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Killing innovation and being rewarded!

Comments / {{hitsCtrl.values.hits}} Views / Thursday, 18 December 2014 00:00

It is indeed important and perhaps timely to reflect that some of the methods and systems that we take for granted, and solidly declare our corporate allegiance to, are not really held in that high esteem at all times. This is where Schumpeter’s creative destruction become relevant in today’s boardrooms. The spirit of King C. Gillette should be understood. He has stated that they will stop making razor blades when he cannot keep making them better. Well Gillette has not stopped yet and continuous innovation as well as keeping global leadership should be a lesson in organisational ethos for us   Adding insult to injury, these organisations may well be rewarded for following these systems meticulously to the end, though with really mediocre performance when compared on a global scale. These systems may and have now proven to actually kill the very essence that is needed for an organisation for growth. Most of our corporate embrace some growth with happiness and feel quite content. As long as salaries can be given, all perks are managed and some margin is kept, the boards are happy with the organisational trajectory. No wonder we say or rather Voltaire stated that good is the enemy of great.   Creativity and innovation Sri Lanka witnesses many a night of rewards and recognition. We do indeed witness national events recognising financial reporting, best annual reports, etc. and deeper analysis of the winners and front runners can throw up many questions if one dares to ask some searching questions. Are we at times over valuing our performances as we live and perform with an island mentality? Our best in class is really no match for the best in art or craft or in that particular commercial space taken regionally let alone globally. Do they have the potential? Most certainly they do, if they dare to embrace principles of growth. A salient ingredient of this meaningful growth is nurturing creativity and embracing innovation. Consider the humble safety razor. A company such as Gillette has kept on innovating on the humble razor and perhaps pre- and post-shaving products thrown in for some good measure to complete the experience! What can one learn from Gillette or more precisely from King C. Gillette who proved some of the best scientists of the day wrong? King Gillette gave a new and an everlasting meaning to Pogonotomia – the art of shaving. The company owes its legacy of precision to this one man, and the company over a period of 100 years, starting in 1901, continues to bring us the best shaving experience. Something that the cave man did not do, but we today have built into our civilised living. Yes, Gillette speaks openly of 100 years of innovation and the story from their first design to-date proudly shown bears testimony to a journey in innovation. It is important that for over 100 years they have innovated on just one function and giving extra consumer satisfaction. With innovation they have kept more than one billion men across the world starting their day with Gillette. Can we bring in innovation to have more than one billion families start their day with an experience with our tea? We do not see the kind of Gillette philosophy in our company’s boardrooms. Cash, cash and cash is what filled the agenda.   Conservative and risk averse It is possible to read with some path breaker organisations that they have been keen to take risks, wait for results in the long run and support projects considered to be of high risk and with a high probability of failure. In fact some projects these companies have supported have nine in 10 chances of failure. The way we discuss projects and write proposals and grant approvals this situation can only be dreamed of. It is quite hard for us to believe that these organisations exist in this world. What is important to understand is indeed these organisations exist but unfortunately not in Sri Lanka. We are quite conservative and risk averse and believe in real estate investments for growth and placing bets on the tried and tested. As such, we have a peanut size economy. It was interesting reading the comments of Dr. Weerasooria during the launch of the book on Company Law recently – Sri Lanka’s blue chip companies being miniscule compared to foreign multinational conglomerates. He has stated SL’s GDP worth $ 67 b is just a fraction of group sales in companies such as Shell. Shell had group sales of $ 451 b in 2013. Research and development and scenario planning (Shell was a pioneer here) along with foresight exercises are quite common within these enterprises and those exercises made the difference. It is important to realise that different trajectories can only come with different thinking.   Destructive effect of financial tools A local writing on the destructive effect of classical financial tools may not find any favour or acceptance. Our comments are made more with a gut feeling than with an in depth analysis. However, Clayton Christensen of Harvard had been a researcher on innovation with a proven track record. It was he who has broached the subject of innovation killers: How financial tools destroy your capacity to do new things. It is quite difficult to explain in detail all his explanations on crimes against innovative human beings by three financial analysis tools! The accusations are on the following financial tools; to quote Christensen: n The use of Discounted Cash Flow (DCF) and Net Present Value (NPV) to evaluate investment opportunities causes managers to underestimate the real returns and benefits of proceeding with investments in innovation n The way that fixed and sunk costs are considered when evaluating future investments confers an unfair advantage on challengers and shackles incumbent firms that attempt to respond to an stimuli or an attack n The emphasis on earnings per share as the primary driver of share price and hence of shareholder value creation, to the exclusion of almost everything else, diverts resources away from investments whose payoffs lies beyond the immediate horizon. I can visualise anyone reading the above three points becoming quite agitated about doing away with such practices. Christensen has emphasised however that these are not bad tools and concepts though identified as innovation killers. What he stresses is that the way they are commonly wielded in evaluating investments which in the end is supposed to create a systematic bias against innovation. He speaks of the need to follow alternate methods which should help managers to innovate with a much more incisive eye for future value.     Changing from tried and tested technique If financial planners compare the cash flows from innovation against the default scenario of doing nothing, there is the possibility of analysis recommending the default scenario. Companies do have their default NPVs and IRR figures and if not met the investment is dead before arrival. The fundamental flow in this analysis is that no investment means doing nothing and then the future of the company depends on the company current architecture and activities to ensure the future prosperity too. The assumption that the present health of the company will persist well into the future via the activities that kept the company afloat in the past is flawed and wrong. The more agile and innovative will push these conservative companies to history. Hence recommended is the analysis of projected discounted cashflow with the scenario of decline in performance in a climate of nonrenewal of assets. Compare the manufacturing sector in Sri Lanka with antiquated equipment all crying out for replacement. A young entrant elsewhere with state-of-the-art equipment can take the position by storm. This is the agility of the new entrants which can simply eliminate an existing market player. Many an example is available to demonstrate on the big and the powerful who worked on the premise of incremental growth while nursing an old stock of assets. Realities are sure to dawn on them one day. Our companies are sometimes quite happy over creative improvisations that may have saved a day. Continue to rely on such jagged innovations will not take one really forward either. In the DCF type analysis we simply rely on numbers as the only language to determine any future interventions and this unfortunately appear to be erroneous. How one can change from a tried and tested technique is a big challenge.   Continuous innovation, global leadership When the present is changing very fast and the future is with us quite quickly, it is imperative that new capabilities must be introduced or injected to ensure competitiveness. Benchmarking yourself against the industry best is important. This requires industry heads to reach out and explore external surroundings. Results may be unpleasant yet not knowing where one stands will only delay the inevitable. These days gleaning this information is not difficult yet we operate with limited vision. The spirit of King C. Gillette should be understood. He has stated that they will stop making razor blades when he cannot keep making them better. Well Gillette has not stopped yet and continuous innovation as well as keeping global leadership should be a lesson in organisational ethos for us.   [The writer is Professor of Chemical and Process Engineering at the University of Moratuwa, Sri Lanka. With an initial BSc Chemical engineering Honours degree from Moratuwa, he proceeded to the University of Cambridge for his PhD. He is the Project Director of COSTI (Coordinating Secretariat for Science, Technology and Innovation), which is a newly established State entity with the mandate of coordinating and monitoring scientific affairs. He can be reached via email on ajith@cheng.mrt.ac.lk.]

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