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Embrace Possibility

Monday, July 1, 2013 - 11:15

With developing countries fast improving the quality of their products, Australian companies need fresh ideas to stay ahead of the curve. Tom Skotnicki reports

An Australian Institute of Management report due for release shortly raises serious questions regarding the organisational commitment of most enterprises to promoting innovation.

The report, based on a survey of more than 2400 members and organisations, for the first time reveals the extent of the gap between the focus on innovation of the top 25 per cent of enterprises and those in the bottom 25 per cent.

Professor of Management at Melbourne University Danny Samson, the report’s author, said survey participants were ranked on the basis of nine criteria (including profit margin, revenue growth, patents and customer satisfaction) to determine their ranking.

Those surveyed were asked a series of questions on areas including spending on research and development, new technology and areas relating to management engagement, customer focus and other innovation-related practices to provide a detailed comparison of the top and bottom quartiles.

Professor Samson told Management Today that although the survey revealed massive differences in the focus on innovation, what he found even more disturbing was the extent of neglect by most organisations of the benefits of incorporating innovation into their strategic approach, corporate culture and management practices.

Professor Samson said unless organisations became far more involved in generating both product and process innovation there was little chance Australia could maintain its international economic standing.

"Australia is not a low-cost economy and this is not about to change. Most people would not want to see us become a low-wage country. This means we can never rely on being able to compete with our international competitors on the basis of cost," Samson said.

"Competing on the basis of quality is also becoming increasingly problematic."

Professor Samson said the quality of production from many developing countries was rapidly approaching the levels expected of the best in Europe and the other first-world nations. He pointed out that many of the latest high-quality, high-performing technologies, including tablet computers and smart phones, were produced in China and other traditionally lower-wage countries.

"The quality gap, if it still exists, is rapidly closing," he said.

As a result, a strategy of focusing economic production primarily on increasing quality does not represent a viable long-term option, he argued.

Professor Samson said the answer lies in a much greater focus on innovation. He said rather than just being the best at what you do, the objective had to be to offer customers something better than what is currently available. He said the approach offers benefits to all sectors of the economy if it is incorporated into the culture of an organisation.

"It can have enormous benefits in improving processes as well as products and services," Professor Samson said.

An innovative approach may result in greater benefits, in terms of improvement in processes and their impact on productivity than product innovation.

Internationally, a better understanding in recent decades of the drivers of productivity has revealed that improvements associated with changes in capital and labour frequently account for less than half of all productivity gains. Hence there has been an increasing emphasis by economic researchers on areas such as spending on research and development and patent application as a proxy for technological innovation.

However, although this approach has been found to have some merit in analysing innovation gains in manufacturing, in the growing services sector, where innovation frequently reflects more than spending on new equipment and technological breakthroughs, it has been insufficient.

Professor Samson said one of the most important aspects of the AIM survey is that it is one of the first attempts to measure differences in the approach to innovation using a methodology that can be applied to all organisations.

The survey comes at a time when there is evidence of a pick-up in innovation and productivity among Australian firms as the realisation hits that factors such as the mining boom and the terms of trade can no longer be relied upon to help generate revenue and profit growth and the high dollar may not deflate quickly.

In 2012, for the first time in several years the rate of productivity growth (which usually averages about 2 per cent and in the past decade was often significantly lower) surged past 3 per cent.

However, at this stage it is hard to judge how much of the productivity gain relates to short-term measures such as working staff harder or taking easy options to curb costs – including cutting research and development or new investment.

Samson said significant benefits are achieved when there is a leadership commitment to innovation "and it is adequately resourced, measured and integrated into corporate behaviour and culture".

He said it was obvious from the survey many firms were still not genuinely convinced of "the huge upside from increasing innovation".

Toyota Australia, Samson said, was an example of a large company that has focused on innovation and reaped benefits.

"It does innovation in small and large leaps," he said.

The hybrid synergy drive (which alternates between petrol and electric power for maximum efficiency) was an example of a major development, but Samson said throughout the organisation there was a continuous focus on process innovation that is also extended into the supplier base.

There are many firms that have a genuine long-term commitment to maximising the benefits of innovation. However, according to Samson, they are most often found in the top 10 per cent of firms, with many of the rest lagging too far behind.