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Innovation and Jobs at the Macro Scale: Why China, Inc. is Defeating USA, Inc.

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David Croslin, author of Innovate the Future: A Radical New Approach to IT Innovation, explains why, like any company, USA, Inc. must fund and target disruptive innovation in order to survive.
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Treating the entire U.S. and other countries as if they were huge corporate entities has become a fairly common practice among analysts. Invariably, the analysts will propose solutions that are derived from a turnaround CEO’s playbook: cut costs, utilize assets, cut employees, and increase revenues.

Unfortunately, turnaround CEOs are rarely effective in the long run. They bring a short term appearance of improvement and then, because of their ongoing focus on slashing costs without innovation-driven revenues, they drive the company to the point of being no longer competitive. We have seen these types of approaches fail at companies like HP, Xerox, Motorola, MCI and many other previously highly innovative firms.

In this article, I’ll explain why, like any company, USA, Inc. must fund and target disruptive innovation in order to survive.

The Macro View

The U.S. is currently experiencing sustained unemployment that many suggest is well over the published numbers, with actual unemployed/underemployed rates approaching 16%. At the same time, the U.S. is borrowing money almost faster than it can be printed, and yet costs continue to rise.

Treating the U.S. as a company, USA, Inc., is a reasonable approach to summarizing systems and activities that are so complex that comparison otherwise quickly becomes impossible. But, as I stated at the outset, using a turnaround CEO approach is totally wrong.  The U.S. is cutting costs by laying off millions of workers (the high unemployment rate) and raising money to get over the hump (the huge national debt). Yet, quality of product is decreasing, U.S. citizens are totally displeased with government (unhappy with the “company executives”), and the government is unwilling to increase taxes (pay more for products).

The U.S. has not “lost” the ability to innovate, but it is being out-innovated by China. Why? Not because of a lack of education and talent. Not because of a lack of workers. The U.S. is being out-innovated because of poor innovation investment.

Invention and Innovation

One of the problems that most companies—and countries, including the U.S. and China-- suffer from is the inability to separate invention from innovation. Companies continually think they are innovating when in reality they are inventing and damaging their products.

Let’s take a simple example that defines the difference between invention and innovation. Open the pantry in most homes and you will find a collection of spices, condiments, flours, etc. These are all ingredients. Rarely does someone sit down and have a meal consisting of only the spice cumin. These ingredients are basic inventions. They are wonderful things, but individually will rarely create disruptive innovations in the food market. Ingredients must be combined to make something taste wonderful and have consumers shell out hard earned cash for that “new snack food.”

Now take the ingredients from that pantry and follow a recipe. In some cases we will make a yummy meal. In some cases it will be a disaster. If you follow someone else’s recipe, then you are trying to replicate their meal and therefore their innovation. If you combine the ingredients in a unique new way that people love to eat, then you have created an innovative new meal. If that meal makes people stop spending money and time on other meals and focus on eating your prepared meal, then you have created a disruptive innovation.

Incremental and Disruptive Innovations

Companies are normally born from disruptive innovations. Companies normally die from incremental innovations. Let me explain.

Disruptive innovations create new markets or change the way an existing market functions. Smartphones were highly disruptive to the cell phone market. Almost overnight sales of traditional cell phones collapsed and sales of smartphones skyrocketed.

Once a company gets going, disruptive innovations start to vanish. There are many reasons for this that I discuss in my book, but the primary reasons have to do with the financial need to use existing product delivery infrastructure, satisfy existing customers, and meet demands of shareholders for increased revenues.

Startup companies focus largely on existing markets and need disruptive innovations to compete. Existing companies focus largely on evolving existing innovations and using incremental innovations and inventions to attempt to satisfy customers and compete.

For example, a new restaurant and its chef must create a menu and dining experience that are unique and that are disruptive to the dining market. It is often not good enough to be the same as established restaurants.

An established restaurant, however, must avoid alienating its clientele by maintaining existing menu items and avoiding too much change. Any changes the established restaurant and chef make have the potential to drive customers away. In order to stay competitive, some established restaurants must often cut costs--and therefore quality of dining experience--in order to increase revenues, especially in tough economic times when consumers are unwilling to absorb price increases. The chef’s cost reductions drive down quality and force the customers out the door. The chef implements more and more changes in an attempt to draw back the customers, but often loses sight of the reason the customers were leaving in the first place.

The U.S. is just like that chef -- totally focused on incremental invention and innovation. Creating jobs through ‘cash for clunkers,’ funding bankrupt companies, and building bridges and roads are short term incremental changes that have no positive impact on the long term disruptive innovation potential of the U.S..

A Child’s View – Lack of Assumptions

I have eight kids, and sometimes even my little kids say the most brilliant things. For instance, I was trying to explain a household maintenance problem to my eight-year-old. He asked, “Can you use a screwdriver to fix it?” I explained that it was far more complicated than that. He then pointed at a particular spot and said, “Is that supposed to be loose like that?” I blinked four or five times, got a screwdriver and fixed the problem. My assumptions blinded me to the obvious. My son had no such assumptions.

Companies have the same “assumption blinders” on all the time. Rather than looking at alternatives, they focus on existing assumptions and roadmaps. HP is currently faced with this problem. While HP is still profitable thanks to massive layoffs, they have largely lost the ability to create disruptive innovations as they focus on pleasing existing customers. The U.S. is doing the same thing by continuing policies and procedures that have worked multiple times over the past 100 years. Programs that attempt to create construction jobs, increase consumer spending or improve education do not solve the problem of being able to compete globally in a high tech world and create millions of high tech jobs that have been lost to overseas competitors.

China Plays Unfair

I am a big supporter of capitalism. China follows a different model, and that model is killing the U.S.  China will create entire cities to achieve dominance into a specific global market. China will change laws to reach success. China will allow the theft of intellectual property (inventions) in order to create new market-disruptive innovations and damage existing competitors. For example, there are certain areas in Shenzhen that are dominated by shoe manufacturers that illegally manufacture counterfeit name brand shoes.

Should the U.S. become like China? Definitely not. But the U.S. has got to recognize the need for disruptive innovation and drive competitive positioning for those disruptions. Cutting costs, borrowing money and laying off employees are no longer working. Incremental innovation has failed to make the U.S. more competitive. It is time to fund disruption in order to be competitive with China.

Making More Pizzas Is Not Disruptive

Almost everyone agrees that most new job creation comes from smaller companies, and especially from new companies. China funds startups directly and employs millions virtually overnight. The U.S. does “cash for clunkers.”

Virtually every program that the U.S. has for helping startups is based on a “more pizzas are better” model. In other words, if you want money for your startup, you can have some to buy a pizza oven and have a store front. You have to create an easy-to-understand business plan on how many pizzas you are going to sell. And if you sell some pizzas, you can have a tax credit in addition to your pizza oven loan.

Unfortunately for the U.S., the creation of disruptive technological innovations is nothing like making more pizzas. The issue that most high tech startups face today is paying for manpower, not paying for pizza ovens. The assets (manpower, intellectual property, etc.) are far more intangible in the startups that the U.S. now needs to foster. There is risk: There is no immediate market, no short term income to balance against those tax credits, and no department within the U.S. that has the expertise and knowledge to value a technical startup that does not follow the ‘more pizzas’ model.

Focusing on Disruptive Innovation

As a venture capitalist, I have been approached by thousands of startups. Many of their inventions could be turned into phenomenal innovations. Invariably all of these startups are lacking just a few things:

  1. Money - $50,000-$200,000
  2. Advisors – business and market
  3. Market penetration – contacts and visibility

Our venture capital community will never kick-start the disruptive innovation engine that the U.S. so desperately needs to get running because the VCs do not have the funds, the staff, or the expertise to properly review, manage and fund all the thousands of potential high-quality startups. Most startups never even get looked at because of the costs the VCs incur while reviewing a startup.

The U.S. has lots of idle assets and can redirect funds from incremental programs into disruptive programs:

  1. Most startups only need $50,000 to $200,000 to get over the hump and become productive. This sum is too small for VCs to consider. So, the startups jack up their numbers to try to qualify. But, to avoid argument, let’s say each startup needs $1M spread over 3 years. Given an investment of only $5 billion per year, the U.S. could fund 15,000 new startups over a three year period.
  2. There are literally hundreds of thousands of under-employed and unemployed executives and technology leaders that, acting as business and market advisors, can be used to vet and determine funding for startups. This would be funded from application fees from the startups and state and local funds.
  3. Companies are constantly looking for new disruptive innovations, but have a terrible success rate of finding them. Identifying the available disruptive technologies through a national registration program would create the linkage needed.

The key objective is to create disruptive innovations and create jobs. 15,000 startup companies would create millions of high-tech, high-paying and high-tax bracket jobs virtually overnight, and the headlines would quickly change to ‘Has China Lost the Innovation War?”

Administration

I don’t want the federal government to get directly involved in managing startups. That would create incremental innovation startups, not disruptive innovation startups. So, here’s one way it could work:

  • The federal government gives grants to local governments to fund startups based on the unemployment rate in the area. All states will get funding.
  • The states and local governments administer the application process.
  • Local governments use some funds to hire under-employed/unemployed/retired business experts to review the applications and to act as advisory board members to the startups. Some compensation for advisors will be deferred and based on the success of the startups. There is no free ride for advisors. Advisors would naturally focus on startups that have the best potential for market disruption.
  • All funded startups must be based in the local area and must employ U.S. citizens and buy U.S.-based services. No offshoring or outsourcing is allowed. U.S. based supplies must be preferred over foreign, and tax credits will be issued for verifiable cost differences approved by the advisors.
  • Each startup advisory board would list the startups in a national registry available to potential partners and customers.

The U.S. Can Innovate

The U.S. has not lost the ability to innovate. But, like any “company,” USA, Inc. must fund and target disruptive innovation in order to survive. Using existing and available assets, it is possible to fund disruption and create millions of high paying jobs.

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