Profiting from innovation

(As originally appeared in Financial Post, 31 January 2011)

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By Trent Henry, Canadian chairman and chief executive, Ernst & Young LLP

As the global economy stabilizes, the race is on to chart a path to the next era of wealth and opportunity. Entrepreneurs have a unique role to play in propelling a new generation of economic growth, creating jobs and building vibrant communities. And nowhere is that more the case than in Canada, where our mid-sized economy is powered by entrepreneurs.

After all, businesses with fewer than 100 employees account for a whopping 98% of all Canadian private enterprises. And while these one-million-plus companies may be “small,” they’re impact is big. They employ nearly five million people — about half of the labour force — and represent 29% of Canada’s gross domestic product. Widen the scope to include businesses with up to 500 employees, and that rises to 45% of GDP.

While no sector has been immune to the economic upheaval of the past two years, Canada’s entrepreneurial community is emerging stronger than ever. Amid the cost-cutting and restructuring of their larger counterparts, Canada’s entrepreneurs have held employment levels relatively stable, with recent Industry Canada figures now showing net gains above the pre-recession peak. Survival rates show a continued upward trend, and business confidence among small business owners surveyed by the Canadian Federation of Independent Business is at a nine-month high.

By all measures, Canada’s entrepreneurial sector will continue to drive and shape the country’s economic resurgence. This is good news, not least because an entrepreneurial economy is an innovative one, fuelling sustainable growth, increasing productivity and building new market leaders.

Innovation is at the heart of entrepreneurship. It’s the drive to create something new, or apply new thinking to familiar problems, that inspires the entrepreneur.

What’s more, innovation is essential to growth. In a recent survey of global entrepreneurs, EY found 82% identified innovation as critical to their growth, while 65% of Canadian chief executives polled by the Conference Board of Canada rated innovation as a “very,” if not “the most,” important factor in developing new markets. Harvard Business Review suggested innovation will be the currency of global competition in the years ahead.

And yet of all the factors that characterize entrepreneurship, innovation may be the hardest to foster. Of the global entrepreneurs EY surveyed, 49% said innovation becomes more difficult as their companies expand. We call this the “innovation challenge.” We need to learn how to sustain innovation as startups grow and evolve.

Through its Entrepreneur Of The Year® program, EY has long worked with and celebrated the achievements of entrepreneurs throughout the world. We recently spoke to several winners and finalists of the program about overcoming the innovation challenge. Here is some of what they revealed:

Don’t leave innovation out of strategy. Innovation is the key to market leadership, but many businesses fail to set strategic priorities for it. The smart ones make it a boardroom issue.

Don’t lose your power to innovate, it makes you unique. As entrepreneurial businesses grow, they need to keep the spirit of creativity alive. It is the responsibility of the leader to foster a culture of creativity.

Good ideas are too valuable to waste. Innovative thinking, and the process of harnessing its power, should be rigorously managed and be company-wide. Innovation needs to be organized and made predictable and scalable.

Balance blue sky and bottom line. Fast-growth companies must connect creativity and profit. If new ideas don’t translate into products and services that contribute to the bottom line, the quest for market leadership will fail.

Rethink how the business works, not just what it does. Entrepreneurs are often adept at thinking up new products and services. But to stay on the fast-growth path, they need to apply that same innovative zeal to how the business operates, not just what it does.

The time it takes to turn a fast-growth company into a world leader is shorter than ever. The companies most likely to achieve market leadership will be those that have embedded innovation into their core business strategy, ensuring it is nurtured, managed and funded.

If Canada is to benefit from the powerful thrust innovators can provide, we need to cultivate a national entrepreneurial mindset on multiple fronts. The financing community can play an important role by creating more allowances for entrepreneurs; educational institutions can implement entrepreneurial and management studies; and governments can make the economy more innovation-friendly by financing innovative ventures, implementing favourable tax policies, and eliminating burdensome processes that can discourage developing businesses.

With continued signs of growth and confidence, a favourable credit environment, and increasing mergers and acquisitions and initial public offering activity driven by growth companies, there has never been a more advantageous time to nourish the entrepreneurial spirit in Canada. We are uniquely equipped to tackle the innovation challenge and chart an impressive course into a new era of global wealth and opportunity.

Read more in Connecting innovation to profit: five key insights from the world’s leading entrepreneurs.