Sustained Profits Sustain Businesses
Is Free Cash flow the Holy Grail or is the Holy Grail what generates the free cash flow?
Free Cash Flow is pretty important. Technically it is operating cash flow minus capital expenditures. It is the cash flow that a company can use to pay dividends, make acquisitions, buy back stock, or build its cash on hand for a bad turn in the economy. Without cash, it's tough to develop new products, make acquisitions, pay dividends and reduce debt.
But some would argue the greatest generator of sustained free cash flow is innovation and invention and human capital investment – making your people smarter, wiser and more engaged.
“Innovation and Invention” and “Human Capital Development” are two of a CEO’s 10 Greatest Challenges.
Sustained innovation and invention is certainly one of a CEO’s toughest challenges but there is no magic to it. It is fuelled by establishing it as a key core competency and creating corporate culture and processes to deliver on it.
Many now believe that whether you are striving for a gold medal, to be a bestselling author or desiring to be a virtuoso, hard, focussed, and appropriately directed work trumps natural talent every time.
On the other hand, the ability to think innovatively can be nurtured but like in winning a gold medal or being a great musician, genes, brain patterns and DNA make a difference. That’s why a CEO’s best bet is to recognize the difficulty of the challenge and hire proven creativity, nurture it, and apply it to an identified unarticulated customer need.
A quick search at the patent office appears to confirm the need to hire for this ability. Once a person has filed one patent he is about 10,000 times more likely to file a second, third and forth than another equally intelligent person. This is true in both large and small corporations and across a broad range of categories.
Similarly a child prodigy is more likely to succeed than someone who is not as long as they put in their 10,000 hours of hard well directed work.
Malcolm Gladwell in his now famous book ”Outliers” writes prodigiously on this topic. Arguing the best thing a budding NHL hockey player can do to succeed is to be born in the first quarter of the year. It is likely something equally obtuse that makes an innovator and inventor what he is.
Lester Thurlow in his book “Head to Head”, makes the observation that “Innovation in process trumps innovation in product”. His precept is clear that there are more short term gains to be made through changing a process, the way it is manufactured, financed, distributed, marketed or sold than in creating a new product that meets a strong unarticulated need or even by improving an existing product.
So what are the ingredients necessary for sustained innovation?
- Hiring proven innovators and people with scarce knowledge and a dash of genius
- Developing innovation techniques
- Having a clear compelling vision of an unarticulated need
- Liberal financing
- Uncompromising collaboration amongst teams of varied cultures and knowledge.
The key linchpin however is simply seeing the problem before it is realized by others and dashing quickly in order to be the first at the patent office.
Lynn Zucker and Michael Darby explore the patterns of invention and innovation in their well cited paper “Patterns of invention and innovation in the formation of the biotechnology industry”
It’s worth a read.
Thurlow contrasts the research investment strategies in Japan versus the U.S. He focused on the post-war years and believed. The U.S. took a materialistic approach to their investment, focusing on products,while the Japanese focused on process and that as a result .While the U.S. invented DRAM, the VCR and the LCD, it also incurred the highest up-front costs, while the Japanese reaped the primary profit due to their superior processes of constant improvement in manufacturing. Now with the benefit of more time having passed, it appears most analysts would believe the U.S. approach has paid off more handsomely in the long term and it is the only thing saving them now from the Chinese trade juggernaut.
In 2005 many believed that Dell had Apple on the ropes. Apple was below Acer in PC market share. Indeed Hewlett Packard sold far more laptops than Apple every year in the last five years but everyone knows how this situation eventually finished in Apple’s favour. Dell’s process innovation may have given them a dominant market share for a while and as a result many including Fast Company, Jan.2004 came to the conclusion that innovation may not be all that it was cracked up to be but time has proven them disastrously wrong.
We certainly know research investment alone is not the answer. One only needs to look at the demise of Xerox PARC, one of the greatest private research facilities of the last fifty years. PARC has been responsible for such well known and important developments as laser printing, the Ethernet, the concept of graphical user interface (GUI) object oriented programming, and finally some amazing advances in very large scale integration. Yet where is it today? Why are they not attracting the invention stars of today?
There is no greater thrill than thinking about the critical issues today and inventing new methods of solving these challenges. It is truly putting the important first rather than just the urgent.
We are only one set of minds and if we enrol your brainpower we will likely come out with a better world for us all to enjoy.
or email your thoughts and questions to
editor@community.seec.schulich.yorku.ca to continue the conversation!
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