Innovation is said to be the Canadian weapon of choice against low-wage foreign competitors. If so, innovation calls for the creation of an innovation culture – which does not come easily. You cannot expect to manage your way to creativity; however, good management sets some of the preconditions for it.

Innovate or die. With markets becoming less and less local, Canadian companies are being advised to compete globally based on their ability to innovate successfully. Certainly, Canada needs to compensate for a large and growing labour cost handicap compared to overseas competitors. The Canadian Advanced Technology Alliance said recently that “looking at a pure cost, Canada can’t compete at the level of India or China; [but] when you move up in the engineering class or the highly innovative manufacturing talent, Canada ranks right up there.”

However, there is what the Canadian Manufacturers and Exporters Association describes as “a significant gap with respect to innovation, including training, research and development, investments in new technologies, and the commercialization of new products.” CME sees “less of a tendency to compete on the basis of new products, new processes and new skills, and a greater reliance on other factors such as a low Canadian dollar, slower growth in labour costs and strong U.S. market demand. Those underlying conditions are now rapidly changing.” Putting innovation into practice can definitely be a challenge.

Despite widespread uncertainty about implementing it on the part of Canadian management, innovation is an overworked word. Last October, a search of “innovation” on Google returned an astonishing 338 million entries. By mid-December the count had climbed to 373 million.

Creating an innovation culture is easier said than done. There is no magic bullet for creating innovations, or any guarantee of a sustaining competitive advantage as a result. But, if an innovation culture is the goal, how should a CEO change the organization’s mindset? How can the organization be mobilized as a team to bring new products and services to market quickly? What will bring the organization together to translate product and service initiatives into sustained results? This article will address these questions.

Innovation – now for something completely different

The classic definition of innovation is “immense, incomplete and inimitable.” Innovators serve their customers with products, services and processes that radically shape customers’ perceptions and needs, creating new and enduring markets. Conceiving innovations requires breakthrough creativity, imagination and instinct. Developing them requires perceptiveness, ingenuity and agility. Implementing them requires co-operation across the enterprise.

Innovation as a management concept has matured over the past decade thanks to thought leaders like Clayton Christensen, Michael Porter and others who have popularized topics such as disruptive technology, competitive advantage and competitive strategy. Porter sees strategy as resting on unique activities, “choosing to perform activities differently or to perform different activities than rivals, and leads to sustained competitive advantage and profitability” (“What Is Strategy,” Harvard Business Review, November 1996). Christensen says that disruptive innovations need not be “a breakthrough from a technological sense, but instead of sustaining the trajectory of improvement that has been established in a market, it disrupts it and redefines it by bringing to the market something that is simpler” (Gartner Group Interview, April 2004).

Technology frequently is instrumental in creating innovations and bringing them to market. It enables consumers and businesses to do things not previously conceivable or affordable. It also can provide intelligent, inventive and complex automation to mitigate high labour costs.

Productivity – first catch the competition

Being an innovator in the global marketplace requires a strategy of growth, melding research with engineering on products, “whereas many so-called productivity efforts are really strategies of shrinkage,” says Chris Piper, Associate Professor and Faculty Director of the Ivey Operations Program at Richard Ivey School of Business.

Productivity is a necessary adjunct to innovation. John Hagel III and John Seely Brown characterize rapid incremental improvements as innovations if they are difficult to copy. As they write in Optimize magazine (November 2005), “that’s because they require deep mastery of practices developed cumulatively in specific contexts.”

However, it would be a serious mistake to think of productivity as a proxy for innovation. Productivity rarely eliminates cost gaps completely, and almost never creates a competitive advantage.

The foregoing matrix illustrates productivity and innovation as separate factors; a third factor, growth without productivity improvement, is at best a temporary strategy – an invitation to a lower cost competitor to seize market leadership once the innovation’s value has been demonstrated to a few early adopters.

It is all too tempting to see productivity improvement as a substitute for innovation, as easier and less risky at least in the short term. A Manufacturing Leadership Roundtable held at the Richard Ivey School of Business in October 2005 bears this out. A cross-section of Ontario industrial and product manufacturers was asked about bridging the excellence gap in manufacturing productivity and innovation. The Roundtable participants concluded that “creative breakthroughs are rare, so it is better to focus on quality and performance improvements that can enable future innovation.”

This raises a big question – to what extent are longterm competitive implications being thought through? Would-be global market players should heed Porter’s warning that operational effectiveness is not strategy, that “performing similar activities better than rivals may be essential to superior performance, but tends to drive companies to competitive convergence rather than uniqueness.”

In any case, productivity in Canada has its own competitive issues. Labour productivity has been flat in Canada for more than two years, compared to around 4% growth in the U.S., and much higher growth among Far East competitors. Canada also lags in corporate investment, often viewed as an indicator of future productivity, with information and communications technology investment per worker less than half that of the U.S. Although Canadian business investment in machinery and equipment has picked up recently, there is little evidence yet that the Canadian cost gap is shrinking. Nor have recent energy price increases that raise transportation costs appeared to have had a noticeable “proximity to the U.S. market” benefit for Canada. Mexico looks set to be the greater beneficiary.

The experience of an automotive parts company in western Ontario is a good example. Polymer Industries is relocating some manufacturing processes to Mexico. John Bell, CEO of Polymer Technologies Inc., says that the move is for cost savings and competitive survival. He adds that “locating close to a customer still can be a reason to be in Canada, and access to engineering skills is perhaps another.” However, Bell says the skills advantages are in danger of eroding and points to the more than 500,000 engineers graduating in China and India each year. There is clearly an urgency in creating an innovation culture.

Culture change – mobilizing the organization

There is no guarantee that an innovation culture will lead to innovation, but it certainly is a prerequisite. The Ivey Manufacturing Leadership Roundtable identified a “culture of innovation” as the central strategic requirement for Canadian companies today (see sidebar, “Leadership and Innovation”).

What constitutes an innovation culture? The Roundtable participants pointed to actions such as “sharing of ideas in a team,” “holding annual innovation education boot camps,” “using measurement to change behaviour” and “making front-line supervisors better coaches of their teams.” These are useful steps, but not comprehensive enough for building an innovation culture. A more organized view of innovation culture implementation is clearly needed.

The Continuum approach described here has been developed over several years. Its origins are in behavioral approaches to understanding customers in large service industries such as financial services, banks especially. The organization progressively moves itself across the Continuum to higher levels of achievement, with the goal of lifting performance at each level. Three levels of performance culture are depicted: “foundation,” “advanced” and “breakthrough.”

At the “foundation” level, a hierarchical and risk-focused organization typically concentrates on transactions, selling more products or services and keeping costs in check. Foundation organizations often try to improve performance by working harder, developing sales skills and targeting selected customers more systematically. They often let go staff who fall short of performance goals set for them or for the organization. This approach can work, at least for a while – many foundation organizations have reported steadily improving financial and operating results for extended periods. However, they also build up considerable stress at all levels in the organization and raise serious long-term questions about both business purpose and sustainability. The majority of Canadian organizations are in the “foundation” level, or else in transit to “advanced.”

At the “advanced” level, an organization is typically integrating organizational silos, so that individual departments can work with each other for productivity improvements and greater flexibility of response. More operating decisions are being pushed down to the front line. Higher-profit-contributing customer groups are being identified and given special treatment. Selected operating metrics are being measured, but the ability to use the data to fine-tune business decisions may lag the ability to generate the data.

Major service organizations are making this transition in various degrees. For example, banks, insurance companies, government, airlines and some retailers are improving the granularity and use of customer data to customize offerings, and are outsourcing non-core activities to hold down costs.

Many manufacturing companies have made considerable headway in streamlining supply chains – integrating them internally, backwards to suppliers, and forwards to customers – and have implemented quality and lean processes. More companies are collaborating with their customers in product development, while also facing an adversarial tone as customers squeeze them to improve their own cost competitiveness.

Performance – the “breakthrough” level on the Continuum

Early adopters have found that the “advanced” level will only take them so far. Aspiring to a higher level of accomplishment, they seek an adaptive, knowledge and learning culture in which performance improvement not only cascades down but is also self-directed, and innovation becomes the driving force.

“Breakthrough” performance extends strategy alignment to goal alignment. The desired payoff is a competitive advantage that is selfsustaining as the environment changes.

Enhanced leadership capabilities; development of front-line supervisory skills to improve employee engagement and retention; co-operative and creative business practices; organization-wide selfactualization – these all lead to a shared knowledge and learning organization. A recurring theme is also managing overwhelming workloads so that all important issues are addressed promptly, rather than deferred because people are too busy.

The “breakthrough” level embraces Total Performance Scorecard concepts developed by my colleague, Dr. Hubert Rampersad. The Total Performance Scorecard approach has been described in the article “Sustaining profitable customer relationships requires real leadership” (Ivey Business Journal, November/December, 2004). It is being used by senior executives and staff in several major organizations around the world for sustained improvement in key performance metrics, both financial and non-financial, by aligning individual and organizational performance, and vice versa.

“Breakthrough” also calls for robust data management. Especially, collection and analysis require a suitable platform that can link detailed results measurement to strategic and tactical decision making, supported by a proper business case (see also sidebar, “The Role of Technology in Innovation”). Many organizations have installed a Balanced Scorecard process, often using a commercial software tool. Many are finding the results are underwhelming. Generally, the best results for the effort are being achieved by organizations moving into the “breakthrough” level.

The implementation of innovation culture change often starts with a readiness assessment that examines multiple cultural and strategic components. This yields valuable insights about the organization, often at variance with the organization’s existing view of itself.

Putting innovation into practice

Several companies are now in “breakthrough” territory, especially in how they work with their customers. They are now targeting customer needs as well as customer profitability through an understanding of customer behavioral factors. In other areas, there is more work to be done. The management and strategy elements particularly require selfdirected and self-motivated teams to carry out groundwork to define required changes in behaviour and expected results, and to bring staff to a sufficient comfort level.

Our research indicates that progression on the Continuum reduces resistance to new ideas and improves results, both financial and non-financial, and so is a necessary first step. Innovation realization is still somewhat anecdotal, but there are good early indications that it becomes more achievable and sustainable as barriers to innovation are removed.

An innovation “how to do it” guide would contain four essential ingredients:

  1. Remove constraints from people by sharing knowledge and decision making
  2. Foster expanding horizons, not internal needs – as a shaper
  3. Create an environment of creativity and intellectual satisfaction – identify those who fit and those who don’t
  4. Set up benchmarks for performance, action and continuous improvement

The aim is to remove obstacles to culture change and create organizational conditions that are conducive to innovation. Innovative behaviour does not stay innovative forever. Strategy must be continuously improved by probing boundaries and pushing them forward to stay ahead.