I recently interviewed Peter Balbus who discussed how we can make America's supply chains more dynamic and innovative.
How do you think we can make America's supply chains more dynamic and innovative?
A big part of the answer lies in shifting how we think of supply chains, away from the traditional three bids and buy procurement, to a truly strategic resource that most companies today are dramatically underutilizing. The business world of the 21st century is highly networked, and not just on the Internet or wireless apps on the iphone. Peter means real strategic business networking across the entire value chain, including the supply chain.
Peter thinks large companies are starting to realize that a significant amount of innovation can be affectively developed with or acquired from smaller companies who are better structured to risk manage the intricacies of strategic innovation.
Why do you think small businesses are the source of global innovation and job creation?
That really is the $64,000 question. Peter thinks it is a combination of factors. One of them is what Peter might call the Law of Large Numbers. It is not so much that big companies don’t know how to do innovation. In most cases they were founded by coming up with something that was so innovative you could build an entire company or industry around it.
The problem is that most innovation, when it is young, does not immediately lead to billion dollar markets. If I am managing a large company, let’s say a $10 billion company, I honestly can’t afford to develop new business lines that are in the ten, fifteen or twenty million dollar range. I don’t have the management staff, the shareholder approval, and if I am going to do something it has to make a significant bottom line contribution within a fairly short period of time.
By and large, small businesses are far better structured and they have far more ability and agility to bring new technology to a point of commercialization where we can demonstrate that a market exists. We can demonstrate that there is an adoption and where we can prove there is a viability of a business by having customers, a certain amount of marketing and sales and technical staff; that make the acquisition of that technology, or even the whole company, a viable option for a large company.
In other parts of the world we see much more of this happening. Frankly, for the most successful tech companies in the US, we tend to see an entire cottage industry; former employees and people who are providing very specific kinds of innovation or services to the larger companies.
Peter finds it very refreshing when he sees large companies recognize that these outside networks of small companies can be an integral part of their own supply chain. If they stop thinking of the supply chain as just parts and services, but access to innovation that the large company themselves might not be able to do, it dramatically improves and increases the ability of these companies to not only be more innovate but also to create jobs.
If we look at the Fortune500 there has been a net loss of jobs over the last 25 years. Large companies are more concerned with productivity enhancements. Frankly, coming out of this current recession, while their profits are up, they are not hiring. What we need in this country is more re-industrialization.
It is not just a question of innovation. Even companies like Google don’t employ that many people. They become large quickly, and that is about the end of it. What we need are small companies whose innovations lead to entire new industries. This is where growth occurs. Far more growth occurs with companies with few than 500 employees, than all the rest of the companies combined.
What needs to be done?
While Peter is not a huge fan of widespread government intervention, he thinks this is one of the clear roles for both State and Federal government investment. Some of the states which have created clusters of innovation and technology have done so because they recognize they can provide certain incentives to young companies to come to their areas.
In some cases it is the ability to provide financing or funding. In some cases it is a tax abatement for a brief period of time to allow a company to gain sufficient capital that they can afford to pay the full range of taxes.
Part of it is simply raising the visibility that innovation is going to come from these small companies. If the large companies are either unable or unwilling to solve our biggest challenges, because they are so attached to 20th century business practices, then it is up to us as consultants and conveyers of knowledge to raise awareness that it really is the small companies (in the US and worldwide) that are really leading the charge for broad based innovation.
How should employees or entrepreneurs get started?
This is a very difficult question. The answer takes the form of “it depends”. For employees in companies that are already at a point where they acknowledge that innovation and ideas can come from anyone and everyone within a business, Peter’s sense is to continue to provide ideas and insights to senior management. Even though in many cases the employee may not think that those suggestions are being considered, Peter can say as a consultant to senior management that they are being considered. Keep up the good work.
In companies that are somewhat behind the power curve, part of it is that you have to build a business case for the suggestion. You can’t just put a note in a box. You have to almost take a consulting approach and say “hey, I have got an idea, and here is why I think it is valuable. Here is the problem it is going to solve, here is the benefit that I think it will yield for our organization, and here is what I think the cost is going to be.”
Management does not suffer from a lack of ideas, with ideas coming from all over their organization both inside and outside. The best ideas are those that are fairly well thought through. Don’t just put a one liner that someone needs to do something about this issue on our manufacturing floor, for example. Take the time to build a business case. That is the language of business.
As a consultant, Peter thinks that we need to do a better job of raising awareness and visibility. There is always the balance of coming in and doing what they have been asked to do, but also providing perhaps some additional value by offering alternatives to what you were asked to do. This doesn’t always go over well. It is something you have to be very careful with. However, Peter is finding that more and more that if you built credibility in doing what you said you would do, clients are more open to alternative approaches. Part of it is gentle nudging more senior management to ‘think outside of the box’. This is the reality. The more outside examples of successful initiatives that you can bring to their attention, the better they are going to be.
Provide examples that come from their industry which are fairly closely related to the kind of ideas you have. In summary, supply chains and supply networks are one of the great untapped potentials that exist in this country. It is a way of accelerating not just innovation but economic growth. The more we can pull in the small companies into constellations of being providers to the larger companies, the more and faster the economy is going to expand.
Peter’s Views on Innovation
Innovation is an area that Peter feels passionate about. It really is one of the more untapped but much more fruitful sources. Peter is on a personal mission. Every time he hears that innovation is crowd sourced or that innovation comes from contests and talking with your customers, he wants to cringe because this is not really where innovation comes from. While it can be a source, and depending on the industry some get more value from this than others, but by and large (especially organizations with complex supply chains, most likely industrial) you don’t get a lot of innovation just by asking your customers.
You get a tremendous amount of insights just by looking the other way, sitting down with suppliers who very often have ideas which they would love to share. The smaller the company the closer senior management tends to be to the market. It is somewhat counterintuitive, almost like looking in the rear view mirror to forward, but it is not. Henry Ford is famously quoted as saying that if he had asked his customers what they wanted I would have built a faster horse. There is a lot of truth to that.
We confuse product improvement with innovation. They are really two very different things. You can ask your customers what they want to improve your products, which you should. But if what you are really trying to do is bring real sustainable competitive advantage that isn’t just an obvious next step, then your customers are not necessarily going to be a good source for that.
As it relates to your internal operations and manufacturing, for example, your customers are not going to tell you how bring innovation into the shop floor. However, your suppliers might.
About Peter Balbus
Peter has been an active participant in the wonderful world of strategic innovation for about 25 years, working with clients across a wide range of industries. Most of Peter and his team’s focus is on harnessing the power of their supply networks to foster what he would call Real Innovation in their business. By Real Innovation he means taking bold moves that yield sustained competitive advantage and profits, not just incremental improvements that are quickly matched by the competition. Peter’s formal education includes a degree in chemical engineering from MIT and completion of the executive program in corporate strategy at the University of Chicago.