simultaneously. This means that small portfolios of experiments must be developed and supported, trying many different ways to solve a problem. Many of these are guaranteed to fail, but new novelty will also arise. The health of a system depends on more options being proven viable. Strong alignment of interests, priorities and interventions are actually unhealthy for a system in the long run.

I’ve had this discussion many times with fellow practitioners in the last years and usually at some point somebody would say “but not everything is complex”. I agree. They would argue that there are definite casual relations between for instance education and economic development. Well, this may be true in some places. However, whenever a government (or a donor) decides that a particular sector or industry requires support it should assume that the issue is much more complex than it may appear, otherwise the industry actors and supporting organizations and demanding clients would have sorted things out by themselves.

The idea that diagnosis takes place during intervention has many detractors, despite the fact that many strong economic development organizations intuitively follows this process logic of working with diverse stakeholders in an ongoing process. Here is a short list of some of the detractors and their main reason for resisting such a process approach:

• Large consulting firms: They would fight this approach as processes are much more difficult to quote and manage than a clearly defined project. Furthermore, this kind of approach depends on more expensive multidisciplinary experts that require a combination of technical, facilitation, change and business skills. The number of people that can support such a process are few and far in between.
• The public sector: To overcome constraints created by complexity requires that dissent be nurtured and premature alignment be avoided. This is also risky for the public sector as things may not be so neat nor supportive of past policies and decisions. Furthermore, when more options are created it is not certain which firms will really take up the solutions – meaning that in a country like South Africa with strong benefit bias this is too risky, as preferred candidates might not be the beneficiaries of public support.
• Donors and development organizations: Simple cause and effect interventions that depends on controlling certain inputs in order to benefit specific target groups still dominate the logic of donors. Therefore a process that is not specific, and that explores different alternatives may not be appealing to donors. Furthermore, donors are expected to be able to very precisely report not only in inputs, but also on impact. A process that has multiple shifting goal posts makes planning and resource management very difficult. However, many examples exist of donor supported projects that are very open to this approach, but this is mainly the prerogative of the programme managers deployed into the field – it is not systemic.
• The private sector: Yes, even firms may resist an open ended and exploratory approach. One reason is that firms try to push the problems experienced in the private sector back onto the public sector (blame and responsibility shifting). An exploratory approach puts much more onus on the private sector to not only contribute, but to be open for alternatives and to then actively pursue opportunities that arise. Secondly, the incumbents in the private sector sometimes profits from a disorderly system. Many existing firms will resist newcomers trying different things and trying to create new markets, as this disrupts the way things are done at the moment. In a complexity sensitive approach we have to on purpose introduce novelty into the existing structures, and this means challenging some of the dominant views and agreements about what is going on, what must be done and why nothing has changed. This is very unsettling for the existing actors.
• Top management in an organization: Management science in itself assumes many casual relations. For instance, strategy development typically starts with defining a vision and objectives, and then making sure that everyone is aligned and committed to these goals. As one of my favorite strategy David Maister argued  “strategy means saying no”. This means that resources are dedicated to a few specific areas in the belief that addressing these would have predictable and desirable effects.

Now I must state that in more ordered domains, where there is less complexity, many of the arguments outlined above are valid. In a small organization with limited resources priorities must be set. Governments cannot help everyone, so somehow a selection must be made. However, I believe that industry development is in many cases complex also because it is so hard to see how unpredictable effects will affect an industry.

I am grateful that I work with organizations that are willing to embark on industry development or institutional development processes that are more complexity sensitive. I believe that such an approach is particularly important for innovation systems promotion and for industrial policy. I am surprised at how many manufacturers and universities have agreed to embrace a more complexity sensitive approach to development, strategy formation and developing new services/products. All involved have been amazed at the early results this far, as these processes typically unleash a lot of energy and creativity by different stakeholders that in the past were more than willing to just observe from a distance what was going on.

Recognizing competing hypothesis as complex

In order to improve the economic performance of an industry or a territory, it is important to recognize the current Status Quo of the economy. This is basically to understand “what is?”, but to also understand “what is possible next?”. You may think that local stakeholders, firms and public officials will know the answer to “what is going on now?”, but every time I have done such an assessment I have discovered new suppliers, new innovations, new demands and many new connections between different actors.

The benefit of being a facilitator, process consultant or development expert, is that we can move between different actors, observe certain trends, recognize gaps and form an overall picture of what we think is going on. It is very difficult for enterprises to form such a picture as they can only observe other firms from a distance.

The main challenge is about figuring out what can be done to improve certain gaps or to change the patterns that we observe. These are answers to “What is possible next?” questions . As Mesopartner, we always insist that any process to diagnose an industry or a region starts with the formulation of various hypothesis. This hypothesis formulation before we commence is not only about revealing our bias, nor only about figuring out what exactly we want to find out. It also helps us to figure out what kind of process is needed, the scope of the analysis and what different actors expect from the process.

Unlike in academic or scientific research, hypothesis formulation does not only happen in the early stages of a diagnostic or improvement process, it should be constantly reflected upon and expanded as we go on during the process of meeting stakeholders and analyzing data. This is where the importance of recognizing competing hypothesis within our team and between different stakeholders are important.This process is not about convergence, but about revealing what different actors and the investigator believes is going on.

Economic development practice is full of competing hypothesis that all seem to be very plausible. In a recent training event with Dave Snowden the consequences of not recognizing or revealing these competing hypothesis struck me. According to Dave, competing hypothesis that plausibly explains the same phenomena indicates that we are most likely dealing with a complex issue. For instance, in South Africa we have competing hypothesis about the role of small firms in the economy. One hypothesis is that small firms are engines of growth and innovation, therefore they deserve support. A competing hypothesis is that large firms invest more in innovation and growth, and that they are better drivers of economic growth. Both hypotheses are plausible – the issue is complex. Recognizing this complexity is very important, as the cause and effect relations are not easy to identify and they might even be changing – the situation is non-linear. (Marcus Jenal and I wrote a working paper on complexity in development). This simply means that to get a specific outcome, the path will most likely be indirect or oblique – cause and effect is not linear.

Why is it important to recognize competing hypothesis, or to know when some patterns in the economy or complex? The answer is that it is almost impossible to analyze a complex issue with normal diagnostic instruments. Complex patterns can only be understood by engagement, that is, through experimentation. Again, according to Dave Snowden, you have to probe a complex issue by trying several different possible fixes simultaneously, then observe (sense) what seems to work best under the current circumstances. The bottom line is that you analyze a complex issue by experimenting with it, not by observing or analyzing it.

The implication of this insight in my own work has been huge. By recognizing that many issues that I am dealing with are complex (due to competing hypothesis that are very plausible) and can only be addressed through direct engagement has saved me and my customers a lot of resources that was previously spent on seemingly circular analysis. I now use the hypothesis formation with my clients to try and see if we have competing hypothesis of “what is” and “what must be done”. Where the hypothesis seems to be straight forward, we can define a research process to reveal what is going on and what can be done to improve the situation. But when we have different competing hypothesis of what is going on, we have to immediately devise several simultaneous experiments to try and find an upgrading path. I thought my customers would not like the idea of experiments, but I was wrong.

The conditions are that you must take steps to ensure that there are many different experiments that are all very small, and that by design take different approaches to try and solve the same problem. This takes learning by doing to a new level – because now failure is as important as success as it helps us to find the paths to better performance by reducing alternatives and finding the factors in the context that makes progress possible. The biggest surprise for me is that this process of purposeful small experiments to see what is possible under current conditions (context) has unlocked my own and my customers creativity.

Perhaps a topic for a separate blog is that to really uncover these competing hypothesis we have to make sure that we do not converge too soon about what we think is going on. Maintaining divergence and variety is key – this is another challenge for me as a facilitator that is used to helping minds meet!

Linking: Change: simple, but not easy by Tim Kastelle

I am humbled that Tim Kastelle has quoted a paragraph from a recent blog I wrote in an article he just published on Change and why it is simple but not easy.

For my students and online learners, I recommend that you also subscribe to Tim’s blog as he deals with many issues relating to innovation and especially business model innovation.

 

Help – the industry I am working with is uncompetitive and many do not care

In most strategic management textbooks 4 generic factors are identified that can be used to build competitive advantage: efficiency, quality, innovation and customer responsiveness. These four factors are highly interrelated, as an improvement in customer responsiveness for instance could result in improved quality and better efficiencies. By addressing these four factors a business can reduce its costs and can create a differentiated position in a market. Let me briefly expand on the four factors.

• Superior efficiency: a manufacturer converts inputs into outputs. Inputs are basic elements such as land, capital, labor,raw materials or knowledge. Firms that manage this conversion by constantly trying to find better ways to reduce costs, improve throughput and reduce wastage tend to be able to be more price competitive.

• Superior quality: means that products are reliable and that they can do the job that they were designed for, meeting the specifications and performance requirements of customers. In most cases it is difficult to ensure consistent and reliable products without a system in place to control quality
• Superior innovation: This is about the novelty of the products, process or services of the firm. It is not just about the great design of the product, but about the total offering and how customers can interact with the firm. Thus it includes how the company thinks about its own structures, internal systems, relations with markets and customers, use of technology and product development.
• Superior responsiveness to customers: A firm that is highly responsive to its customer not only meets their requirements, it strives to anticipate and exceed those requirements. Although this could be about flexibility to respond to customers demand, in most cases it is not. It could simply be to find a way to respond the needs of customers in a creative way.

Enough of the strategy lesson. Back to the real world where we are all trying to use our own limited resources to promote particular industries or regions.

Here are the questions that keeps me awake about this project:

What if the industry that I am working with do not seem very eager to develop any real advantage around any of these four factors?

What must I do to improve the competitiveness of the region if the firms do not seem to even care about their own competitiveness?

For the last few weeks I have been wondering about these questions as I visit a range of manufacturers as part of a process to stimulate a regional innovation system in an industrial area. By visiting many firms in this region I noticed a big gap between those that are  are differentiated or excellent and the rest. The gap is so big that I sometimes wonder if it ever would be possible to move or support firms to cross over the empty space between those that can be described as “excellent” versus the “average”. Knowing that I only have a limited time, and the organization that I am supporting (An University) only has limited resources, I started worrying about helping all the firms. But this is not possible nor is it desirable.

All the average firms can offer many arguments for their current state. They lay the blame at policy uncertainty, high costs of borrowing, crime, political interference, expensive employees, low skills and many more. Many would say that they are component manufacturers that depend on the strategies and innovations of their customers (we just make what they want how they want it). Very few firms ever acknowledge that their current state is a reflection of past strategic choices taken deliberately or that played out to the current status because of not making decisions.

Yet, almost each of the excellent firms that we come across in our fieldwork focused on getting some basic principles. Many started monitoring their costs and wastage to try and improve their efficiencies. They focused on equipping their staff to understand the business, the products and the process, resulting in lower failures and higher quality. They spoke to their customers to find out how they can offer better services and products, even when they were just manufacturers of components used in someone else product. They focused on the quality of their products by looking at the quality of their process, their equipment, their systems and their management.

Those that are excellent are not necessarily better educated, better off financially, or better engineers. They just took charge despite being in the same economy, the same reason and even the same sector, with all the same environmental factors that the average firms use as a reason to do nothing. Sometimes the firms that are now excellent where started by disgruntled employees quitting the average firms. Or in other cases, the excellent firms were started by people from outside the sector moving in with a different perspective and approach.

What bothers me is the way the public sector responds to the manufacturing sector with their funding, support interventions and incentives. The strange thing is that most public sector interventions are aimed at the average or below average performers. It is almost as if the logic is that they are weaker and therefore they need protection and special care. Well, if economics is the study of how humans allocate scarce resources, then we should be very worried about directing too much of our scarce resources to firms that cannot use the resources the society endow them with (capital, labour, land and knowledge). Of course there are exceptions, but the problem is finding a fair way of deciding when it is justified to protect a firm and when it is best to let a struggling firm fold in so that the resources can be redeployed to other people that are able to use these same resources in a better way.

So what can we do when we are faced with this situation? Here are some of the ideas that we are working on now.

Lets say, of the 50 manufacturers we want to work with, 5 stand out as trying harder than the others. Perhaps another 5 or so are ambitious but they just don’t seem to know where to start, who to work with or where to go. We argued that we start with the first 5 (already good) and the 2nd five (the almost there). Then we invited any of the willing from the rest of the group (3 more stepped to the front). Now we have a core group to work with. Now we are trying to find ways to better connect them with each other, trying to get them to identify their own and their common competencies and opportunities. We have arranged a few pilots to support some of these firms to try and improve their own performance, and we have arranged some events with experts to discuss common issues.

But we have to remind ourselves that we cannot create competitive firms if they do not at least work on the four generic advantages outlined earlier. We cannot improve the competitiveness of the region without being able to show firms that are excellent. Trying to get these generic factors under their control is a minimum requirement. We should never use public resources to support firms that are not serious about improving their overall performance. Furthermore, everything that we do should become public knowledge in this industry and perhaps in the downstream customers, perhaps one of the other firms or even a customer decides to step up and form part of our initiative.

• Have you also had an experience like this? The firms you are expected to work with just don’t seem bothered by their current status or improving their game?
• Hey, what else should I do?

• How do we use the principles of innovation systems and good development practice to get firms in a region to work together to improve their competitive performance in order to improve the economics of the region?

My activities in the last months

So what have I been up to in the last few months?

At the moment I am working with several industry organizations and development institutions in South Africa on topics that are all interrelated around the topic of upgrading of our manufacturing sector. This involves working both on the softer issues such as facilitation of processes, building trust, identifying patterns, mobilizing stakeholders and lobbying for change to both government and the private sector. Another dimension of this work is to assist meso level organizations created to stimulate upgrading and competitiveness of industries to design better and more relevant programmes, developed organizational plans, and diagnosing industries to find systemic intervention points. I am involved in several cluster development programmes, and I am also working quite a bit with universities to better respond to the (often unarticulated) needs of industries. Lastly, I am assisting several large international and national buyers to develop their South African supply chains. This work is partly fueled by the public sectors increased emphasis on localisation.

For me all of this can be summarized under the heading of upgrading innovation systems, and building new industrial competencies. Sometimes I describe it as modernizing industries, or to stimulate technological upgrading of industries and regions. My customers do not often use these words.I thought it would be interesting to perhaps share with you how some of my current customers describe the work I am doing. I will not share their details due to the sensitivity of the work I am sometimes involved in.

The universities I work with describe my work as :

• stimulating industry- academia relations around upgrading and regional innovation,
• facilitating the improvement of technology transfer,
• developing industry partnerships, research strategies and applied research programmes. This involves improving innovation within the academia
• improving innovation systems that the university forms part of by designing appropriate support programmes

The industry development organizations I work with describe my work as:

• facilitating the improved competitiveness of industries,
• facilitating change processes in industry in order to unlock new markets and improve competitiveness,
• developing public sector programmes that are responsive to the needs of industries.
• High level policy advocacy and industry partnerships

For the government officials that I work with my work is:

• developing industry – government partnerships,
• supporting the development of local industries,
• brokering partnerships,
• shaping policy based on industry insight and
• developing practical development programmes.

Why do I share this with you? The insight for me is that I am using a limited number of tools (mainly facilitation skills, some insight into manufacturing and technology transfer, insights into innovation systems, organizational development and a fearless approach to engaging with industry leaders) to work with a largely overlapping set of stakeholders.

Although I think that I am basically doing the same kind of work, my customers describes my work in completely different ways, even if ALL my current customers have the same objectives (they all want to improve manufacturing competitiveness and grow the local industries).

This work is all based on process consulting and I am very happy that I have a complementary set of customers that are all eager to work together to achieve our common goals. The work is very intensive and I am also grateful that I have contracts that have sufficient time and sufficient flexibility in so that my work can be supportive and responsive to the people I work with.

 

Note 1: Right at the moment I hardly work for any donors agencies in South Africa, mainly because private sector development and especially innovation system promotion in South Africa is not very high on their agendas. I do however assist with capacity building, coaching and programme design work occasionally.

Note 2: One important contract is with GFA on behalf of GIZ where I am supporting several technology stations at universities to improve their technological services to the industries they work with. This work is included in the descriptions above about the work I do for universities.

Note 3: The work I am currently doing is all possible due to the experience I have gained by working for organizations such as the GIZ (then GTZ) on issues such as innovation systems, university industry relations and local/regional economic development.

There is more value to the value chain than adding value to products

I am supporting value chain practitioners in various programmes where I am coaching, teaching, supporting, pushing and pulling experts. This is one of the perks of my job as I get to look over the shoulders of practitioners working all around the world on commodity, agricultural, manufacturing and service value chains.

While marking some assignments for a course I am tutoring for the ILO I realized that many practitioners are trapped in a particular chain, just like the actors that they are trying to empower. With trapped, I mean that they are working with the actors and the chain for the benefit of the chain. They completely miss the broader impact of their work. (I know that this is often more the fault of the people who design programmes, more about this elsewhere in my blogs).

Let me explain.

For me a value chain is something we construct so that we can understand a part of a sub-system. If you are diagnosing a tomato value chain then it is true that you are getting a deeper understanding of the tomato system. But you are also gaining an insight into an agricultural system, a regional system of stakeholders and communities, but also an insight into the national or maybe even global economy. While some value chains exists in a very formal way, with contracts linking the different actors, most value chains can rather be described as temporary social phenomena. Temporary because they tend to change over time.

Back to my main argument. While it is true that value chains are known by their end products or markets, there is more to a value chain than just the conversion stages of a product/service. Value chains show us how an economic system works. It show us how responsive institutions and supporting organizations and indeed a whole society is towards economic activities of a certain kind. Value chains also tell us some fluffy yet important things about the society it is framed by. It tell us something about the social relations, the search costs (finding people to do business with), the social capital (how well we trust each other, how easily we collaborate), the enabling environment, and the returns on investment and effort in different parts of the system.

So if we find that tomato farmers are not very sophisticated, that they have poor market relations, that entry barriers are very low hence nobody has an incentive to invest, that suppliers are dishonest, that there are some new market niches developing but that nobody knows, that intermediaries have disproportionate power; I am not surprised at all. In fact, your findings are rather typical, even predictable in some sectors. What I am surprised by is if you treat this like it is a unique finding contained only to the tomato farming sector. The chance that these characteristics are contained only to those involved in the tomato chain is rather slim. This is the real risk of having a too narrow product focus.

Yes. Value chains are known by their end markets or products. But no, we are not locked into a product. We want to understand the system better so that we can support the emergence of institutions, market systems and interventions that make the whole system work better. Those issues that I outlined before in my tomato example can be verified in the sectors or crops around it. In my experience, many crops or business sectors sometimes have similar challenges. Therefore instead of trying to work at a low scale with some tomato farmers, you could possible be working with 10 crop types in a region, involving 1000s of farmers, and maybe a dozen supporting institutions. Few extension services for instance focus on one crop, they often handle a variety of crops, animals and markets. So you have to try and understand what each kind of economy activity (like farming with tomatoes) have in common with other business types or farms, and then what is unique. When you do this you often find that the actors in the chain have far more in common than the product or crop. They could all be equally unskilled, equally under-capitalised, equally vulnerable to market fluctuations, equally exposed to poor contract enforcement, or monopolies. This is how we get to real systemic interventions.

But the idea should never be to promote some products. This is the job of business people and entrepreneurs, not development practitioners. No, development practitioners should try to understand and strengthen the system. We make the features of the system that is overlooked or not visible to stakeholders more apparent. I also dislike it when practitioners start with an hypothesis that profit is unfairly distributed, or many of the other typical biases that exists in this field. The simple truth is that investments in economies flows to where there are (visible) returns. If it becomes more profitable to invest in retail than in manufacturing or farming, then this tells us something about the system. It is an important finding in itself which then allows us to ask the next question “how to make farming more profitable for investors (farmers and the poor are also investors)?”.

Your value chain has more value in it than the value added at each stage of the chain. What is valuable is the insight you are gaining about how a part of the economy works. Don’t become a product promoter. Be a system builder.