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Innovation: the driving force in business?

A Note by the Director (Ditchley 2008/05)
 
16-18 May 2008
Ditchley’s spring conference fittingly looked at the subject of innovation in business and in a modern economy as a whole.  We were conscious that the participation around the table was much more weighted towards the OECD area and a conventional outlook than to Asia, for instance, or to leading-edge technological innovation.  Nevertheless we had an important and, on the whole, enlightening debate about the need for a culture of innovation, about the key elements of innovation in management and about government’s role in promoting an innovative environment. 
No-one had any doubt that a capacity for innovation was important for the economic health of a developed world society in a competitive and rapidly changing world.  But we were also conscious that there was nothing new  in innovation:  its good and bad effects had been with human activity from time immemorial.  What needed to be recognised in the new millennium was the speed of change, the complex interactivity of different developments  in different geographies and the huge power of modern channels  of communication.  The general view seemed to be that this was a change of degree rather than of kind, with competitiveness and market characteristics still the compelling factors in growing a business.
The conference was also interested in understanding the ingredients of an innovative culture.  The Britons amongst us were conscious that, although British businesses scored well on a number of fronts in the eyes of international observers and customers, our reputation for innovation itself was low.  The United States in particular was looked up to as a much more positive example of an innovative environment.  We decided therefore to look carefully at innovation in implementation and delivery as well as in product development.  And the theme of education also came through strongly. 
For a while participants seemed puzzled about the characteristics in an economy that truly represented innovation.  It was not just adapting to change, or inventing new approaches or technologies, or developing a grand new idea, or devising a clever new process.  Many great commercial successes could be classed almost as accidental by-products of other activity.  A fresh, inventive approach could just as easily prove harmful as successful.  There seemed to be more questions than answers as we examined the evidence.
Nevertheless a number of solid factors began to emerge from the mist.  An economy had to have the capacity to adapt to external factors, not least global factors now that markets, capital flows and labour had such strong globalised features.  The environment had to be right for innovative activity, including a country’s infrastructure (in its widest sense), tax and regulation climate, educational facilities and business motivation.  There had to be a political consensus for a climate of liberalisation and open exchange.  The opportunities from globalisation, and particularly from the emerging economies, needed to be welcomed.  Above all, perhaps, the quality of a society’s individuals, in terms of leadership, first-mover capacity and business judgement, was paramount.  People mattered.
We had a detailed and entertaining discussion about clusters.  The grouping of sectoral activity in a single geographical area was not new;  yet rapid changes in communications had not made it  less significant as a phenomenon, even if clustering was becoming virtual as well as physical.  We talked about Silicon Valley at one end of the spectrum and about the maritime sector in Portsmouth at the other.  Entrepreneurial business decisions so often fed off best practice from elsewhere, or from niches created by other producers, or from an inspiring local culture, that what looked like innovation was much more likely to occur in a cluster of related activity, on whatever scale.  This gravitational pull for new business was an important feature for governments to recognise and promote, particularly in their approach to infrastructural development.  It also brought home the point that more innovation tended to be incremental than disruptive:  Japan and Germany were both, in their economic advance since the second world war, interesting cases in point.
When we came to management innovation, participants struggled to define it clearly, in a way which distinguished it from management more generally.  The most important distinction that came out of the debate was that between change in the world and change within a specific company or organisation.  Managers often have to change a firm’s approach to stay in tune with an evolving market or a surprising external development, but they might do so by borrowing best practice from elsewhere.  This was as likely to affect the production process as product development.  The area needed to be distinguished from technological innovation and the promotion of research.  It was also a territory full of warning signs, as a lot of management innovation could be misplaced and therefore damaging.  Perhaps the most important factor was judgement of risk, with good innovators accumulating a stronger record of well placed risk, while being unafraid of failure as inevitable in a (small) proportion of their initiatives.  With this balance, a culture of innovation in almost any company or organisation in the modern world tended to be an advantage.
There was also an important discussion about whether it was possible to quantify and measure management innovation.  Some participants felt that increased profitability was a measure in itself, though others disputed whether this was relevant to innovation as such.  The reaction of customers and of the work force was thought to be an important indicator.  Others felt that an understanding of the true costs of new activity (or of not adapting to change) was a fundamental feature, common to companies both large and small, but particularly relevant to the smallest companies which had the least capacity to try a spread of bets on new business.  In the end, the conference was content to come back to the underlying and perhaps obvious observation (though it was surprising how many managers missed it), that management innovation was above all the responsibility to relate the internal aspects of the firm to the external in a world of constant change. 
The most pointed area of conference discussion covered the role of government in fostering innovation.  The strong business voice at the table was loud and clear on the need for government, first and foremost, to avoid doing harm to an innovative culture in the economy.  It was also the majority view that government departments need not think that they always had to be precise in allocating funding to research or other innovative activity.  The most important function of government (or, in the EU, the Commission) was to promote a long-term vision of openness, adaptability and positive response to global change.  With this should come research funding in sensible areas, together with the occasional big idea or initiative (such as the moon shot) which only governments could produce.  Demonstrating effectiveness at scale was the cardinal point.  The public sector could also share with the private sector a wise approach to incentivisation, rewarding innovative ideas that worked but not punishing failure excessively. 
Government had a significant responsibility in setting ambitious educational standards for a competitive world, especially in the help they gave to universities and other research areas through funding, but also in encouraging a stronger focus at the school level on science, maths, engineering and other skills which were currently, in the eyes of business recruiters, at a premium.  The education sector might be one area where the North American environment was superior to the British one in fostering innovation.  With all that said, we came back to the strong plea that governments should not think of themselves as innovators and needed to take stock of their poor record in top-down innovation in the constant reorganisation of public sector structures. 
Beyond these general guidelines, there were a number of specific points which we hoped that the governments of countries represented around the table would bear in mind:
  • For the business world, government consistency was golden, in terms of setting the framework of tax, regulation and long-term vision;
  • Funding was especially valuable for the largest projects, especially when a change of approach was needed – carbon capture and storage was a prominent example; 
  • Together with consistency, good competition law was essential for the right climate of private sector investment;
  • Patent and intellectual property law (the UK was regarded as the good example) should be clear and tilted towards first-mover advantage, but it did not have to be comprehensive in every area.  It was more important for the economy to be open to innovative initiative than restricted by standards of absolute fairness;
  • Planning laws and procurement processes should be updated and streamlined, as they otherwise created barriers to innovation;
  • Universities, and especially the bigger ones, needed space and encouragement for research and development, with the minimum of restrictions on the free flow of talent inwards and outwards (affecting the area of immigration laws);
  • Above all, government had to be strategic, developing a trust in the business community and providing a framework for an innovative culture to grow without micro-management.
There was a great deal else of interest in this wide ranging discussion.  The very unpredictability of the modern world was regarded as a challenge rather than a threat, with spikes of intense disruptive activity alternating with longer periods of incremental refinement.  We were clear that the private sector was better at judging these things than governments.  Original research and inventive implementation were both equally important.  Collaboration across borders was a new phenomenon, worth exploring rather more intensively, especially in environments such as the UK where risk was treated with greater caution than in some other leading economies.  Resisting the short-term and the short-sighted was also taken as a feature of an innovative society. 
China was bound to come into the discussion and it did, more as an example of innovative approaches to process rather than to product invention.  The democracies represented around the table had to admit that this autocratic society had learnt as well as any how to follow the main principles we were advocating:  strategic consistency, big project leadership, increasing openness of opportunity (from a backward start) and encouragement for the best people to move forward as individuals.  We also noted that 35% of China's 25 million students at the current time were studying engineering.  Within a few years, the number of Chinese engineering students alone would match the number of students of all disciplines in either the US or Europe.  It was also undeniable that China had an ambition to catch up with and outdo their economic rivals.  But perhaps, we felt, it did not matter if China had that vision and became the largest centre of economic activity, so long as the world was open and science and technology were global.  The European renaissance, after all, was kindled in a few centres in Italy.  It would be a shame, however, if the developed world did not somehow regain a sense of ambition which matched China’s.
This was a stimulating event, supplied with a positive spirit by a remarkable range of professional viewpoints.  We were fortunate in having a chairman with top-level experience of global economics, who steered the conference between the rocks of irrelevance and over-complexity.  Ditchley will be interested to see whether, in the fields either of policy-making or of teaching, some of the lessons we extracted will prove applicable.  The mood at the end seemed to indicate that they would be.
This Note reflects the Director’s personal impressions of the conference.  No participant is in any way committed to its content or expression.
 
 
PARTICIPANTS
Chair  :  Mr Richard Lambert
Director-General, Confederation of British Industry (2006-);  Board Member:  Enterprise Insight;  VisitBritain;  Commissioner, UK Commission on Employment and Skills;  Chancellor (designate), University of Warwick (2008-).  Formerly:  Financial Times (1966-2001):  Editor (1991-2001);  Member, Monetary Policy Committee, Bank of England (2003-06).

CANADA
Dr Paul Boothe

Senior Associate Deputy Minister, Industry Canada, Ottawa (2007-).  Formerly:  Professor of Economics, University of Alberta.  Member, Program Advisory Committee, The Canadian Ditchley Foundation.
Mr Allan Gotlieb
Senior Business Advisor, Bennett Jones, Toronto.
Professor Roger Miller
Jarislowsky Chair for Technical Innovation and Competition, Department of Mathematical and Industrial Engineering, École Polytechnique de Montreal.
Mr Joseph Rotman OC
Chairman, Roy-L Capital Corporation;  Founder and Director, Clairvest Group Inc.  A Member, Board of Directors, The Canadian Ditchley Foundation.
CHINA/SWITZERLAND
Professor Dr Maximilian von Zedwitz

Professor of Strategy and Innovation, Tsinghua University;  President, Asia Compete Int’l Limited;  Director of Research, Center for Global R&D Management.
 
FRANCE
Dr Eric Albert

Founder and Managing Partner, Institut Français d’Action sur le Stress (IFAS) (1990-);  Editorialist in business press.  Formerly:  Psychiatrist.
Mr François Carn
Managing Partner, Groupe Mercator.
OECD/UNITED STATES OF AMERICA
Mr Douglas Lippoldt

Senior Economist and Policy Analyst, Directorate for Science, Technology and Industry, OECD, Paris.
SWITZERLAND/FRANCE
Dr Hervé Lebret
Manager, Innovation and Tech Transfer, Ecole Polytechnique Fédérale de Lausanne (2004-)
UNITED KINGDOM 
Lord Aldington

Chairman, Deutsche Bank London (2002-);  Member, Chairman’s Committee, LIBA (2003-);  Member, Chairman’s Committee, BBA (2003-);  Trustee, Royal Academy Trust (2003-);  Member, Oxford University’s Court of Benefactors (1990-).  A Governor, The Ditchley Foundation.
Dr Atul Arya
Head, Policy and Long-Term Strategy, BP, London.
Dr Roger Bilboul
Chairman, Information Today;  Director and Co-Founder, Expert Information Limited;  Founder:  Online information Meeting, Information World Review, Learned Information Limited;  President and CEO, Disclosure Inc.
Professor Julian Birkinshaw
Deputy Dean and Co-Founder of the Management Laboratory, London Business School.
Mr Andrew Cahn
Chief Executive, UK Trade and Investment, Department of Trade and Industry, London (2006-).  Formerly:  Director, Government and Industry Affairs, British Airways (2000-06).
Mr David Eyton
Group Vice President Research and Technology, BP.
Mr Raoul Fraser
Associate (UK), Investment Management Division, Goldman Sachs (2006-).
Mr Roger Gough
Research Director, Policy Exchange.
Sir Julian Horn-Smith
Senior Advisor, UBS Investment Bank;  Board Member:  Lloyds TSB Group plc (and Non-Executive Director);  Digicel Limited;  Member, Advisory Board:  The Company Agency;  Altimo;  Chairman, Turkish-British Business Council;  President, Egyptian Exploration Society. 
Professor David Hughes
Managing Director, Business Innovation Group;  Visiting Professor of Engineering Management, City University, London.
Dr David Kingham
Chief Operating Officer, Oxford Innovation Limited (Director since 1992);  director of the R&D Society (2006-);  Director of NHS Innovations South East (2005-);  Director of Oxford Investment Opportunity Network (1997-).
Mr Ian Laing CBE
Chairman:  SQW Group Limited;  Doctors.net.uk Limited;  Non-Executive Director, Stanhope plc (2006-).  Formerly:  Chairman, MEPC Milton Park Limited (1993-2006).
Professor Sir Andrew Likierman
Professor of Management Practice in Accounting, London Business School;  None-Executive Director, Bank of England and Barclays Bank plc;  Non-Executive Chairman, Applied Intellectual Capital plc.
Mr Iain Mathewson CMG
Non-Executive Director, Candole Partners (2007);  Adviser:  Detica plc (2007-);  Citigroup (2007 ).  Formerly:  HM Diplomatic Service (1980-2006).
Sir Adrian Montague CBE
Chairman:  British Energy Group plc (2002-);  Michael Page International plc (2002-);  Infrastructure Investors plc (2005-);  Friends Provident plc (2005-);  A Director:  CellMark AB, Gothenburg;  Skanska AB, Stockholm.
Mr Paul Newman
Managing Director, ICAP Energy Ltd (1990-).  Formerly:  Director, Intecapital Group Ltd (1992-2000);  Director, Rudolf Wolff & Co Guernsey Fund Management Limited (1990-93).
Mr Oliver Pawle
Partner, Whitehead Mann (2007-);  Chairman Financial Dynamics;  Director:  Execution Limited, Delancey Real Estate, Reform (Political Think Tank);  Governor, Goodenough College.
Dr Allyson Reed
Director, Strategy and Communications, Technology Strategy Board.  Formerly:  CEO, 3CResearch;  Director of Innovation Partnerships, Qinetiq plc.
Mr Paul Skinner
Chairman, Rio Tinto plc.
Mr Ian Taylor MBE MP
Member of Parliament, Conservative, Esher and Walton (1997-);  Chair, Conservative Party Policy Taskforce on Science, Technology, Engineering and Mathematics (2006-).
Mr David Willetts MP
Member of Parliament, Conservative, Havant (1992-);  Shadow Secretary of State for Innovation, Universities and Skills (2007-).  Author.  A Governor and Member of the Programme Committee, The Ditchley Foundation.
UNITED KINGDOM/JAPAN
Mr Koshi Noguchi

Vice-President in EU-Japan Relations, Toshiba of Europe Limited;  Visiting Fellow, International Economics Programme, Chatham House.
UNITED KINGDOM/UNITED STATES OF AMERICA
Dr Jennifer Barnes FRSA

Education Consultant, Global Education Strategies;  Consultant to governments, corporations and universities.
The Hon Barbara Thomas Judge
Chairman, United Kingdom Atomic Energy Authority (2004 );  Chairman, School of Oriental and African Studies;  Deputy Chairman, Friend’s Provident PLC (2001-);  Director, Magna International Inc, Canada;  Director, Massey Energy (US), among others.  A Governor and Member of the Council of Management, The Ditchley Foundation.
Mr A Lloyd Thomas
Doctoral Researcher, Finance, Cass Business School, Senior Associate, Reorganisation Services, Deloitte.
UNITED STATES OF AMERICA
Professor Ashish Arora

H John Heinz III Professorship of Economics, Innovation and Economic Development, Heinz School, Carnegie Mellon University.
Professor Rajesh Chandy
James D Watkins Chair and Professor of Marketing, and Co-Director, Institute for Research in Marketing, Carlson School of Management, University of Minnesota;  Member, US Secretary of Commerce Advisory Committee on Measuring Innovation in the 21st Century.
Ambassador Thomas Foley
Ambassador of the United States of America to the Republic of Ireland (2006-).  Formerly:  Director, Private Sector Development, Coalition Provisional Authority, Iraq (2003-04).
Mr Sarwar Kashmeri
Strategic Communications Advisor;  Columnist;  Host, Global Currents and New Hampshire Presidential Primary 2008, MP3 Interview Programs.  Formerly:  Founder and Chief Executive Officer, ebizChronicle.com Inc (2000-03).  Author.  Member, The Advisory Council, The American Ditchley Foundation.
Professor Theodore Marmor
Professor of Public Policy and Management, School of Organisation and Management, and Professor of Political Science, Yale University;  Director, post-doctoral program in social science and health policy, Robert Wood Johnson Foundation (1993-).  Author.  Member, Board of Directors, The American Ditchley Foundation.
Mr Dane Neller
CEO, On Demand Books, LLC, New York (2007-).  Formerly:  Acting President and CEO, Bassini Playfair and Assoc, New York (2006-07);  President and CEO, Vice Chairman of the Board, Dean and Deluca, Inc, New York (1996-2005).
Mr Paul Tagliabue
Senior Counsel, Covington and Burling LLP, New York and Washington;  Chair, Board of the Graduate Institute of International Relations and Commerce, State University of New York;  Board Member, Georgetown University, Washington DC;  Member, Council on Foreign Relations.