The Twelfth Pillar: Innovation

Some of you may have noticed that the World Economic Forum has issued the latest version of their highly regarded  Global Competitiveness Report.

The report ranks competitiveness out of 142 countries surveyed – as shown in the chart on the left.

While many people have been reporting mainly on the shifts in rank between 2010 and 2011, I think the important story is very different.  (who went up or down – and who is to blame – isn’t what we need to think about).

First, let me explain a little about how global competitiveness is measured.  While assessing competitive capacity is complex, the WEF measured countries along 12 different dimensions assessing basic capacity, elements that enhance efficiency, and innovation.   Here are the dimensions they used:

 Basic Dimensions

• Institutions
• Infrastructure
• Macroeconomic environment
• Health and primary education

 Efficiency enhancers

• Higher education and training
• Goods market efficiency
• Labor market efficiency
• Financial market development
• Technological readiness
• Market Size

 Innovation and sophistication factors

• Business sophistication
• Innovation

As it turns out, nations – like companies and people – go through different life stages.  Developing nations (like Haiti, Bolivia Bangladesh, and Nicaragua) are seeking to develop fundamental infrastructures that provide for health of the population, deliver utilities, create a banking and transportation systems,  establish formal market places, and so forth.   Without these, economic growth is almost impossible.

As nations mature, the drivers of economic vitality shift to what WEF calls “efficiency enhancers”.  Emerging economies (like Argentina, China, Turkey, and the Russian Federation) must focus on developing more sophisticated parts of their infrastructure that enhance efficiency, like training and education, financial markets, technology (like the internet) etc.

For the most developed nations, like those at the top of the rankings, the game is very different.   These nations already have pretty sophisticated infrastructures in place. What becomes a more important differentiator has more to do with what you do with these infrastructures.  So for these nations, the most important driver of economic vitality is INNOVATION.  Let me explain why.

The evidence is that while investing (to build infrastructure, reduce macroeconomic instability, or improve human capital ) almost always brings about some improvements in economic output, all these factors eventually seem to run into diminishing returns.   When we reach a point when we all have access to the same technology, equipment, information, etc., these no longer are a source of competitive advantage.  We are just like everyone else.

The more we advanced we become, the more competition becomes about people including how to harness their creativity, unleash their personal energy, and stimulate their ability to create and innovate.  The WEF report concludes that “In the long run, standards of living can be enhanced only by technological innovation.  Innovation is particularly important for economies as they approach the frontiers of knowledge and [face new possibilities] of integrating and adapting emerging technologies.”

Of course, this creates classic tension between short and long-term objectives.   The WEF report goes on to admonish  leaders, saying that “in light of the recent sluggish recovery and rising fiscal pressures faced by advanced economies, it is important that public and private sectors resist pressures to cut back on the R&D spending that will be so critical for sustainable growth going into the future”.   It takes courage to stay the course in the face of growing economic pressures (which is part of the debate still taking place in Washington, and European capitals where their countries are facing slow economic and job growth.

What Got You Here, Won’t Get You There

These ideas, to me, seem as true for companies, as they are for nations.

In most organizations, I wonder if we spend enough time thinking about what it takes to really drive innovation.  We intuitively know it matters, but few companies I know of have a deliberate way of accomplishing it.  Some see it narrowly as about making investments in R&D.  (We all wish that it could be that simple).

As we discussed in more detail in our post on the 7 Laws of Innovation, it is far more involved than funding R&D.  It requires a certain kind of leadership that is eager for change and experimentation, and a culture where challenging the status-quo is not seen as political back-stabbing but a healthy and normal curiosity about how we could be better.  It also requires  a culture where failure is reasonably tolerated.   I think it also helps immeasurably to have a deliberate innovation strategy.

One of the more interesting examples of an organization with such a deliberate strategy is the Mayo Clinic.  Here is a linkto a Yale School of Management case about how this admired health care institution worked (over many years) to infuse what they call “design thinking” into the practice of health care.

(Make sure you watch the video clips embedded in the case).  It’ll take you an hour or so to get through it – but if you are serious about developing an innovation strategy for your organization, it is worth it.