Competitiveness, Productivity and Innovation Study

February 5, 2012

Introduction and Basic Definitions

In order to embark on the task of analyzing Competitiveness, Productivity and Innovation (CPI), and their interconnectedness it is necessary first to clearly define these and some other related terms. The need for clarification lies in the fact that often in casual everyday use, even media reports, some of the words are used loosely or interchangeably. In addition to confusion of some of the terms in casual use, even the professional writers and subject matter experts may lean to slightly, or sometimes significantly different definitions. This may produce confusion in the readers’ mind and unnecessary muddle further discussion.

Innovation

One of the notable commonly confused words is Innovation. We often can hear this word bundled with Creativity. Therefore it is not unusual that some people don’t really differentiate between the two and use them interchangeably. For purpose of our discussion we will differentiate the terms.

Creativity is commonly referred to as the attribute of a person, his or her ability to create something new. Creativity is therefore “the how” of the thinking process and is commonly dealt with by psychologists. Creativity is not the phenomenon discussed in this paper.

Another commonly confused term related to Innovation is Invention. The dictionary definition we are going to use for this term is: “the discovery or production of some new or improved process or machine that is both useful and is not obvious to persons skilled in the particular field”. This definition implies some degree of discreteness, the singular event. We could therefore call it “the what” of the creative process.

Even though both Creativity and Invention could be related to Innovation, the nature of this relation is not the subject of our discussion.

The definition for Innovation which is suitable for this paper is as follows: “Innovation is the multi-stage process whereby organizations transform ideas into improved products, service or processes, in order to advance, compete and differentiate themselves successfully in their marketplace” (Bargheh et al. 2009). The emphasis of this definition is transformation of ideas into improvements that allow the companies to compete in the market place. We could also call it “the so what” or of the invention.

Productivity

The Innovation is only the first and very crucial element in the chain of processes that include Productivity and Competitiveness. Defining the Productivity is relatively easier. The commonly accepted general definition of Productivity is the ratio of output over input. However to measure Productivity is not always as easy. Because the output often cannot be measured in units of quantity and may also include the “quality, fit, timeliness and other intangible characteristics that create value for the consumer. Similarly, the input should adjust for labor quality, and when measuring multi-factor productivity should also adjust for other inputs, such as capital” (Brynjolfsson, 2010).

Competitiveness

The pinnacle of this process is the Competitiveness which is the function of the Productivity. The definition of Competitiveness then is “the capacity of people, organizations and nations to achieve superior outputs and especially outcomes, and in particular, to add value, while using the same or lower amounts of inputs” (Carayannis, 2003).

The role of technological innovation in increasing productivity and raising competitiveness has significantly increased especially in the last one-two hundred years or so. And the rate of the technological innovation is only ever increasing. In the old economies, especially pre-Industrial Revolution, the competitiveness of enterprises and the nations was almost solely based on the Comparative Advantages of the nations which were mostly derived from the natural resources, and some superior knowledge and proprietary know-how. This notion of comparative advantage was first described in 1817 by David Ricardo.

The idea of Competitive Advantage was elaborately developed by Michael Porter in his “Competitive Advantage” published in 1985. Though the bulk of the book is dedicated to analysis of the competitiveness through the value chain within the company, there is a chapter on technology and competitive advantage. There Porter makes a strong statement on importance of technology in obtaining and maintaining competitive edge: “Technological change is one of the principal drivers of competition…. Of all things that can change the rules of competition, technological change is among the most prominent” (Porter, 1985).

Innovation in Firms and Beyond

Now that we have basic definitions out of the way, let’s take a look in more detail at the implications of CPI on different levels: firm, industry, national and transnational.

Although implications of innovation can be discussed in the context of the firm- micro level; on the industry level – meso-level; and national/transnational – macro-level; firms are commonly considered the primary engine of innovation. This is explained by the fact that private companies face much stronger pressure and incentives to develop new products and services in order to differentiate themselves in often fierce competition. Private companies also have management systems and substantial resources in place to invest in innovation.

The most important source of innovation for most firms is their own internal Research and Development department (R&D). This department, depending on the size and organizational structure of the company, may comprise central corporate as well as divisional R&D departments.

Usually the R&D includes a broad spectrum of activities, starting with Basic research, which is not directed at immediate or short-term commercialization of researched ideas. Other activities within firm’s R&D include Applied research and Development. While applied research can be viewed as interim activity aimed at better understanding of the knowledge derived from the basic research, development activities are designed to specifically apply the acquired knowledge from research to producing commercially viable products and services. The nature of the R&D process is influenced both by the science push – the outcomes of the scientific or engineering processes and by demand pull – an attempt to respond to perceived customer wants and needs.

In order to take advantage of all opportunities to properly direct and manage R&D activities firms often get involved and stimulate various external networking and collaborative activities, most notably with their own customers, partners and suppliers, competitors, educational and non-profit entities.

Tapping into the users’ feedback for refining company’s products has been a good policy for many firms for quite a while. Probably the most effective way for utilizing collective brain power of users is available to software development companies when they make beta versions of their programs available for testing to a selected user base.

One of the relatively newer and less obvious variations of external networking for the firms is so-called crowdsourcing. Arguably it could be defined as a hybrid between the collaboration with customers and partners and suppliers. Its emergence became only possible with the development and wide-spread of the internet, but there have been quite a few projects that have been developed using this technique already.

Essentially, crowdsourcing is outsourcing some components of the R&D process, usually performed by internal staff or contractors, to a large unidentified group of people through an open call. Some of the examples of successful crowdsourcing include InnoCentive – a broker website for pharmaceutical companies, GE’s multi-million dollar challenge for cleaner, more efficient and viable grid technologies. Wikipedia.com can also be used as an example of crowdsourcing, albeit in a different niche.

If cooperation in R&D field with suppliers and complementing companies seems as a rather logical and reasonable extension of the company’s own R&D activities, the new trend – cooperation with competitors – seems to be somewhat counterintuitive. However, there are fundamental underlying reasons that make this kind of cooperation necessary, if not desirable by many companies:
• The modern technology is becoming so complex that no single company may exclusively possess all the knowledge required for the next technological breakthrough.

• The cost of developing new technology could be very high, so the companies may need to pool together their financial, human and other resources.
• The risk of failure of any new technology is very high and the level of uncertainty can be unacceptable for any one company. Pooling resources together allows companies to share the risks associated with technological innovation.

This trend of companies working together with competitors has already received a specific name – co-opetition. Given the persistence of the above mentioned reasons one can only expect that this co-opetition will be becoming more and more common in the light of challenges faced by the companies.

Other collaborative networks available for firms include participation in government-funded research, government-sponsored technological incubators and parks. These venues, just like the collaborative networks initiated by the firms, as described earlier, provide additional opportunities for increased innovation through further knowledge, resources and risk sharing.

Productivity in Firms and Beyond

As was mentioned earlier in the definition of productivity given by Brynjolfsson the dollar amount is not an adequate measure of productivity measurement even if we make adjustment for inflation. The reason for this is that many of the products available today possess significant additional benefits for consumers compared to the products from the past. One of the examples to illustrate the flaw of comparing the Consumer Price Index brought by Brynjolfsson and Saunders in their book was the comparison of prices in 1913 and 2008. Specifically they compared the Reo car which cost $1,095 in 1913 with the average price of new car – $28,350 –in 2008.

According to Bureau of Labor Statistics prices over that period increased by a factor of nearly 22. But the authors further prompt you to “think of all of the products and services you use today that were not available at any price in 1913. The list would be far too long to print here. Suffice it to say that a 1913 Reo didn’t come with power steering, power windows, air conditioning, anti-lock brakes, automatic transmission, or airbags. Measuring the average prices will give you some idea of the cost but not the quality of living in these different eras.” (Brynjolfsson, 2010). Therefore, it is important to always keep in mind the improved standard of living attained through the technological innovation when making an attempt to measure productivity.

The productivity of innovation measured in dollars can only be used as a very rough proxy, but intangible benefits should always be taken into account in such cases. This principle is equally true when comparing productivity over time or across the industries and nations at the same snapshot of time. According to George Group’s Stephen Wilson “Standard accounting … doesn’t give you a sense of where you are creating value in the organization.” (George Group Report, 2006). And if quantitative methods fail to reflect the true measure of innovation productivity then other qualitative models should be used, e.g. models based on or similar to Analytic Hierarchy Process (AHP). And just as this approach could be used for estimating innovation productivity at the firm level – micro level, it could also be used for measuring productivity at meso- and macro- levels.

Competitiveness in Firms and Beyond

Going back to the brief discussion of the competitiveness earlier in the paper, we want to emphasize again the idea that competitiveness is “the function of productivity” and “technological change is the most prominent” contributor to competition. Therefore the strategic planning of not only companies, but also nations should be focused on stimulating and fostering innovation at every level.

However, it is important to remind that innovation should not be pursued just for the sake of innovation. It is always should be viewed through the prism of how the innovation can contribute to increasing long-term sustainable competitiveness, not just quarterly financial ratios. This is a very delicate balancing act. Given the universal underlying principle of scarcity of resources, whether on a company or national level, sometimes the leadership can be tempted to trim the balance sheet or the federal budget by slashing investment into R&D. This tactics is very short-sighted and will eventually backfire.

If we accept as a proven fact that competitiveness is a function of productivity driven by technological innovation then we will have to admit that successful competitive firms must have innovation as their core cultural corporate value. And if this is true then the captains of the industry should demonstrate their adherence to this value by planning ahead and staying on course of innovation by investing in technology the thick and through the thin economical cycles.

This assumption is actually supported by empirical evidence. According to report prepared by Ernst & Young in 2009: “More than half of the companies on the 2009 Fortune 500 list, and just under half of those on the 2008 Inc. list, were founded during a recession or bear market” (Ernst and Young, 2009). Therefore the economic downturn is not a threat to the truly innovative company, but rather a unique opportunity to capitalize and get ahead of the less insightful competitors.

Instead of pulling back, the economic slowdowns should be used as a jumping board to current and future competitiveness through increased productivity fueled by continuous and steadfast commitment to innovation. Admittedly, if the company has the courage and stamina to stay this course, it should actually be easier for them to maintain their competitiveness, because many companies are in fact prone to a knee jerk reaction of pulling back and withdrawing from innovation initiatives.

We believe that the same strategic approach is equally applicable to the national as well as transnational levels. The government should exercise political will to maintain its country’s competitiveness by continuing to provide support to government-funded R&D programs and government-sponsored consortia of private businesses and research universities that define innovative leadership of the country in strategic areas. These strategic areas will not only contribute to upkeeping the country’s standard of leaving, but also its national security and economic interests in the long run.

This role should also be performed by international institutions, e.g. Multilateral Development Banks (MDB), to support the countries committed to increasing their productivity and competitiveness through technological innovation rather than poaching their natural resources or surviving on mere subsistence levels.

Conclusion

Innovation is indispensible building component of the competitive strategy which should be not just reluctantly adopted, but enthusiastically embraced by firms small and large, as well as entities at higher economical levels, including governments and transnational institutions. It should not be looked upon as burdensome obligation or just another unavoidable line in the liabilities section of the balance sheet, but rather as invaluable strategic asset of the company. The choice for a company or other economic entity is very clear and unambiguous: increase productivity to stay competitive by the way of innovation or go the way of dinosaurs, only in much faster manner.

References

Baregheh A, Rowley J and Sambrook S. “Towards a multidisciplinary definition of innovation.” Management decision, vol. 47, no. 8 (2009): 1323–1339.
Erik Brynjolfsson, Adam Saunders. Wired for Innovation: How Information Technology is Reshaping the Economy (2010): 3.
Elias Carayannis, Edgar Gonzalez. “Creativity + Innovation= Competitiveness?” International Handbook on Innovation (2003): 588.
Michael Porter, Competitive Advantage (1985): 164.

http://en.wikipedia.org/wiki/List_of_crowdsourcing_projects

George Group Special Report. “Smart Growth: Innovating to Meet the Needs of the Market without Feeding the Beast of Complexity” Knowledge @ Wharton (October 2006): 9
Ernst & Young. ”Entrepreneurship and Innovation” (2009): 7