Business innovation fuels growth of U.S. economy

by David Bernd
for Virginia Business
June 2007

Last December, the office of the Secretary of Commerce Carlos Gutierrez asked me to serve on the Advisory Committee on Measuring Innovation in the 21 st Century. It’s a national commission of CEOs and academics that is helping the department define and measure innovation’s effect on the economy.

Innovation has triggered a great acceleration in our gross national product over the years. Jim Clifton, CEO of The Gallup Organization, says that economists predicted 25 years ago that Germany’s total economy now would be $4 trillion, Japan’s would be $5 trillion and that the U.S.’ would be $3.5 trillion. Those predictions were correct for Germany and Japan, but the U.S. economy stands at $13.2 trillion. Economists now believe that innovation and the atmosphere that encourages innovation in the U.S. has been the main driver for this great increase. This highlights how important it is to understand and measure the impact of innovation on the economy.

The base of our economy has evolved over the years from agriculture to manufacturing to service. In fact, today the service sector makes up 80 percent of the gross domestic product. However, the full spectrum of the service sector is woefully under-measured in our current statistical system of national accounts.

By contrast, the European Union (EU) has been measuring innovation and its effects on the economy for five years. According to the fifth edition of the European Innovation Scorecard, the EU countries at best achieve average performance in innovation, with a number trying to catch up to the international average. Some EU countries are even losing ground. By the EU’s measurements, though, Japan and the United States exceeded all EU members in innovation.

The Department of Commerce’s initial defini­tion of business innovation is the “development and imple­mentation of new or altered products, services, processes, systems, organizational structures or business models for the purpose of creating new value for customers or financial returns for the firm.”

The most important summary mea­­-sure of innovation for the economy is growth of output per unit of input. If output expands at the same rate as input, no innovation is taking place. Expansion of output at a rate faster than input requires innovation of products or processes or both.

At our February meeting, the executives shared stories about innovations at their companies. For example, John Menzer, Wal-Mart’s vice chairman, said that five years ago his company decided to reduce its transportation costs by 30 percent, an ambitious goal that forced it to innovate. The company learned that the diesel engines of many of its 18-wheel trucks operated 24-hours-a-day to provide heat, lighting and power while truckers slept in their cabs at night. Through brainstorming sessions, Wal-Mart initiated the construction of a small, diesel-powered generator that would serve this purpose instead of using the truck engine. With this innovation, Wal-Mart was able to save millions of gallons of diesel fuel a year.

I discussed Sentara’s experience with the world’s first remotely monitored, electronic intensive care unit (ICU) and the fact that in health-care innovation is measured not only by return on investment, but also by reduction in mortality and improvement in throughput in our institutions. With a $2.5 million initial investment in the electronic ICU, Sentara saw a 155 percent payback on this investment after the first year through increased throughput, less use of ancillaries in its ICUs and a sustained reduction of hospital-wide mortality of more than 15 percent.

The point here is a simple one — finding and measuring innovation in our economy is critical. Companies that set stretch goals and measure outcomes tend to be more innovative — a boon for the U.S. economy and our global competitiveness. The potential for American companies to improve their measurement practices and in turn boost their return on innovation spending is enormous. And it is a challenge that we, as a nation, must be prepared to meet.

David Bernd is CEO of Norfolk-based Sentara Healthcare. Other members of the Advisory Committee on Measuring Innovation include CEOs Art Collins of Medtronics, Mike Eskew of UPS, Steve Ballmer of Microsoft, Samuel Palmisano of IBM, George Buckley of 3M and Carl Schramm of the Ewing Marion Kauffman Foundation, plus James Blanchard, the retired CEO of Synovus, and Luther Hodges, the owner and manager of Santa Fe Hospitality. Professors on the group are Don Siegel of the University of California at Riverside, Dale Jorgenson of Harvard University, Ashish Arora of Carnegie Mellon University, Rajesh Chandy of the University of Minnesota and Kathleen Cooper of the University of North Texas.