Innovation drives productivity, boosts profitability and helps nations and businesses

The trick is often in making innovation stick.

But just how do you make it stick?

Updated 2 August 2017

When most people think of innovation, they think of shiny electronic gadgets and high-tech medical wizardry. But for economists, innovation is much more fundamental. Because innovation drives productivity, economists see it as the key to growth and higher living standards. It’s also essential to corporate survival. 

“The evidence is clear – all economic growth, all productivity gains can be attributed to innovation,” says John Steen, associate professor of strategic analysis at the University of Queensland.

“In dynamic economies, if you’re not finding a way to lower your costs, do something more efficiently, develop a new product, find a better way to meet customers’ needs, you’ll go out of business.

"Very few companies can sustain competitive advantage for periods of longer than five years without innovation.”

The good news is the Asia-Pacific region includes the world’s most innovative nations, including an emerging innovation superpower. But Australia urgently needs to follow their lead or risk falling behind.

Roy Green is dean of the business school at the University of Technology, Sydney, and a former chair of the Australian Government’s Innovative Regions Centre. He says the last few decades have seen a number of Asia-Pacific nations transform their economies and create exceptional growth through targeted investments in innovation.

“Singapore, with its industrialisation boom, Taiwan with microelec¬≠tronics – these are economies that have successfully repositioned themselves in the world market,” observes Green.

But it’s South Korea – named the world’s most innovative country in a global survey by Bloomberg – that has achieved the most impressive transformation. 

“Korea, which [in the 1960s] the World Bank said would be lucky to grow enough rice to feed its own population … decided to invest heavily in the industries of the future,” Green says.

“They created companies like Samsung and Bosco – a steel company which derived its original technology from BHP Steel, but which is now so much bigger.”

While each country has used a different combination of policies to foster innovation, each has combined regulatory reform with a willingness to pick winners by actively investing in selected industries and building interconnected research and business hubs. Now China is following suit.

“China … now has the potential to become a very dominant world power in technology,” according to Green.

“We shouldn’t think for a moment that China is going to be comfortable to continue being a low-cost economy. It’s moving up the value chain and investing in R&D in a way we can only dream of here, drawing on the world’s best to design and create new products.”

According to Strategy &, PwC's strategy consulting business, Asia has now become the top region for corporate R&D spend, ahead of North America and Europe, which has dropped to third, in a complete reversal from 2007 when Europe was the leader.

Meanwhile, Australia’s productivity growth has slumped. And as the China-led resources boom which sheltered the country from the worst effects of the global financial crisis recedes, it could see Australian companies struggling to catch up.

“In the 1990s, over 90 per cent of Australia’s national income growth was supplied by productivity growth,” says Green. “But by 2007-08, that fell to around 50 per cent. The rest came from the stimulus provided by the terms of trade – but that stimulus has now gone.

“We’ve had [25] years of uninterrupted growth, supercharged by the commodity boom. We powered our way through the global financial crisis. Now the commodity boom is running its course, and with the terms of trade retreating, we now need to find new sources of growth and productivity.”

Australia’s flagging productivity growth isn’t due to underinvestment in research, as CPA Australia’s research report, Australia’s Competitiveness: From Lucky Country to Competitive Country, identified. While expenditure on R&D remains slightly below the OECD average of 2.3 per cent of GDP, it still grew steadily over the last decade, peaking at 2.25 per cent in 2008-09.

But Australia has been less successful in translating research spending into business outcomes. The problem may be a lack of collaboration.

According to Green, research shows innovative companies are most likely to thrive in a highly connected ecosystem linking government, industry, universities and workplaces. The Australian government’s 2013 Innovation System Report found that businesses which collaborate with research organisations are 242 per cent more likely to raise productivity than their peers. Yet only about one in four “innovation-active” firms collaborate.

In 2014, the same report found that Australian businesses rank low on new-to-market innovation compared to other countries, and in 2015 it identified key areas for improvement such as corporate culture for innovation and access to early stage finance.

A potential gap in Australia’s approach to innovation is a focus on technologies and products, rather than processes and business models.

“Innovation is not just about science and technology,” says Green. “It’s also about organisational innovation – in particular the role of management in fostering innovation and creative activity.”

A global study by McKinsey & Co in 2009 found that a one-point improvement in management practice on a five-point scale yielded the same increase in output as a 25 per cent lift in staff numbers or a 65 per cent rise in invested capital. Yet when Green and his colleagues extended the study to Australia, they found local managers lagged world’s best practice on all 18 management performance benchmarks – especially the key metric for innovation, “instilling a talent mindset”. But that could be set to change.

With companies under increasing pressure to enhance competitiveness, many are looking for new ways to drive productivity, according to Bianca Park, founding director of Sydney-based consultancy Raw Innovation. She works with Australian and international businesses to kickstart innovation and translate good ideas into real business outcomes.

She says that while new product development is still important, organisations are increasingly seeking to drive widespread innovation across the enterprise, including innovations in business processes, communications, people management, cost control, even the underlying business model.

Park stresses that “innovation, like anything else, is a discipline. It’s not sitting down on bean bags coming up with a bunch of ideas – it’s hard work, a disciplined process”. She and her clients follow a standardised six-step methodology, from goal setting to idea identification and assessment, through to practical implementation.

Successful innovation also requires clear direction from the top. “The leadership team needs to set the structure. If you simply ask people to nominate ideas, you’re setting yourself up for failure,” Park points out.

According to the University of Queensland’s John Steen, having a clear direction is also the starting point for accurately measuring results – essential both for building a business case and identifying what works. “Innovation is a way of delivering the strategy. The things you set out to measure in your strategy – the things you care about – are what you need to be measuring,” he says.

Easternwell slashed the time it  takes to drill a well.

Easternwell slashed the time it takes to drill a well.

Roy Green believes that innovative businesses are distinguished by a willingness to engage the whole workforce in the change process. “Instilling a talent mindset is the essential feature of innovative orga¬≠nisations,” he says. “If we can’t do that [in Australia], we’re going to find it very hard to be an innovative economy.”

Park says her preferred approach involves creating high-performance, cross-functional teams tasked with making innovation happen. These teams draw together skills and insights from across the business, and she believes accounting professionals can be some of the most valuable team members. 

“Accountants can often be the superstars of innovation,” she says.

“They have an ability to find gold nuggets and help innovation teams make ideas happen.”

From drilling contractor to well factory

Six years ago, the managers at Easternwell, an Australian drilling and mining services company operating at the heart of Queensland’s coal-seam gas boom, had a realisation about their business model.

While it was based around contracting out drilling rigs, their true products were the wells those rigs produced. They were a “well factory” – and like any factory, they needed to create efficient processes capable of creating the same high-quality product, time after time.

“We sat down and looked at all the activities that were required to drill a well,” says Easternwell’s former chief operations officer, Darren Greer.

“We looked at what was reducible and what we could do to minimise activities on the critical path.”

They found it took an average of eight days to finish each well – but that only eight hours were actually spent “spinning pipe”. The rest was support and logistics.

Greer and his team set to work to drive that time down. Through a multitude of incremental changes, they slashed the average time per well from eight days to two, almost quadrupling productivity.

While they did introduce some technological change, Greer stresses that process innovations were crucial.

“The majority comes from just being really well organised,” he says. “Equipment innovation accounts for the last 20 per cent.”

The other essential step was to engage everyone in the company in a process of continuous improvement – from senior management down to workers handling pipes in the field.
“You have got to engage those guys because they’re the ones who are actually doing the work,” Greer says.

While each saving was small, the overall effect was huge.

“When you’re looking at a saving of an hour … and you multiply that by a couple of thousand wells a year, the amount of money and time you save for clients is tremendous.”

It wasn’t only Easternwell’s clients who benefited. At a time when the company’s minerals exploration arm had been under pressure from the mining slowdown, its energy drilling business began to thrive, with volumes doubling in less than five years.

Six surprising innovations

1.   Smaller toilet roll tubes create big savings. By shaving 11mm from the diameter of the cardboard tubes in the middle of its toilet rolls, UK supermarket chain Sainsbury’s could fit more rolls on a truck, and saved an estimated 500 semi-trailer trips a year.

2.   Using digital forms rather than paper ones can immediately cut out duplicate data entry. It can also drive other efficiencies in processing time, and storage and transport/mailing costs, as well as enhancing back-office knowledge transfer.

Driver helmet

Driver helmet

3.   Elizabeth Holmes, ushered in a new era of superfast diagnosis medicine by devising a more efficient way to draw and test blood. Her Theranos system requires only a pinprick and a drop of blood to perform hundreds of tests, from standard cholesterol checks to genetic analyses. 

Holmes started on her idea to reinvent “phlebotomy” when she was a second-year US college student just over a decade ago. She dropped out of Stanford and founded her Theranos company in California with her tuition money.

In late 2013, the company introduced its radical blood-testing service in a local pharmacy, preceding a national rollout of testing centres. The results are faster, more accurate, and far cheaper than conventional methods and introduce the potential for the next generation of diagnostic tests to head off serious afflictions from cancer to heart disease. Theranos claims its process could save the US medical system more than US$200 billion.

4.   In the wake of super storm Sandy in the US in October 2012, relief agencies struggled to meet demand for food. Six months later on New York’s Long Island, when not-for-profit Metro Food Distribution was still turning away hungry families, it introduced the Toyota Production System, a business innovation process created by the iconic Japanese car company.

By introducing a smaller box size – including “less air” – more boxes of food could be packed on trucks. Boxes also became easier to handle. By setting up a production line, the time it took to pack a box was reduced from three minutes to 11 seconds. Ultimately, this minor change meant that 400 more families could be fed.

5.   Formula One racing drivers’ helmets have four transparent sheets on the visor so when a bug splats at high speed and obscures vision, the dirty sheet can be ripped off quickly to reveal a shiny clean visor.

6.   Communication and brand innovation are a strategic focus for CPA Australia as it grows its membership. 

Innovation around the world

The World Intellectual Property Organisation’s Global Innovation Index sets a benchmark for national innovation performance. Measuring 79 aspects of innovation across 140 countries, it tracks both innovation inputs – such as research investment and market sophistication – and innovation outputs – such as patents and productivity.

In 2015, Switzerland, Britain, Sweden, the Netherlands and US led the pack. Perhaps surprisingly, however, many countries in Africa punched above their wright. However, even though China is now churning out a lot of patents, it is still way behind the US and other developed countries when it comes to innovation quality.

Australia ranked 17th for the second year in a row, after slowly moving up the ranking in previous years being overtaken by the likes of New Zealand.

Australia exhibited relative weakness in knowledge and technology outputs, and did not fare well with regards human capital and research and business sophistication. According to the index, improvements can be made in knowledge diffusion, communications, computer and information services exports and foreign direct investment.

In contrast, in education Australia ranked first in the number of years of schooling and sixth in tertiary enrolment. In infrastructure, it came in fourth overall, and scored well across the board for internet services. It also moved up one spot in market sophistication, placing ninth overall.

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