Business Times

Innovation key to competitiveness, development progress

By Lloyd F. Yapa

A newspaper recently reported that a Five Year (2011-2015)National Science, Technology (S andT) and Innovation Strategy has been prepared by the Ministry of Science and Technology to achieve at least 10% increase in high tech products. This is an excellent idea as we spend as little as 0.2% of GNP on Research and Development -R andD- (India and South Korea have at times reached 2.0% and 3% of GNP respectively on this score) and still tend to sell most of our products in primary or secondary form enabling multinationals to ‘skim off the cream’ by adding value to our goods. It is also important in the context of the need to accelerate economic growth to about 8-10% per annum and alleviating poverty since about 41% of the population are reported to be earning less than $2 a day and most e.g. children and lactating mothers suffer from malnutrition.

Another good example of positioning is that of Jollibee Foods, a fast food company in the Philippines. When McDonalds, the American fast food chain with 3000 outlets in 100 countries, began to open stores in the Philippines, Tony Tan, CEO of Jollibee Foods a local firm decided on a strategy of not clashing head on with the international giant; he learnt its operating systems to reduce its costs and control its quality at store level and started selling differentiated food items catering to local preferences. McDonalds which sold its standard product line of hamburgers etc found it difficult to cater to the peculiar local tastes.

The writer wishes to point out that it is differentiation as well as the improvement of productivity that have to be realized through technological innovation to improve competitiveness and not mere innovation as the latter can easily be copied by competitors and that differentiation involves other strategies than innovation of products using science and technology to keep competition at bay; it is not only products that have to be differentiated but also strategies and activities (of firms) which may or may not involve Science and Technology (S&T). It has also to be pointed out that it is the firms who have a direct role in innovation to differentiate. The government plays an important indirect role and what is important is it does not consist only of developing science and technology.

Differentiation is mainly achieved through the adoption of a strategy of positioning in a particular segment of the market with a differentiated set of activities and products to deliver a unique mix of value to those customers and to prevent imitation by competitors, not only through product innovation/differentiation.

This means giving up other segments of customers as all cannot be served at the same time without confusing the employees and customers and as adopting such a strategy can cost a large investment. Profitability can be enhanced by deepening the strategy by making the companies’ activities more distinctive as in the case of budget airlines such as South West Air Lines and Virgin Air which have very successfully adopted a low cost strategy in all their activities, different from the rival full service airlines, to customers (in a segment) who want to reach a destination speedily without paying unnecessarily for frills.

Another requirement is adopting a tailored system of activities among which there is a ‘fit’ ; the competitiveness of South West Airlines for example is due to the fact that activities under its low cost, strategy fit and reinforce each other and do not cancel out; in fact they complement each other. ‘Fit’ prevents imitation by creating a chain of interlocked activities.

Another good example of positioning is that of Jollibee Foods, a fast food company in the Philippines. When McDonalds, the American fast food chain with 3000 outlets in 100 countries, began to open stores in the Philippines, Tony Tan, CEO of Jollibee Foods a local firm decided on a strategy of not clashing head on with the international giant; he learnt its operating systems to reduce its costs and control its quality at store level and started selling differentiated food items catering to local preferences. McDonalds which sold its standard product line of hamburgers etc found it difficult to cater to the peculiar local tastes. The Sri Lankan manufacturers of Siddhalepa and Janet Cosmetics (Nature’s Secrets) have adopted similar strategies of side stepping international competition.

Management experts in fact suggest that in addition, firms should adopt the following strategies in addition to strong leadership with a clear vision:

  • motivating employees to enhance operational effectiveness,
  • creating an internal culture of pay based on performance and of innovation, and
  • adopting flat structures to reduce bureaucracy and improve information flows between management and employees.

The quality of leadership of a company as demonstrated by the examples of companies mentioned below is critical in adopting a successful positioning strategy and other aspects of the above mentioned process. They are Dr. Parvinder Sing of Ranbaxy, the Indian pharmaceutical company which achieved 20% share of drugs sold in the US against stiff competition; Stan Shih, CEO of Acer, the Taiwanese computer manufacturer, who made his products as renowned as any other and our own NG Wickremaratne, formerly of Hayleys who made Dipped Products Ltd, the 4th largest rubber medical glove manufacturer in the world; Dr. Nihal Jinasena of Loadstar (Pvt.) Ltd., who converted his company to be one of the largest manufacturers of solid rubber tyres in the world and Merril Fernando of Dilmah Tea who made his brand of Ceylon tea a name to be reckoned with in Australia and other countries.

Improving productivity

Improving productivity (or ‘more and more outputs from less and less inputs’) to reduce unit costs should also be achieved by entrepreneurs along with differentiation as most customers are price conscious. Here again it has to be stated that it can be realized not only through SandT but also through other means by firms as described below and that the government has to support them through a variety of means.

At this stage it is pertinent to ask what Sri Lanka’s productivity has been vi- a-vis some of its competitors in the region; value added per worker in agriculture in Sri Lanka for instance according to the latest (2010) World Development Report was $702 as against Singapore which had $40,419 and New Zealand $27,189.

The next question that arises is how business firms could improve productivity. They do so by; (a) increasing labour efficiency, (b) increasing asset use, (c) shifting to higher value added goods/services, (d) realizing more value from current goods/services, (e) reducing inventory holding costs, real estate costs, working capital etc.

Techniques of improving productivity

The techniques that they can be adopted to improve productivity can be categorized into internal and external (basically government interventions).

Internal techniques- by firms

1. Realization of economies of scale to reduce unit costs using;
i. large scale production,
ii. formation of joint stock companies among SMEs including small farms,
iii. ‘orchestration’ as in the case of Li & Fung of Hong Kong which has an ICT enabled network of suppliers of materials and manufacturers, 7000 in all, for manufacturing and marketing of garments,
iv. subcontracting and value chain co-operation - among suppliers, producers, distributors and marketers as practiced by the likes of Toyota and Honda, and.

v. clusters of enterprises with urban facilities, the most famous cluster in the world is that of the Silicon Valley (California) where advanced computer related products and services are produced.

2. Capital deepening/ widening or the use of machinery and equipment at a faster rate than that of labour.

3. (R and D) –as stated earlier the country spends very much less than some of its Asian counterparts on R andD. Another reason why Sri Lanka does poorly at technology improvement is that it has no access to such techniques due mainly to patent protection available to foreign firms. Government should therefore promote Foreign Direct Investment (FDI) which can bring in scarce capital, management skills, technologies and access to external markets, (and reversing the ‘brain drain’) by making Sri Lanka a delightful place to live in and work thro’ better governance, rule of law ( conviction rates in courts is reported to be only 4% !) and ethnic harmony. Between 1995 and 2008 Sri Lanka had attracted only about $3.5 billion FDI while for instance Taiwan another small country has succeeded in attracting about $40 billion according to World Development Reports and the World Investment Report, 2009. If the objective is to develop S and T among government agencies concerned without emphasizing on FDI, it may prove to be unreachable and ineffective.

4. Kaizen: This Japanese word means continuous improvement in small steps by introducing means such as the ‘5 S’ system including one stop accessing of tools instead of running around, cutting out time spent on non value adding operations and reducing transport costs by having fewer suppliers located closer to the factory, minimizing work interruptions, eliminating certain parts by redesign, doing several things at the same time, eliminating waste, decreasing inventory by introducing just in time (JIT ) inventories, standardizing work and products to reduce defects and coming up with creative solutions to improve the return on assets.

5. There are numerous other productivity improvement techniques such as Quality Circles (QC) and Brainstorming with employees and others, Waste Reduction, Total Quality Control (TQC), Pareto Analysis which is the assumption that 80% of results come from the implementation 20 % of the ( major) strategies, better Human Resource Management (HRM), Work Study which is the measurement of time a worker needs to carry out a job in order to improve productivity and Cost Benefit Analysis before starting a project to invest only in the projects which yield a satisfactory return.

External techniques –(by Government)

These are summarized as follows:
1. Establishing a clear set of goals and objectives for firms in consultation with them.

2. Inducing macro economic (budgetary and monetary) discipline (according to the latest Global Competitiveness Index –GCI- Sri Lanka ranks 124 out of 139 countries on this score) for instance by obtaining private sector capital and management skills to reduce the massive losses incurred by government owned businesses and by reducing waste, ostentation and corruption to increase savings for investment and reduce debt.

4. Formulating a closely monitored set of policies, incentives and regulations to motivate higher productivity and innovation (according to the GCI, in business innovation our rank is 40 and in respect of technological readiness the rank is 8

4) in products and services to meet customer expectations thereby increasing earnings.

5. Development of infrastructure ( GCI rank 70) - especially the hitherto neglected road network linking major towns - which slows down transport and increases costs; ( e.g. 50 years ago the commuting time by bus between Kandy and Colombo was 3 hours; it is now reported to be 4 hours )

6. Development of ( tertiary) education (GCI rank 62) particularly by setting up foreign universities as the government plans to do to allow students who fail to enter the existing universities due to the absence of vacancies, by raising the standard of S and T including Information Technology (IT) and the level of working in English

7. Simplification of bureaucratic procedures by improving the efficiency of government institutions (GCI rank 53) including the judiciary by recruitment and promotion purely on merit and of course using top class professional management, which has disappeared due to the disastrous decision in1972 to make the politicians responsible for it .

According to the latest Doing Business Report of the World Bank, Sri Lanka ranks 102 out of 183 countries; it reports SL ranks 72 in getting credit and takes 1318 days to enforce a contract – in courts against 150 days in Singapore and 225 days in Bhutan; the same report reveals that the numerous taxes paid by our firms total 64.7% against 9.3% in Maldives). The firms seem to be spending their time and resources running around in circles due to cumbersome procedures instead of undertaking innovation! Fortunately the Budget 2011 proposes to reduce taxation and simplify procedures.

8. The most important of requirements is to increase competition among firms particularly by discouraging monopolies and reducing protection of domestic enterprises so that they will be compelled to innovate instead of seeking protection which induces them to impose shoddy goods and higher prices on consumers.

9. Still another requirement is listening to admonitions by the private sector and the professionals (brainstorming as stated above).

Thus it is an integrated and all inclusive approach that is required both by the private and public sector to raise innovation to improve competitiveness to achieve the targets of growth set by the government and not the single approach of raising only the level of S and T.

(The writer is an economist)

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