Lean by Design

As policy analysts and western consumers at large, wring their collective hands over the economic future of western democracies, simple and inevitable truths will eventually become too obvious to ignore.

Yes, the west is faced with the daunting challenges of unsustainable debt and rapidly aging populations. De-leveraging and the inescapable need to radically alter expensive heath care mechisms as well as other social systems that arose during the previous century’s era of excess, will be slow and painful indeed. But without hope of high-valued employment prospects for the population at large, the future will quickly begin to look, and feel, pretty dismal to say the least.

Many have been hoping that the current shift of wealth eastwards, and reduced strength of the American dollar, would help revive American industry and return us to a previous era when good jobs were more evenly spread across the job spectrum. Unfortunately, some are starting to recognize that that will not happen to any meaningful extent. As Steve Jobs is reported to have said; “those jobs are gone forever”. Well if that is the case, what economic opportunities will await the next generation of Western job seekers? The conventional wisdom is that innovation will save us. There is a belief that western culture offers developed nations a distinct advantage in terms of higher valued roles, that demand greater creativity and innovation. After all, this has been the story of the recent past, and is the reason that companies like Google, and Apple were created in the US, along with thousands of smaller, yet valuable companies. But why is that the case, and will it continue to be the case in the future? I don’t believe it will. In fact history suggests the possibility of a different outcome.

The west has, in relatively recent history, been the center of innovation. Places like silicon valley have established critical ecosystems for technology and business innovation. But what is also true, is that as other economies developed, high-cost western companies were forced to climb the value chain and abandon functions lower down the chain. It is now clear that virtually all manufacturing, including that requiring very sophisticated processes, has migrated east. This has also included suphisticated engineering work, as can be seen in Chinese tech companies like Huawei and Haier, that design and build their own techology. In fact Chinese companies have surpassed their American counterparts in patent applications! The next step up the ladder of value, is for these same companies to master leading edge innovation processes – and they will. Chinese companies, despite some understandable hick-ups along the way, have already surprised most with the sheer rapidity by which they have mastered new domains. Where will that leave developed countries?

Once developing countries have mastered disruptive innovation, the flight up the value chain will have ended. There is almost nothing left to surrender. Now we will be forced to go toe-to-toe with more and more companies from what we formerly considered, developing nations – a term that we will soon need to replace with something more appropriate for countries like China. As we enter this new era, western countries are going to need to more actively develop national industrial strategies and plans to help prepare nations to be more competitive. This will also demand a stronger work ethic. As the playing field evens out, there are no real signs that workers in Asia are adopting western attitudes towards work. Japanese workers never really lost their famous work ethic as the country transitioned from developing to developed nation status, and there is no reason to expect that to change in China either.

I have found that some of the greatest innovation occurs during time of stress, and innovation programmes have failed when sponsors have mistakenly offered greater free time for ‘innovation’ activities. For examples of this you need look no further than Google, that famously allocates 20% of their staff time to dreaming up new innovations. Little of real value has come out of this, despite the enormous effort that this has represented from some of the best minds in the business. So success in the new economic reality will likely boil down to two dramatic changes for western nations:

1. Successful adoption of some form of state led capitalism
2. Successfully encouraging workers to work harder

The last point will quickly be dismissed by many as being a naive, simplistic and even regressive suggestion. After all, wouldn’t it be better to work smarter rather than simply harder? Of course, but in an era of rapid diffusion of innovation, developed countries do not have a monopoly on working smarter, and so no sustainable competitive advantage will result.

We better encourage our children to work hard, and pursue a career that they love, because they are going to spend a lot of time at it, if they want to make a decent living.

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More evidence that the center of innovation, and not just wealth, is shifting eastward. Note the comment that Chinese companies are ‘exploring new ways of using products’. Improvisation of this kind is an Asian / Chinese strength. The growth of Chinese exports of new products and yes, even technology, will have a profound influence on how we perceive product innovation. If you are able to recall the Japanese industrial expansion of 30+ years ago, you may recall how it changed industry standards. Japanese exports lead to what some analysts referred to as an epidemic of quality. They changed how we thought of quality, dramatically raising standards, and threatening the survival of many western companies in the process.

[Update: 18/1/2012] It has been a year since my last post here, but I noticed further evidence of the shift eastwards of innovation and future prosperity in the news today. This is however old news now, and I think generally people are coming around to understanding this so I will not be commenting on it further.

Chinese lead product innovation that focuses on rapid improvisation and dramatically reduced product life cycles, could be one consequence of the Chinese branded (product) invasion.

Will your company be ready?

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Europe certainly appears to be in economic turmoil today, while we Canadians, have pretty much continued our pre-recession ways, confident that we will escape the more serious troubles that most of the developed world is experiencing.

The last 5-10 years or so, has marked an unusual period in contemporary Canadian history. As a nation we have gone from a people generally characterized as humble, respectful, law abiding pacifists to become more assertive, openly proud, and more inwardly focused. Consider the rabid popularity of the ‘I am Canadian’ beer commercials, the whole Tim Horton’s phenomena, our enthusiastic commitment to the Afghanistan war, or the 2010 Olympic event in Vancouver. We have become – dare I say – somewhat arrogant. Others will argue that these changes are in fact good, and mark the belated coming of age of our nation. I don’t see it that way. Okay, but what has this got to do with Government Budget cuts? I believe that a dangerous hubris has developed in Canadian culture that is blinding us from the dangers that lie ahead,

I am Canadian

One example involves our heath care system. Canadians have become irrational in the pride that we have in our National Health Care system. We constantly hold it up as an example of our moral superiority over our southern neighbour. This is, of course, simplistic and wrong headed thinking. The danger, however, lies in how this attitude blinds us to the undeniable fact that our health care system is as broken as the American’s. But while they are struggling to fix theirs, we are losing precious time wallowing in illusions of our own making.

Another example of this kind of dangerous hubris can be seen in our reaction to the recent economic crisis. Immediately following the onset of the 2008 economic crisis, Canadians with the eager support of their government and financial institutions, congratulated ourselves on the superiority of our financial regulatory system that made us largely immune to the disaster that was happening all around us. While it is true that we had greater regulation (largely due to the slow speed at which our bureaucracy was able to deregulate this industry, not as a result of some clever strategy) and this avoided the need for the government to bail out banks, it had very little to do with our resiliency in the face of a severe global recession. Rather, it was our large natural resources sector that fed the continuing economic expansion in Asia, that has buoyed the economy, along with the largest government post war deficit that we have ever had! Again, our hubris has caused us to mostly overlook the issue of this debt, while European nations risk the wrath of angry unions and citizens, as well as damage to the struggling recovery, in order to get their debts under control. The facts would surprise most Canadians. A perception has been cultivated that the rest of the developed world got themselves into severe debt, but that we are in good shape. This is simply not true. Because our government did not have to bail out any banks our deficit this year is somewhat lower, as a percentage of GDP, than other western countries, but when you consider total debt and include provincial debt, as you must to get a real comparison, Canadian debt last year as a percentage of GDP was 72.3%. This is right up there with the rest of the developed world, and in fact exceeds the UK debt! Now for the scary part. All of this at a time when our economy, and so GDP was doing relatively well when compared to the others. If we weren’t then the figures would be worse. Moreover, individual indebtedness is now dangerously high, and is largely supported by a currently robust real-estate market. Should that change it would exacerbate our economic challenges at a time when the government would have little leeway to stimulate the economy.

So once again hubris has lead us into a state of complacency. While the rest of the developed world works on making the necessary adjustments for a sustainable future, we continue to bury our children in debt of our making, and risk damaging our long term economic productivity as government expenditures crowd out more productive private ventures.

I would just like to end this post, by first acknowledging that I am not an economist, but the radical measures being proposed in the UK seem to me to be very dangerous given the state of the economy. If many other countries follow suite, and currency wars evolve to slow trade, we could end up creating a lost economic decade for the developed world.

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