Post 2: Technological capability: enabling enterprises to innovate

This is the second post in this series about building technological capability. I believe that this technological capability is best developed by an innovation systems approach with a particular view on emergent properties of the system. I have written before about the importance of taking a business perspective on an innovation system here and here. In the previous post I explained our concept of technological capability. I argued that one of the elements of technological capability is “The skill of the producers to imitate and innovate at product, process and business model levels. This is largely dependent on pressure to compete as well as pressure to collaborate with each other”.

In this post I will look a little deeper into this ability to innovate, collaborate and competition. For the remainder of this post I will take the perspective as a knowledge broker (or facilitator) working with an technology transfer center responsible to promote the upgrading and modernization of a sector.

One of the challenges of promoting an innovation system is that the technological capability in the private sector is not easy to see. Often we have to use proxy indicators such as exports to determine whether our industries are innovative and competitive. But export figures does not tell the whole story.

While the physical attributes of a product or component could tell us something about the sophistication of the product and the process behind it, even a simple metal component could be the result of an extremely sophisticated process that combines different knowledge domains, technological capabilities, materials (combining metallurgy and sand for instance in a foundry) and enterprises. Even if you have access to the premises, the tacit knowledge, experience and networks that are accessed to make a product is not always detectable.

Not only is it hard to determine what companies are able to do, it is also difficult to figure out what they cannot do. The fact that a manufacturer three years ago developed a successful product is not a guarantee that they can still do this. The finding that a particular function or technology is not present in an enterprise does not mean that they do not have access to this technology when they need it. When the entrepreneurs claim that they lack finance to do innovation this is often merely describing a symptom.

Enterprises that are able to adapt, change and improve not only their products but also their processes and business models are essential for any economy. This is about competition, but it is also about unlocking the capability of individuals, being more responsible with resources, and being responsible within a broader socio economic environment.

Finding ways to get enterprises to collaborate is very important for the health and dynamics of an innovation system. At the same time, stimulating competitiveness, not only at the level of price, but in terms of alternative approaches to solve a problem or in terms of different ideas and concepts is necessary. Often business associations and industry bodies are good with some limited collaboration, for instance on advocacy, but not so good at stimulating new (competing) ideas, approaches, models and solutions.

For a broker or intermediary it is still possible to move between and into enterprises to find opportunities for improvement. I am often amazed at how hesitant universities, technology intermediaries and research centres are to

Searching for opportunities for collaboration

Searching for opportunities for collaboration

embrace this privilege of being able to move around in an industry to see what is possible and what constraints or barriers to innovation exists. I will expand on that in a future post in this series.

For enterprises to find out what other enterprises can or cannot do is a lot more difficult. Firstly, by asking somebody if they can or cannot do something might give them a hint that a specific opportunity exists. Secondly, many companies do not like their competitors on their premises. Thirdly, there are many risks and costs associated with working with a competitor. Lastly, there is a risk that a competitor is able to exploit a joint opportunity better and thus gain more prominence in the market.

The ability of enterprises to find opportunities to work together is important as a means of reducing costs and gaining access to resources that individual enterprises cannot afford independently. For instance, skills development, joint marketing efforts are quite easy to cooperate on.

However, on issues such as joint research and development, procuring scarce and sophisticated equipment, or collaborating in a more intensive way such as a cluster often require an external broker. Often this kind of brokerage is hard to organize at the level of enterprises. Industry associations, Universities, technology intermediaries of government programmes aimed at industry promotion must step in. This is where I earn my bread and butter as many industry support programmes are ill-equipped to diagnose, articulate and facilitate these kind of firm level collaboration processes as part of improving an innovation system.

Let me bring all of this together. Enterprises that are striving to improve their performance, their value add and their overall competitive offering are an important element in an innovation system. These enterprises are expected to compete with each other, not just on price, but with different approaches, solutions and concepts. At the same time, we expect to see that these enterprises cooperate or collaborate on issues where there are benefits to do so. The dynamic of how enterprises interact with each other (collaborating and competing) is a direct contributor to the technological capability of a region, an industry or an economy. Where enterprises are not able to work together and at the same time compete with one another, a key ingredient to the technological capability is weakened. It is not always possible for enterprises to formulate or develop opportunities for collaborating due to many risks, costs and the difficulties associated with forming the cooperation concepts. This is a technology related market failure that sometimes can only be overcome by a broker-like service of Meso-level institutions such as technology intermediaries or education institutions.

Competitive advantage? Just how competitive are you.

I am working every day with businesses that are denying that the game has changed. Many believe it is just the government that is inventing new rules. This is true in some cases, but in most the government is also simply responding to global changes. The benefit of working outside of South Africa sometimes is that I get to see the domestic manufacturers from another angle. And the truth be told: South African firms are not as competitive as they would like to believe. Yes, there are exceptions, and we hail their achievements.

Tim Kastelle published an article today titled “here’s why you need to build your innovation capability“. When my eye caught the first sub heading I almost stopped reading. It shouts “Competitive advantage is dead. Or at least dying”. Blink. I believe in competitive advantage, and I believe that firms must figure out what it is that they have to do to remain competitive. I also know that once you found a gap in the market it takes hard work to remain competitive. Being a follower of his blog I plowed on.

Wait. Don’t let me spoil a good post. you have to read Tim’s argument for yourself. He argues that it is more important to become innovative than to have a competitive advantage. This is not a new argument in itself, but I like his angle on this. He then provides some simple steps that a manager can take to become more innovative even within a rigid organizational context where innovation may not necessarily be appreciated. His logic will also apply to not-for-profit organizations that don’t believe they compete even though they have to be able to compete for funding.

Reading this article also made me think of how we idolize some of the very famous firms now, but how we tend to forget how many great firms have dissolved here in South Africa and in other developing countries. It usually starts with a refocusing, then with selling off under-performing or non-core units. Then a merger of the remains with another firm with a “strategic fit”. Then, the end. They just slip from our conscious into the past.

Let me not close so depressing. Let me rather ask: how can you use the environment as an constraint that you have to consider in your business model and your innovation process?

If it constrains you it must constrain your competitors. Can getting around this give you an edge? In other words, can you put the constraint between you and your competitors?

Then ask: what are the constraints that are on the horizon, and how can I anticipate these constraints to get them between me and my competitors?

Thinking about this often might save you the anguish of trying to adapt while under pressure to also deliver.

I wonder how your answers will challenge your current view of how competitive you really are, and how innovative you are to respond to the changes in the environment.

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.

Generic competitive advantage

  • 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?

Business profits in South Africa and elsewhere

I spend a large amount of time interviewing and engaging with private sector enterprises. This fieldwork is sometimes like a roller coaster ride, because you can go from seeing a cutting edge business to seeing a business on the verge of collapse within one morning.

While even I have often lamented the state of competitiveness of our South African manufacturing sector, I am often amazed at how profitable many businesses are. If so many of our enterprises are so profitable, why are we complaining? Oh, perhaps it is also good to ask that if so many enterprises are so profitable, why are they not also competitive? Can less competitive enterprises still be profitable? Lastly, a business person recently asked me what I mean with profitable. His argument was that it is better to keep the cash for the “thin years” than to invest now.

So even uncompetitive enterprises can still be profitable. A enterprise that is not “price” or “performance” competitive can still be profitable because they are one of few firms that provide a particular product or service. While many quantitative measures of competitiveness concentrate on measurable indicators, softer indicators such as service, good relations, free (embedded) advise, etc. are not measured. Hence it is possible for an enterprise that could be measured to be uncompetitive to still be profitable. Back to the main argument.

Lets look at those enterprises that are competitive (using some or other objective measure) and they are profitable. Why are so few of them not investing, and treating their current profitability as a short term (if you can call 8 years short) phenomenon? Firstly, many business people comment that earning only 21% gross profit is not good compared to the margins of 15 years ago. No comment. Secondly, many business people in RSA are uncertain about the future and the overall investment climate. News reports about the unsustainable consumer spending also reinforces the message that current demand is unhealthy, unsustainable, or even undesireable. No wonder business people only expand their operations AFTER they get longer term orders.

In general, our developmental challenge is that it is hard to say just how many of our enterprises are profitable. Most of the press coverage and academics research either focus on the listed companies, or on micro enterprises. Take a look at the editorial in the South African Business Day for some of the explanations behind why it is easier for listed companies to be analysed. Of course, their data is publicly accesible.

But perhaps there is another reason. While many of our publicly listed firms are larger firms with many smaller subsidiaries, these listed firms cannot sit and wait for the economic climate to change. Their investors wants continuous financial returns, and hence these firms are constantly trying to find new markets, new niches and new ways to earn a return on their investment. Businesses with private investors behave in the same way. But the rest of the businesses that are “owner managed” do not have this same pressure, and hence they are under less pressure to find innovative ways of investing their profits and earning a return. This is where the underinvestment (despite higher profits) are the most pervasive. If a listed company generates profits, they pay a divident, but the rest of the profits are invested after a while. Financial experts don’t like huge piles of cash doing nothing…

So perhaps another way to get our businesses to treat the current trend as an expansion opportunity would be to get more firms to list on the alternative or development exchanges, or for more private investors to buy into owner-managed enterprises. I know this is easier said than don

My frustration is that smaller (profitable) businesses are not seeing the profitable trend of the last few years continuing into the future. Perhaps we need some stronger leadership in government so that we can unleash investment in the private sector by the private sector. But perhaps that would be shifting the responsibility of forming a vision of the future to government. Actually, the private sector also has a role to play in shaping the future that goes beyond lobbying and advocacy. Often advocacy and lobbying includes painting a bleak picture, so we might just be shooting ourself in the foot if we dont also focus on the bright side and the profitable opportunities that can pursued in South Africa.

By getting the private sector to invest their profits back into the country is the only way that we can use what we already have (clever and brave business people with some capital) to address what we don’t want (unemployed people becoming restless because they feel sidelined).

 

How competitive is South Africa?

Hopefully my international readers are not following the news in South Africa. Over the last few months we have been blasted with negative and mixed messages from the government. It sometimes seems like the government is fighting itself.

But to be honest. Actually, the mood here is not so positive everyday, and for the first time in my professional career I am being asked by industry associations and by local enterprises on practical ways to move parts of their business out of the country. That is one of the main reasons why I have not blogged much in the last weeks. As a positive leader I felt that I did not have anything optimistic to say because I was feeling depressed about the situation.

But the recent long weekend we had gave me some time to reflect.

Firstly, I spend a lot of my time interviewing and visiting businesses to find innovative and competitive enterprises. Take my word, we have some fantastic business people out there. And not all of them are big. Not all of them are famous. Not all of them are white. Many enterprises just get on with it. While some get the basics right, others get the extraordinary right. Unfortunately I also know (like they do) that many enterprises can do better, they can create more wealth and they are all able to absorb more labour. But then the reasons why they don’t is out there in the press. And I understand this reasoning.

Secondly, I agree with an excellent article by Cindy Mauigue about our competitiveness and the reasons for our declining rankings. I would argue that South Africa can make up for the loss in its international rankings of the WEF and the World Competitiveness Reports by being smart (and by setting some priorities that may not be popular). On many of the areas we are in deep trouble, and with the current power of the unions I am not sure that the cluster of indicators around labour market flexibility and competitiveness will be dealt with soon.

But there are also some “low hanging fruit”, indicators that we can address in the next few years. Some of these deal with technical issues like extending and lowering the costs of internet connectivity (can we please have some decision making on this soon?). If you look at how we perform on the criteria of the WEF then you see that we are ranked very high on many of the economic and technological indicators. In fact, we are frequently ranked in the top 10 or 20 on several of the 12 main areas.

So according to the rankings we are falling behind our peers with every year, but as I have just argued, there are some things that our country can do in the next two or three years as well. Unfortunately not many of these issues are described as urgent or important in the planning that our government is busy with (National Planning Commission and the New Growth Plan, to cite just two).

To improve our rankings would require that the senior leaders of our country make up their minds about the image we want to project inwards (to our local investors, entrepreneurs and young people wondering what to do with their lives) and outwards (foreign investors and people with skills thinking of moving here). If we do not clear up the signals then entrepreneurs will keep their cash safe (probably by moving it out of the country), will take fewer risks, and in general our economy will struggle to absorb more people into the labour force. We have to find ways to harness the creativity and the resources of more South Africans to solve the problems and explore the opportunities that we face.

While I agree that we are sitting on a ticking time bomb caused by unemployment in our country, I do not believe that our main intervention point should be “job creation”(this to me is more a result). There are many other things that must also happen, and the government must acknowledge that they have to happen at the same time, or that sometimes we need some things to happen first. I wonder what would happen if we made “quality education from beginning of school to end” the highest priority? Would that not also create sustainable jobs in the long run?

I do believe that we should focus on getting our existing businesses to invest and grow as a first priority, with economic empowerment as a second priority and job creation as a result. The expanding gap in our gini coefficient is not caused by equity disparities, it is caused by differences in education.

I wish I could drive my kids to school without seeing the posters of the newspapers. We are being poisoned by a lack of clear and consistent leadership on many important economic points in this country that will greatly affect us in the short and the long term. And often it is not about leaders not making up their minds, it about lacking a will to take action. It seems like government leaders are afraid to upset their social partners, or to upset anybody out there!

It reminds me of the saying of David Maister that the essence of strategy is deciding when to say “no”! Just what exactly are we saying no to in South Africa.

My wish is that we say “yes” to some of the issues that MUST be addressed to strengthen our economy and unleash the entrepreneurship that we have (regardless of race, age, gender or social status). Let us get our entrepreneurs to be excited about this country and its potential. But let us also all work together on the huge social challenges that remain. And let us acknowledge that some people will make profit from this, but let us focus on getting the systems to work for our country.

In concluding. Our country is more competitive than we think. Please don’t believe everything you read. Come and visit some businesses with me if you need to be convinced. For now I am staying here, and I am investing here very carefully. But I am constantly evaluating my options.

For my business readers: You have to do whatever it takes to grow and expand your business, and to secure your ability to earn returns today AND tomorrow. The risks in South Africa is high, but the returns are higher.

Different kinds of competition

If we assume that competitiveness is essential for economic growth, then it is important to explore the reasons why so many people do not like competition. Perhaps we all work with someone who is very competitive that can turn even getting to the water cooler first into a life-and-death rush.  From a developmental perspective many people are uncomfortable with competition, because we have all seen so many people marginalised because of their uncompetitive situation. This despite the depth of academic literature on the importance of competition in allocating resources to the economic actors most able to convert the resources into goods and services productively.

However, we all love it when our favorite sports team out-compete their competitors. So it seems like we all dislike certain aspects of competition, and yet we also like certain aspects of competition.

To explore this topic more I will discuss 3 kinds of competition:

  • the characteristics of individual competitiveness;
  • the characteristics of organisational or team competitiveness; and
  • the characteristics of geographic competitiveness.

The characteristics of individual competitiveness

For the sake of this discussion I will use an individual athlete as an example. For our athlete to be able to compete in the 3000 meter track item, she needs certain clothes and shoes. She must work on her fitness and diet, and may require coaching to master the technical aspects of her item. But this does not yet make her competitive. In order to be competitive, she needs to practice hard. This requires mental and physical discipline, and would require many personal sacrifices. The more she competes, the more she would have to invest not only in participating in different events, but she may require sophisticated shoes, other gadgets, specialised coaching and other costs known only to athletes!

The characteristics of organisational competitiveness

For an organisation to be competitive, it requires more than the right gear, mental and physical discipline of a few individuals and an exercise programme. Organisations, whether it be private or public, needs more. It needs various management systems, protocols (some kind of a language or common code), and different modes of cooperation between individuals. Leadership, different specialised competencies and technology is used to increase the competitiveness of organisations. Think of a racing team, where even if there is a world-famous driver in the seat, need to operate almost like a single organism in order to outperform the other teams. Here it is not enough for one person to be smart, people need to be smart collectively. Leaders who can empower or develop their staff and that can optimise the talents or resources at their disposal can outwit their competitors through a process of ongoing innovation and investment.

The characteristics of geographic competitiveness

For individuals and organisations to compete, the competitiveness of their geographic environment will start to matter at some point. While a amateur athlete or a bakery can operate in many different locations, their ability to compete with their competitors are influenced by their environment. Michael Porter and other authors have all written about this phenomenon.

Places compete through the combinations and relationships between different individuals and organisations, and places where there is a dense interaction between different people seem to outperform places where the interaction and transactions are lower. There is also a relationship between the ability of firms to compete in their own geographic domains and their ability to compete elsewhere. Furthermore, as firms grow and become more competitive, they become more dependent on specialisation both inside the firm and in their environment. This means that places that cannot offer specialised services, either in the form of direct employment or through specialised providers or institutions, will be disadvantaged. To make this even more complicated, there is a relationship between the competitiveness of firms and individuals and the competitiveness of region, and vice versa. Societies or communities that are able to stimulate a competitive process or debate on different developmental or innovative approaches tend to also outperform regions where there are fewer options available due to an inability to manage the tension of a creative search process for different alternatives. For instance, in Germany, many development agencies compete for public funds through innovative bids, forcing these agencies to be creative in their approaches in order to achieve impact and resource optimisation.

Conclusion

We need to stimulate a competitive mindset both in individuals and organisations in order to strengthen the competitiveness of regions. To achieve this, we need to understand the different factors that hamper or stimulate competitiveness at the different levels, and the relationship between the different factors. Attempting to ignore competition and its role in resource optimisation in societies is futile, so we have to work on getting more people thinking about ways to improve competitiveness. The best thing we can do, is to equip the marginalised with the mental and physical discipline. One of the best ways to get these individuals into the race is through training (education) as this develops both the mental and physical discipline that is required to be part of the competition.

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