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(Ned) Hill Vice President of Economic Development Cleveland State University February 7, 2006Ohio’s economic performance: Ohio’s economic performanceEmployment growth is tepid at best: Employment growth is tepid at bestU.S. and Ohio Employment GrowthPercentage Change in Employment, January 1990 to August 2004: U.S. and Ohio Employment Growth Percentage Change in Employment, January 1990 to August 2004The macroeconomic puzzle: The macroeconomic puzzleWhy is job growth so slow?Five changes in the cyclical pattern of job growth—well, maybe six: Why is job growth so slow? Five changes in the cyclical pattern of job growth—well, maybe six Macroeconomic uncertainty Creative destruction—fewer recalls, job growth comes from job creation not revitalization, In the US capital investment may be the job creation driver. Productivity Growth—better, faster, smarter, fewer throughout the recession; a combination of technology, management and global supply chain integration Benefits wedge—difference between wage and salaries and total compensation and revenue generated per worker Cost uncertainty—health care, torts, mandates, energy. Failed business strategies of two key employersWhat explains Ohio’s economic growth: What explains Ohio’s economic growthThe drivers of Northeast Ohio’s economy: The drivers of Northeast Ohio’s economyShared business functions among Emerging and Driver Industries (2003 estimates in 1996 real dollars): $20 billion $12 billion $6 billion $0.6 billion Research & Development Information Technology Distribution Warehousing Headquarters Shared business functions among Emerging and Driver Industries (2003 estimates in 1996 real dollars) $X billion What business functions do these driver industries have in common?Growth Opportunities: Defining Attributes Growing market for product Relative Ohio competitiveness Opportunity to capture market share Productivity increases Qualitative assessment: - industry specialists - focus groups - business leader survey Growth OpportunitiesEmerging Technologies: Promising investment areas: Emerging Technologies: Promising investment areas Defining Attributes Clear linkage to existing state drivers Research strength and localized intellectual capital Significant Ohio venture-capital interestStrengths and opportunities: Strengths and opportunities Network of population centers, each with unique characteristics and operating environments Depth in professional services industries, including banking, insurance, and medical services Depth in traditional manufacturing and technical skill sets Diversity of manufacturing (food, chemicals, automotive, etc.) Educational resources Air access, particularly its status as a Continental hub History as a strong headquarters location (in particular, in banking and insurance) Strong cultural institutions Multimodal freight transportation Strong tradition in research and scientific initiativesThreats and challenges: Threats and challenges Low to declining population growth The threat of becoming an increasingly commodity-driven economy, dominated by global competitors (China and possibly India) A legacy of organized labor An overall perception of the region as dominated by industries under stress or in decline (“rust belt” image)What the experts say: What the experts say 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.” 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 Finance: “As bankers, it’s tough to get our arms around and get behind how older industries are trying to innovate.” What the experts say: What the experts say 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. Workforce: That aging workforce bodes problems for the future. Most praise their incumbent workers, and many say they are able to hold onto these prized workers by compensating and treating them well. The difficulty, they said, is in finding replacement workers with the right skills, attitude, and ethic. 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.”What the experts say: What the experts say 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 “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.” Energy costs Workers’ compensation Business Strategy:The danger of lemming-like behavior: Business Strategy: The danger of lemming-like behaviorIn a recent Deloitte Consulting survey, manufacturers across industries expect innovation to be a primary driver of growth over the next three years: In a recent Deloitte Consulting survey, manufacturers across industries expect innovation to be a primary driver of growth over the next three years Source: Deloitte & Touche Global Manufacturing Benchmark SurveyProduct Innovation: Faster pace, key to success: Note:* Data on revenues from new products are based on Deloitte Research, Global Report – Vision in Manufacturing (New York: Deloitte Research, 1998). ** Data on time to market refer to year 2000. ***Expected. 29% 35% 21% 18 months 15 months 13 months New Products/Service Launch is ranked as the No. 1 factor to drive future revenue growth through 2006 New product share of revenue to increase by 21 percent over next three years Time-to-market falling 22 percent over next three years Product Innovation: Faster pace, key to success Source: Deloitte & Touche Global Manufacturing Benchmark Survey Note:* Data on revenues from new products are based on Deloitte Research, Global Report – Vision in Manufacturing (New York: Deloitte Research, 1998). ** Data on time to market refer to year 2000. ***Expected. Deloitte’s conclusion from its Global Manufacturing Benchmark study: Deloitte’s conclusion from its Global Manufacturing Benchmark study Three primary forces drive manufacturer supply chain decisions Cost New Market Opportunities 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 reservedDeloitte’s Manufacturing Risk Paradox Jeopardizing the customer experience is a major concern, yet risk of doing so rise with the new supply chain: Deloitte’s Manufacturing Risk Paradox Jeopardizing the customer experience is a major concern, yet risk of doing so rise with the new supply chain 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 Key Challenges: How to manage risk from a global, but customer-centric perspective? How to leverage low-cost sourcing / manufacturing opportunities without jeopardizing the customer experience? How to leverage the global network to reduce risk? Top Destinations – 2003-2006 by Home Region and Function North Western America Europe Destination Future Future Region/Country Growth* Growth* SOURCING China 58% 41% Mexico 24% Other SE Asia 22% 20% Eastern Europe 36% MANUFACTURING China 37% 41% Mexico 23% Western Europe 11% Central Europe 52% Eastern Europe 59% MARKETING/SELLING China 54% 41% Central Europe 40% 52% Eastern Europe 41% 59% Note: *Percentage of Companies Planning to Enter or Expand Operations over Next Three YearsChina: Strengths and weaknesses: China: Strengths and weaknesses Source: Deloitte Real Estate Services/Fantus Analysis Key Strengths Rate of Economic Growth Labor Costs Infrastructure in Special Zones Incentives in Special Zones Major Weaknesses Lack of Standards Legal, reporting and tax system / regulations Poor Intellectual Property Protection Don’t pack up and run away yet: Don’t pack up and run away yet What about top line revenue growth? It is the net that matters, not the gross cost savings Dell GE Conseco How does the move affect customer services and quality of the customer relationship? How does globalization affect minimum scale of operations in Tier II & III manufacturers?Should all manufacturing join the stampede?: Should all manufacturing join the stampede? Shipping costs are killers on the China model when shipping 100% back into the US market. Mid-sized volume at low per unit price exported solely for the US it is usually not a cost advantage to go to China. 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 Think before you jump: Think before you jump Reasons to avoid The dollar will continue to fall Bottlenecks in the port of Los Angeles are a real possibility Long, think, supply-chains are delicate Prospect of intellectual property theft Reasons to join in Follow a customer Average costs down Enter a new marketThe irony of firm strategy: The irony of firm strategy Large firms are outsourcing and reaching globally, especially if they have slow growth products Small and mid-sized firms in the supply chain need to become more vertically integrated Firms need to own their intellectual property or have proprietary knowledge 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)Innovation: Innovation As products move along the product cycle market power and earnings diminish. Industries reorganize and the employment base dies. The economic development implication: innovate or wither.Where Does Innovation Come From?: Where Does Innovation Come From? Existing base Process Innovation—product rejuvenation Product Innovation—product transformation Disruptive Technologies—product replacement (the hoped for gazelles) Economic erratic—economic development attractionSchumpeter’s 5 New Combinations : What did Schumpeter really write? : Schumpeter’s 5 New Combinations : What did Schumpeter really write? 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 half-manufactured 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 productionMeaning of Creative Destruction: 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 Cost savings Sustaining innovations Product rejuvenation Product transformation Disruptive innovations—new product classes Speculative innovations—unknown product classes Slide31: Process innovation immediate Improves productivity Market innovation immediate Extends the reach of existing products Product development and deployment intermediate Refreshes product lines Technology Pull Technology innovation long term Create new products classes and industries Technology Push Time to Impact Type of InnovationThree observations on innovation and regional economies: Three observations on innovation and regional economies Role of catalytic (flywheel) private firms that spin-off companies is under-appreciated Most innovation is sustaining and is done by existing firms Economies are built with bunts, singles and doubles. Don’t count on the home runs but appreciate it when one happens Thinking about Innovation: Thinking about Innovation Ned Hill and Pat GammonsSlide34: The Regional Innovation Portfolio Add-Ons & Enhancements Addition to Family Next Generation New Core Processes Tuning / Incremental Extensions Next Generation New Core Processes Science or Technology Science or Technology Slide35: The Regional Innovation Portfolio Add-Ons & Enhancements Addition to Family Next Generation New Core Processes Tuning / Incremental Extensions Next Generation New Core Processes Retain Intellectual Capital Mobile Intellectual Capital The Regional Innovation Portfolio Science or Technology Science or Technology Slide36: Successful regions and organizations fight commoditization. They retain their intellectual capital Conceptual R & D Technology Development Add-Ons & Enhancements Addition to Family Next Generation New Core Processes Tuning / Incremental Extensions Next Generation New Core Processes Platform Development Product Development Customization Retain Intellectual Capital Mobile Intellectual Capital The Regional Innovation Portfolio Science or Technology Science or TechnologySlide37: Successful regions and organizations fight commoditization. They retain their intellectual capital Conceptual R & D Technology Development Add-Ons & Enhancements Addition to Family Next Generation New Core Processes Tuning / Incremental Extensions Next Generation New Core Processes Platform Development Product Development Customization Retain Intellectual Capital Mobile Intellectual Capital Four Lessons Region’s change their growth trajectory through product mix Firm-level decisions on product investment determines regional product mix Regional product-centered economic development strategies should represent a balanced portfolio of investments Identify market failures in product development and change management The Regional Innovation Portfolio Science or Technology Science or TechnologySlide38: Successful regions and organizations fight commoditization. They retain their intellectual capital Conceptual R & D Technology Development Add-Ons & Enhancements Addition to Family Next Generation New Core Processes Tuning / Incremental Extensions Next Generation New Core Processes Platform Development Product Development Customization Retain Intellectual Capital Mobile Intellectual Capital The Regional Innovation Portfolio Science or Technology 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: Disruptive technology through conceptual research and technology development, Revitalization of firms & economy through technology development Evolutionary change that comes from new platform development and market extensions, Product line vitalization derived from product development and managerial improvements, with the Market share growth through Customer responsiveness of product customization.Think of product mix as an investment portfolio: Conceptual R & D Customization Product Development Platform Development Technology Development Cleveland RTP Austin Bay Area Think of product mix as an investment portfolio 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 Percentage Mix of Innovation TypologyThink of product mix as an investment portfolio: Conceptual R & D Customization Product Development Platform Development Technology Development Ohio RTP Austin Bay Area Think of product mix as an investment portfolio 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. 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. Percentage Mix of Innovation Typology LessonsWhat makes for a successful innovation portfolio? Combination of push and pull technology strategies: What makes for a successful innovation portfolio? Combination of push and pull technology strategies Technology push— where technology pushes products and they can either disrupt markets or be incremental and market-reinforcing Technology pull— where products pull technology into the marketplace Technology pull works from industry-based competitive advantage Technology push most likely works from resource based regional comparative advantage (supply-side of the factor markets) Where is the market failure? Science and engineering or markets and business?: Where is the market failure? Science and engineering or markets and business? There are technology and science special interest groups that have translated market and business failures into engineering and science failures What are the product development market failures? Capital: How do you securitize product development finance? Knowledge: How do small- and mid-sized firms manage continuous product innovation without blowing up their balance sheets? Is there a sufficient density of ideas—e.g. deal flow What is the binding constraint? The time of the venture capitalist Venture capital may be the wrong type of finance to build a regional economy.Five categories of companies: Five categories of companies 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 2Any Questions?: Any Questions? You do not have the permission to view this presentation. In order to view it, please contact the author of the presentation.