Northeast Ohio’s Innovation
Challenge
Edward W. (Ned) Hill
Vice President of Economic Development
Cleveland State University
February 7, 2006
Ohio’s economic performance
Ned Hill, CSU
2
Employment growth is tepid at best
Recession
6,000,000
5,900,000
5,800,000
Number
Unemployed in Ohio
5,600,000
5,500,000
5,400,000
Number Employed in Ohio
5,300,000
2005
2004
2003
2002
2001
5,200,000
2000
Number
5,700,000
Year:Month
Employed
Ned Hill, CSU
Unemployed
3
U.S. and Ohio Employment Growth
Percentage Change in Employment, January 1990 to August
2004
25.0
July 1990 - Nov 1991
Mar-Nov 2001
20.0
US
Ohio
10.0
March-April 1996
5.0
0.0
20
04
20
03
20
02
20
01
20
00
19
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
91
-5.0
19
90
%Change from 1990
15.0
Year(Month)
Ned Hill, CSU
4
The macroeconomic puzzle
Ned Hill, CSU
5
Why is job growth so slow?
Five changes in the cyclical pattern of job growth—
well, maybe six
1. Macroeconomic uncertainty
2. Creative destruction—fewer recalls, job growth comes
from job creation not revitalization, In the US capital
investment may be the job creation driver.
3. Productivity Growth—better, faster, smarter, fewer
throughout the recession; a combination of technology,
management and global supply chain integration
4. Benefits wedge—difference between wage and salaries
and total compensation and revenue generated per
worker
5. Cost uncertainty—health care, torts, mandates, energy.
6. Failed business strategies of two key employers
Ned Hill, CSU
6
What explains Ohio’s economic growth
Ned Hill, CSU
7
Portfolio Analysis Framework
OH GROWTH
The drivers of Northeast
Ohio’s economy
Northeastern Ohio Output Growth Rate (CAGR 1998-2003)
15.0%
Growth Opportunity
Base
Strong Economic
Base
Drivers to build
on in Ohio
Drivers in good
health
Important Supplier
Base
Drivers that need a
transformation in
Ohio
Traditionally
Competitive Base
Drivers with
challenged
strategies
Other Transportation Equipment
Banking
OH COMPETITIVENESS
Environmental Technology
10.0%
Corporate and Division
Headquarters
Hospitals
Other Electrical
Equipment
5.0%
Household Appliance
Insurance
Carriers
Boiler, Tank & Shipping
Container
Electric Lighting Equipment.
Other Mineral Products
Motor Vehicle Parts
0.0%
Metal Wholesalers
Soap and
Toiletries
Paint, Coating &
Adhesives
Other Support
Activities for
Transportation
Forging and
Stamping
Machine Shops
Aluminum and Alumina Production & Processing
Other Fabricated
Metal Product
-10.0%
-
Motor Vehicle
Body & Trailer
Clay Products and
Refractory
Coating, Engraving,
Heat Treating
-5.0%
Motor
Vehicle
Nonferrous Metal Production & Processing
Spring &
Wire
Cutlery and
Handtools
Metalworking
2.0
Machinery
Rubber Products
Foundries
Iron and Steel Mills
4.0
6.0
8.0
Steel Products
10.0
12.0
Northeastern Ohio Competitiveness (2003 Output Location Quotient)
=$1 B in 2003 output
Ned Hill, CSU
8
Shared business functions among Emerging and
Driver Industries (2003 estimates in 1996 real dollars)
$20 billion
All other industries
Motor Vehicle
Parts
Manufacturing
$12 billion
Research, Design,
Development, and
Engineering Services
4%
15%
Engine, Turbine, and
Power Transmission
Equipment Manufacturing
1%
47%
2%
3%
17%
Motor Vehicle
Manufacturing
8%
Lessors of Nonfinancial
Intangible Assets (except
Copyrighted Works) –
patents, brand names
2%
Metals
2%
4%
Plastics Products
Manufacturing
7%
Distribution
and
Warehousing
7%
Chemicals
Manufacturing
Farms
22%
Research, Design,
Development, and
Engineering Services
Medical
Equipment
and Supplies
44%
4%
Motor Vehicle and
Motor Vehicle Parts
& Supplies
Wholesalers
2%
14%
3%
Plastics
Product Mfg.
Information
Technology
$0.6 billion
All other industries
1%
10%
3%
Dairy Product
Manufacturing
Legal Services
3%
7%
Food
7%
Distribution and
Warehousing
Plastics
Product Mfg.
4%
10%
Medical
Equipment
5%
4%
3%
Lessors of
Nonfinancial
Intangible
Assets
4%
Headquarters
Distribution
Warehousing
Energy Production
and Distribution
Research, Design,
Development, and
Engineering Services
36%
Lessors of
Real Estate
Research, Design,
Development, and
Engineering Services
7%
Headquarters and
Division Offices
$6 billion
Converted
Paper Product
Manufacturing
4%
6%
Chemicals
All other industries
Other Chemicals
Driver Industries
What business
functions do
these driver
industries have
in common?
5%
Headquarters and
Division Offices
4%
Distribution
and
Warehousing
Boiler, Tank, and
Shipping
Container Mfg.
2%
11%
Merchant Wholesalers
2%
Construction of
Buildings
Couriers
Basic
Chemicals
41%
Automotive Repair
and Maintenance
All other industries
Machine Shops,
Turned Product,
Screw, Nut, Bolt Mfg.
Distribution and
Warehousing
3%
Construction
of Buildings
Other Food
Manufacturing
2%
Navigational,
Measuring,
Electromedical
Ned Hill, CSU
Core Industry
Driver Industry
9%
Headquarters and
Division Offices
Research &
Development
Headquarters and
Division Offices
Emerging Industry
$X billion Total sector value-add
9
Growth
Opportunities
Defining Attributes
• Productivity increases
• Growing market for product
• Qualitative assessment:
• Relative Ohio competitiveness
- industry specialists
• Opportunity to capture market
- focus groups
share
- business leader survey
Growth Industry
State
Regional
Non-depository credit intermediation (nonbank credit)
√
NE, WC, SW
Headquarters and administrative services
√
WC
Computer systems design and related services
√
NE, SE, C, WC
SW, present in all regions
Scientific research and development services
Specialized design services
√
Electronic and precision equipment repair and
maintenance
√
SE, NW, NE, C, SW
All regions
Tourism and Arts
Ned Hill, CSU
10
Emerging Technologies: Promising
investment areas
Technology
Polymers
Biocompatable
Photonic
Electronic
Conductive
Liquid crystal displays (next generation)
Medical equipment
Fuel cells
HVAC
Electric power generation
Automotive
Nanotechnology
Materials
Remote sensing
Biological applications
Chemical applications
Nano-polymers
Information technology
Medical industry applications
Finance industry applications
Industry-specifc solutions
Micro-Electrical Mechanical Systems (MEMS)
MEMS machines
Automotive applications
Basic chemistry
Market
Impact
Sustaining
Disruptive
Unkown
Disruptive
Disruptive
Both
Disruptive
Disruptive
Disruptive
Disruptive
Sustaining
Disruptive
Disruptive
Disruptive
Sustaining
Sustaining
Both
Disruptive
Sustaining
Formative
Innovation Type
Process
Product
9
9
9
9
9
9
9
9
9
9
9
9
9
9
9
9
9
9
9
9
9
9
9
9
9
9
9
Technology
Infusion
Pull
Push
Push
Push
Push
Push
Pull/Push
Push
Push
Push
Push
Push
Push
Push
Push
Push
Push
Pull
Pull
Pull
Push
Push
Push
Pull
Defining Attributes
• Clear linkage to existing state drivers
• Research strength and localized intellectual capital
• Significant Ohio venture-capital interest
Ned Hill, CSU
11
Strengths and opportunities
¾ Network of population centers, each with unique characteristics
and operating environments
¾ Depth in professional services industries, including banking,
insurance, and medical services
¾ Depth in traditional manufacturing and technical skill sets
¾ Diversity of manufacturing (food, chemicals, automotive, etc.)
¾ Educational resources
¾ Air access, particularly its status as a Continental hub
¾ History as a strong headquarters location (in particular, in
banking and insurance)
¾ Strong cultural institutions
¾ Multimodal freight transportation
¾ Strong tradition in research and scientific initiatives
Ned Hill, CSU
12
Threats and challenges
¾ Low to declining population growth
¾ The threat of becoming an increasingly
commodity-driven economy, dominated by
global competitors (China and possibly India)
¾ A legacy of organized labor
¾ An overall perception of the region as
dominated by industries under stress or in
decline (“rust belt” image)
Ned Hill, CSU
13
What the experts say
¾ Ingrained mindset: “The culture of Northeast Ohio is resistant to
change” “It’s very difficult to do business in Northeast Ohio.
[Workers] see the company as the enemy.”
¾ Unions: Unions are seen as being averse to change, or slow to
change, because of internal political pressures. This is a
perception that the panelists consider detrimental to the area
because it seems so out of sync with today’s rapidly changing
world
¾ Finance: “As bankers, it’s tough to get our arms around and get
behind how older industries are trying to innovate.”
Ned Hill, CSU
14
What the experts say
¾ Education: “I think we have a problem in the state about how we
fund education totally, and it affects the state” and its ability to
compete, said one representative of the banking industry.
¾ Workforce: That aging workforce bodes problems for the future.
¾ Most praise their incumbent workers, and many say they are
able to hold onto these prized workers by compensating and
treating them well.
¾ The difficulty, they said, is in finding replacement workers with
the right skills, attitude, and ethic.
¾ Moving to Northeast Ohio is viewed as too risky a prospect for
managers experienced in leading entrepreneurial endeavors
because they see few other opportunities in the area. “If the
venture fails, they have nowhere to go with their skill sets.”
Ned Hill, CSU
15
What the experts say
¾ Transplanted service industry representatives noted
that the region and state sell their attributes short – both
in terms of competitive business advantages and
quality of life offerings
¾ “The weather is terrible, but housing is affordable,” said
the participant, who represented the IT and
telecommunications industry. “When I came here, I
thought I had died and gone to heaven.”
¾ Energy costs
¾ Workers’ compensation
Ned Hill, CSU
16
Business Strategy:
The danger of lemming-like
behavior
In a recent Deloitte Consulting survey, manufacturers
across industries expect innovation to be a primary
driver of growth over the next three years
95%
% of Respondents
Indicating Moderate to High Importance
90%
89%
85%
85%
80%
80%
75%
72%
70%
66%
65%
60%
55%
50%
New Products and
Services Launch
Economic Turnaround Industry Market Growth Developing New Market
Rate
Channels
Entering New
Geographic Markets
Source: Deloitte & Touche Global Manufacturing Benchmark Survey
Ned Hill, CSU
18
¾New product share of
revenue to increase by 21
percent over next three
years
18
50%
16
T im e t o M a r k e t ( m o n t h s )
¾New Products/Service
Launch is ranked as the No.
1 factor to drive future
revenue growth through
2006
14
40%
12
18 months
15 months
13 months
30%
10
8
21%
6
4
29%
35%
Time To Market (Months)
Revenues From New Products
(Percent)
2
10%
0
¾Time-to-market falling 22
percent over next three
years
20%
N e w P ro d u c t R e v e n u e (P e rc e n t)
Product Innovation: Faster pace, key to success
0%
1998* **
2003
2006***
Note:* Data on revenues from new products are based on
Deloitte Research, Global Report – Vision in Manufacturing
Note:* Data on revenues from new products are based on Deloitte Research, Global Report –
(New
Deloitte(New
Research,
VisionYork:
in Manufacturing
York: Deloitte1998).
Research, 1998).
Data on
to market
refer to year
2000.
** **Data
ontime
time
to market
refer
to***Expected.
year 2000. ***Expected.
Source: Deloitte & Touche Global Manufacturing Benchmark Survey
Ned Hill, CSU
19
Deloitte’s conclusion from its Global
Manufacturing Benchmark study
Three primary forces drive manufacturer supply
chain decisions
¾ Cost
¾ New Market Opportunities
¾ Product Innovation
Interpretation: There is a tension between
clustering (agglomeration economies) and
optimized global production/sourcing due to cheap
IT and transportation coupled with the location of
growing regional markets
Global Manufacturing Industry Benchmark Survey
Supply Chain Management; *680 companies in 26
countries as of May 2004; © Deloitte Touche Tohmatsu
2004, All rights reserved
Ned Hill, CSU
20
Deloitte’s Manufacturing Risk Paradox
Jeopardizing the customer experience is a major concern,
yet risk of doing so rise with the new supply chain
¾ Increasingly, companies close / move /
outsource production, pursue new markets,
often extending supply chains to new
regions. This increases the risk of
disruptions to quality and customer service
¾ Key Challenges:
¾ How to manage risk from a global, but
customer-centric perspective?
¾ How to leverage low-cost sourcing /
manufacturing opportunities without
jeopardizing the customer experience?
¾ How to leverage the global network to
reduce risk?
Top Destinations – 2003-2006
by Home Region and Function
North
America
Western
Europe
Destination
Region/Country
Future
Growth*
Future
Growth*
SOURCING
China
Mexico
Other SE Asia
Eastern Europe
58%
24%
22%
41%
MANUFACTURING
China
Mexico
Western Europe
Central Europe
Eastern Europe
MARKETING/SELLING
China
Central Europe
Eastern Europe
20%
36%
37%
23%
11%
41%
54%
40%
41%
41%
52%
59%
52%
59%
Note: *Percentage of Companies Planning to Enter or Expand
Operations over Next Three Years
Ned Hill, CSU
21
China: Strengths and weaknesses
STRENGTH
WEAKNESS
COST
2
POLITCAL STABILITY
2
CUSTOM PROCEDURES
EASE OF DOING BUSINESS
INCENTIVES
2
2
LABOR REGULATIONS
2
SUPPORT SERVICES
TRANSPORTATION INFRASTRUCTURE
UTILITY INFRASTRUCTURE
LEGAL SYSTEM
LABOR AVAILABILITY
MANAGEMENT AVAILABILITY
INTELLECTUAL PROPERTY
2
¾ Rate of Economic Growth
¾ Infrastructure in Special Zones
2
2
2
AVAILABILITY OF SITES
2
2
Key Strengths
¾ Labor Costs
2
2
SAFETY
TAX SYSTEM
2
¾ Incentives in Special Zones
Major Weaknesses
¾ Lack of Standards
¾ Legal, reporting and tax system /
regulations
¾ Poor Intellectual Property
Protection
2
2
Source: Deloitte Real Estate Services/Fantus Analysis
Ned Hill, CSU
22
Don’t pack up and run away yet
¾ What about top line revenue growth? It is the net
that matters, not the gross cost savings
¾ Dell
¾ GE
¾ Conseco
¾ How does the move affect customer services and
quality of the customer relationship?
¾ How does globalization affect minimum scale of
operations in Tier II & III manufacturers?
Ned Hill, CSU
23
Should all manufacturing join the
stampede?
¾Shipping costs are killers on the China
model when shipping 100% back into the
US market.
¾ Mid-sized volume at low per unit price exported solely
for the US it is usually not a cost advantage to go to
China.
¾ The China advantage: Large volume at low price point
or with some local China market demand
Do not join the lemming-like stampede, a foreign
investment must make strategic sense
Ned Hill, CSU
24
Think before you jump
Reasons to avoid
¾ The dollar will continue to fall
¾ Bottlenecks in the port of Los Angeles are a real
possibility
¾ Long, think, supply-chains are delicate
¾ Prospect of intellectual property theft
Reasons to join in
¾ Follow a customer
¾ Average costs down
¾ Enter a new market
Ned Hill, CSU
25
The irony of firm strategy
¾ Large firms are outsourcing and reaching globally,
especially if they have slow growth products
¾ Small and mid-sized firms in the supply chain need
to become more vertically integrated
¾ Firms need to own their intellectual property or have
proprietary knowledge
¾ Realize that markets hate margins—remember the
real lesson from the 1985 best selling management
book In Search of Excellence (now its In Search of
Margins)
Ned Hill, CSU
26
Innovation
¾As products move along the product cycle
market power and earnings diminish.
¾Industries reorganize and the employment
base dies.
¾The economic development implication:
innovate or wither.
Where Does Innovation Come From?
¾ Existing base
¾ Process Innovation—product rejuvenation
¾ Product Innovation—product transformation
¾ Disruptive Technologies—product replacement (the hoped for
gazelles)
¾ Economic erratic—economic development attraction
Type of Innovation
Relation to Product
Process
Product
Technology
Sustaining
Disruptive
Formative/Science
Ned Hill, CSU
28
Schumpeter’s 5 New Combinations :
What did Schumpeter really write?
1.
2.
3.
4.
5.
The introduction of a new method of production…
The introduction of a new good … or a new quality in a
good.
The opening of a new [geographical] market…
The conquest of a new source of raw materials or halfmanufactured goods…
The carrying out of the new organization of any
industry. …it is not essential … that the new
combinations should be carried out by the same
people
What is creative destruction? The redeployment of
assets to a new combination of production
Ned Hill, CSU
29
Meaning of Creative Destruction
Support must be given all aspects of Schumpeter’s
“new combinations of capital” in the application of
an endogenous development strategy
¾ Cost savings
¾ Sustaining innovations
¾
¾
¾
¾
Product rejuvenation
Product transformation
Disruptive innovations—new product classes
Speculative innovations—unknown product classes
Ned Hill, CSU
30
Type of Innovation
Time to
Impact
¾ Process innovation
¾ Improves productivity
immediate
¾ Market innovation
¾ Extends the reach of existing products
immediate
¾ Product development and deployment
¾ Refreshes product lines
¾ Technology Pull
¾ Technology innovation
¾ Create new products classes and industries
¾ Technology Push
intermediate
Ned Hill, CSU
long term
31
Three observations on innovation and
regional economies
1.Role of catalytic (flywheel) private firms that
spin-off companies is under-appreciated
2.Most innovation is sustaining and is done by
existing firms
3.Economies are built with bunts, singles and
doubles. Don’t count on the home runs but
appreciate it when one happens
Ned Hill, CSU
32
Thinking about Innovation
Ned Hill and Pat Gammons
Product/ Process Complexity
The Regional Innovation Portfolio
Science or
Technology
New Core
Processes
Next
Generation
Extensions
Tuning /
Incremental
Add-Ons &
Enhancements
Addition
to Family
Next
Generation
New Core
Processes
Science or
Technology
Potential Economic Impact
Ned Hill, CSU
34
The Regional Innovation Portfolio
Product/ Process Complexity
The Regional Innovation Portfolio
Science or
Technology
New Core
Processes
Next
Generation
Extensions
Tuning /
Incremental
Mobile Intellectual Capital
Add-Ons &
Enhancements
Addition
to Family
Retain Intellectual Capital
Next
Generation
New Core
Processes
Science or
Technology
Potential Economic Impact
Ned Hill, CSU
35
Successful regions and organizations fight
commoditization. They retain their intellectual capital
Product/ Process Complexity
The Regional Innovation Portfolio
Science or
Technology
Conceptual
R&D
New Core
Processes
Technology
Development
Next
Generation
Extensions
Tuning /
Incremental
Platform
Development
Product
Development
Customization
Mobile Intellectual Capital
Add-Ons &
Enhancements
Addition
to Family
Retain Intellectual Capital
Next
Generation
New Core
Processes
Science or
Technology
Potential Economic Impact
Ned Hill, CSU
36
Successful regions and organizations fight
commoditization. They retain their intellectual capital
Product/ Process Complexity
The Regional Innovation Portfolio
Science or
Technology
Conceptual
R&D
New Core
Processes
Technology
Development
Next
Generation
Four Lessons
1.
2.
Platform
Development
3.
Extensions
Tuning /
Incremental
Product
Development
Customization
Mobile Intellectual Capital
Add-Ons &
Enhancements
Addition
to Family
Retain Intellectual Capital
Next
Generation
New Core
Processes
Science or
Technology
4.
Region’s change their
growth trajectory through
product mix
Firm-level decisions on
product investment
determines regional
product mix
Regional productcentered economic
development strategies
should represent a
balanced portfolio of
investments
Identify market failures in
product development and
change management
Potential Economic Impact
Ned Hill, CSU
37
Successful regions and organizations fight
commoditization. They retain their intellectual capital
Product/ Process Complexity
The Regional Innovation Portfolio
Science or
Technology
Conceptual
R&D
New Core
Processes
Technology
Development
Next
Generation
Extensions
Tuning /
Incremental
Platform
Development
Product
Development
Customization
Mobile Intellectual Capital
Add-Ons &
Enhancements
Addition
to Family
Retain Intellectual Capital
Next
Generation
New Core
Processes
Potential Economic Impact
Ned Hill, CSU
Science or
Technology
An Endogenous Development
Portfolio focuses on product
development through a portfolio of
technology push and pull. Growing
local competitive capacity that
combines: Industry-creating
potential of:
¾ Disruptive technology through
conceptual research and technology
development,
¾ Revitalization of firms &
economy through technology
development
¾ Evolutionary change that
comes from new platform
development and market
extensions,
¾ Product line vitalization derived
from product development and
managerial improvements, with the
¾ Market share growth through
Customer responsiveness of
product customization.
38
Percentage Mix of Innovation Typology
Think of product mix as an investment
portfolio
Bay Area
RTP
Austin
Cleveland
Customization
Product
Platform
Technology Conceptual
Development Development Development
R&D
The optimal portfolio for a
diversified, mature, regional
economy will have a portfolio peak
similar to the line represented by
“Austin.” With the average
company involved in product
development, demonstrating
significant weight on both ends of
the spectrum. The mix of the
portfolio has a direct effect on
innovations ability to impact:
A. Economic Impact
B. Types of Jobs
C. Growth Engine
D. Retention
Through product sales and
productivity growth
Level of Innovation
Ned Hill, CSU
39
Think of product mix as an investment
portfolio
Lessons
Percentage Mix of Innovation Typology
The intersection of a firm’s
business strategy (competitive
advantage) and a region's
economic development investment
strategy (comparative advantage)
takes place in the firm’s income
statement.
Bay Area
RTP
Austin
Ohio
Customization
Product
Platform
Technology Conceptual
Development Development Development
R&D
Level of Innovation
Ned Hill, CSU
If the region does not make a
unique contribution to maximizing
the top line or to minimizing some
of the middle lines—the business
is only attached to the region
through the value of the personal
investment of the decision makers
in the region.
40
What makes for a successful innovation portfolio?
Combination of push and pull technology strategies
¾ Technology push— where technology pushes
products and they can either disrupt markets or be
incremental and market-reinforcing
¾ Technology pull— where products pull technology
into the marketplace
¾ Technology pull works from industry-based
competitive advantage
¾ Technology push most likely works from resource
based regional comparative advantage (supply-side
of the factor markets)
Ned Hill, CSU
41
Where is the market failure?
Science and engineering or markets and business?
¾ There are technology and science special interest
groups that have translated market and business failures
into engineering and science failures
¾ What are the product development market failures?
¾ Capital: How do you securitize product development finance?
¾ Knowledge: How do small- and mid-sized firms manage
continuous product innovation without blowing up their balance
sheets?
¾ Is there a sufficient density of ideas—e.g. deal flow
¾ What is the binding constraint? The time of the venture capitalist
¾ Venture capital may be the wrong type of finance to build
a regional economy.
Ned Hill, CSU
42
Five categories of companies
1.
2.
3.
4.
5.
Product innovators — Grow the top line of their income
statement without blowing up their cost structure. Can
manage continuous product innovation and own intellectual
property or have proprietary knowledge
Process innovators and global competitors — Manage the
middle of their cash statements and ride their product catalogs.
Have deployed IT to tighten supply and customer chains.
Developing global supply chain.
Lifestyle firms — Goal is not growth but owner’s control and
earning target income. Are not profit maximizers. Frequently
have no intellectual property or proprietary competitive advantage.
One trick ponies — Commodity business dependent on a
single business or production relationship
Dead and dying companies — Job shops in auction markets
A balanced innovation portfolio should help move Category 3
firms up to category 1 or 2
Ned Hill, CSU
43
Any Questions?
Ned Hill, CSU
44