Positioning for Digital Transformation

In recent months we are receiving a lot of message about the goodness of digital transformation. Some people affirm that if will produce large benefits for our societies. We expect that it can increase the productivity of our economies and increase innovation providing new services for all of us. On the other hand, some people think about this process as a way to destroy many jobs affecting many families. I am going to analyze this factor with data in order to provide reasonable arguments to create an opinion about it.

First of all we can look at the following graphic, showing the production of the four main Euro economies.

Gross Domestic Product per head of population in current currency. Data Source: OECD

The behaviors of the four economies follow a uniform growth until the crisis of 2007. The differences are obvious in the case of Germany and Spain. Germany is not very affected by the crisis but Spain is.

In this point we should analyze if this has been due to different aspect related to productivity. I am going to analyze this factor with another indicator more related to labor productivity.

Gross Domestic Product per employed person in current currency. Data Source: OECD

As we can see, the behaviors of the four economies are uniform too, although there are some significant differences. The French production per employee is now higher than the German one. And a more important thing is that the effect of the crisis on the indicator is not visible. Crises do not affect necessarily the productivity because productivity is more related to the production process, and technology, than to the markets. However, they can affect considerably the total level of production.

When we are talking about digital transformation we are talking about a change in the production processes, and this indicator is expected to be increased changing the slope of the curves. The level of employment would depend on the markets that would define the used production capability.

There are not many global indicators related to the implementation of digital transformation in businesses. But as a first approach I am going to use the existence of presence webs owned by businesses. Although digital transformation covers all the processes of the company, the sale process can be significant.

Businesses with a website in percentage of total businesses. Data Source: OECD

The interest for the digital world is large in Germany, and higher in Spain than in France. Although digital transformation is something much more complex than having a website, we can deduce than Spain has a better positioning than Italy and France for the digital world. We can make a lot of hypotheses about this fact, but it is reasonable to think than Spanish companies look at digital transformation as a fast way to reduce the gap with France in labor productivity.

In order to analyze the effect on the employment we need to analyze the market from the demand side.

Households with internet access in the four main Euro economies. Data Source: OECD

As we can see the access to digital services is over the 80 % in all the main economies providing a large market to new digital services. The different access in different countries is not a problem itself for any country because European Union is a shared market. In this case, it is predictable that Spanish business increase their productive capability while French ones reduce their own if they do not advance in the digital world.

Now, I am going to continue this dissertation analyzing if digital transformation is the main aspect that must consider businessmen and investors. One thing that can seem surprising is the productivity of France in front of the German one. Germany has more businesses with digital presence and even has a higher expenditure in research and development as we can see in the following graph.

Gross Expenditure in R & D as percentage of the Gross Domestic Product. Data Source: OECD

The answer is that the production over the employees is not the exactly productivity of the labor factor. It depends on the other production factors, for instance, the higher level of technology the higher production per employee. And it depends on the cost of the other factors too. An access to a cheaper energy, for instance, can increase this indicator. On the other hand, the level of technology is not necessarily linked to the expenditure in R & D because technology can be acquired through purchase. In the Euro zone the technology level has not significant differences among countries, although companies with more investment in R & D can get a little advantage but large companies have usually got multinational presence.

Other interesting issue to be considered is why the crisis of 2007 produced a larger effect in Spain than in other countries. There are a lot of explanations for it but I am going to analyze the political conjuncture.

Employed people per head of population. Data Source: OECD

Looking at the last graph we can see than in France and Italy there is a constant level of employed people per total population. In the case of Germany, there has been historically a slight growth. However, in Spain, this piece of data is not uniform. The percentage of people employed is not structural. It depends strongly on the political conjuncture. Italy has been affected by a lot of changes of government and the presence of many unstable governments; however, it does not affect the level of employment. In the case of Spain, we need to look at this fact in deeper.

Employed people per total population in Spain related to the changes of governments. Data Source: OECD

The curve was flat until the death of General Franco in 1975. Then the process of political transition started with a decrease of this indicator that can be related to a period of political instability. In 1982, the socialist party gets the government and produces a change of trend until 1990. The period of growth of this indicator is mostly during the government of the popular party from 1996 and it continues with the socialists until the crisis of 2007 and the new change of trend follows the arriving of popular party to the government again. Without considering the goodness or badness of any political option, it is noticeable that Spain is different to the other countries of the main Euro economies because the employed people fluctuates a lot with political changes, while this fact cannot be perceived in countries with many periods of unstable governments like Italy.

The goodness of certain policies can depend on the economic outlook as we can see if we look at the following graphs related to the last years.

Labor Force indicators in Spain in thousands of people. Data Source: OECD

If we look at this indicator we can see that the socialist government reduced the unemployment until the crisis of 2007, however, it did not know how to cope with the unexpected event of the crisis. This can be seen well in terms of unemployment rate. The increase of labor force can be due to immigration and it was stopped after the crisis. The lack of jobs stopped the immigration automatically.

Unemployment rate in Spain. Data Source: OECD

In this case the initial reduction of the unemployment rate can be seen clearly. This graph is showing us something that we know previously, the productivity of the companies does not changed with the crisis what changed was the number of employed people.

As conclusion, people would be more worried about political transformation than digital one. In the case of Spain, Spain is well positioned to get benefits from digital transformation. What Spain needs is politicians with higher concept of a state that do not produce damages to population with their political disputes and stable political institutions that have not got a strong influence in the life of the citizens, as we can find in other countries of its environment. And it is important than people understand that the goodness of policies depend on the economic outlook and ideologies should never drive any democratic society but reasonable analysis trying to fit the changes in the environment to serve well the citizens.

 Azul Gris 0002Mr. Luis Díaz Saco

Executive President

saconsulting

advanced consultancy services

 

Nowadays, he is Executive President of Saconsulting Advanced Consultancy Services. He is an Industrial Engineer (EQF 7) expert in Automation, Computer Vision and Robotics. He has been Head of Corporate Technology Innovation at Soluziona Quality and Environment and R & D & I Project Auditor of AENOR. He has acted as Innovation Advisor of Endesa Red representing that company in Workgroups of the Smartgrids Technology Platform at Brussels collaborating to prepare the research strategy of the UE.

 

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Two different models of national innovation management

When we analyze the recent crises we usually look at the financial world as if all the answers were there, however, this is the main error of the analysts. Crises can be financial or can proceed from the real economy, however, financial solutions only fit the short-term, and long-term solutions must be provided by the real economy. Both worlds, the real world and financial world, are totally linked. That is the reason why we cannot rule with a single vision, either financial or industrial.

Long term solutions for any economy will require an improvement of competitiveness that can be sustainable if it is based on innovation.

Innovation is the result of different processes; however, as now I am writing about long-term, I am going to use R & D activity as the field of analysis.

If we analyze the main economies of the Euro zone, we will find that the effort in R & D is different in different countries. This implies that there is a structural difference between countries that will drive in a different way the evolution of the future economy at the Euro zone.

Gross Domestic Expenditure in R & D as percentage of the GDP. Data Source OECD

Gross Domestic Expenditure in R & D as percentage of the GDP. Data Source OECD

Germany and France double the expenditure in R & D of the Southern countries. The differences among economies are structural and they are driven by their governments (regardless of the political color) as we will see in the following discussion.

These differences proceed from the past. An important increase of the expenditure in R & D is not a simple matter because to have expert resources is necessary. It is not a matter of increasing the funds for the activity simply.

Related to human resources, we can see that there are important differences:

Total people dedicated to R & D. Data Source: OECD

Total people dedicated to R & D. Data Source: OECD

As we can see Spain and Italy have a similar number of people dedicated to R & D although the GDP of Italy is higher.

This can be better seen with the next graph that makes a comparison with the total number of jobs.

Ratio R & D Staff per Total Jobs. Data Source: OECD

Ratio R & D Staff per Total Jobs. Data Source: OECD

As we can see France and Spain have more people dedicated to R & D that it should be expected by the total expenditure in relation to Germany and Italy. The reasons for this fact can be linked to the political vision of innovation and the role of the states in the R & D activity. In order to take this issue into account I am going to make a comparison between the largest and the smallest economy of the analysis.

In the case of Germany, the amount of R & D performed by business enterprises is much higher in percentage, as we can see in the following graphs:

Business Enterprise Expenditure and Gross Domestic Expenditure in R & D of Germany. Data Source: OECD

Business Enterprise Expenditure and Gross Domestic Expenditure in R & D of Germany. Data Source: OECD

As we can see most R & D is performed by the private sector. This is not the case of Spain.

Business Enterprise Expenditure and Gross Domestic Expenditure in R & D of Spain. Data Source: OECD

Business Enterprise Expenditure and Gross Domestic Expenditure in R & D of Spain. Data Source: OECD

 

In Spain, only one half of GERD is performed by private companies. Spain has a high ratio research jobs per total jobs due to most of them are in the public administration. The effect of this fact is that innovation is father from markets in Spain than in Germany. The capability to influence the future economy of the country will be lower in Spain than in Germany because the connection of R & D and markets is much weaker.

At a fast glance, we can see how the crisis of 2007 has been focused in a very different way. While Germany increased linearly both GERD and BERD, Spain stopped the growth of the R & D expenditure in both private and public sector. This is not surprising as Spain had to face a huge financial crisis in its banking sector that implied lower and more expensive financial resources especially for the activities with higher risk. This is a clear case of how a financial problem affects not only the present real economy but the future one.

Looking at the previous graphs we can think that policies of state expenditure in R & D have not influence in the productive model, or they are inefficient, however, this is not true. The difference is not the public support but how the public support is implemented. You can see this fact in the following graphs.

Financed and performed percentage of R & D by Business enterprises in Germany. Data Source: OECD.

Financed and performed percentage of R & D by Business enterprises in Germany. Data Source: OECD.

Looking at this graph we can see how at the beginning of the century only less than 50 % of the performed R & D activity in Germany was financed by the industry. This implies that the rest of the activity was financed with public resources. German State was funding strongly R & D at the private sector making stronger private companies with public resources.

Financed and performed percentage of R & D by Business enterprises in Spain. Data Source: OECD.

Financed and performed percentage of R & D by Business enterprises in Spain. Data Source: OECD.

In Spain, we can see how the support of the state for the business enterprise R & D is anything but noticeable especially compared with the German case. Spanish industry funds almost all its R & D activity. Public financial resources for R & D (human and financial) are consumed by public institutions very far from markets.

The results of these two different models of innovation management will be seen in the future. We will see if having a lot of support from the state is better or if without having any support from the state will produce stronger companies. As a conclusion we can say that Spain has improved strongly its productivity in the last years but it was done through the salaries of the staff. Public resources have gone to restructure its financial system, and to preserve the public jobs instead of improving the future performance of the real economy. This is not surprising due to the lack of resources, however it can be surprising that this was not done in the first years of this century when its economy was growing faster than in most European countries and there were a lot of resources for this task with surplus in the public accountancy. The reasons for this fact are structural instead of temporal and it does not seem to be influenced by the political color of a certain government.

 Azul Gris 0002Mr. Luis Díaz Saco

Executive President

saconsulting

advanced consultancy services

 

Nowadays, he is Executive President of Saconsulting Advanced Consultancy Services. He has been Head of Corporate Technology Innovation at Soluziona Quality and Environment and R & D & I Project Auditor of AENOR. He has acted as Innovation Advisor of Endesa Red representing that company in Workgroups of the Smartgrids Technology Platform at Brussels collaborating to prepare the research strategy of the UE.

 

Future trends: Virtual Reality

Simulation is a very important technique used in the industry. From the beginning of digital computers, one of the main uses of them has been the execution of simulation algorithms to make predictions about the evolution of many kinds of processes. With the evolution of computer devices to interact with the user and other industrial machines, simulation acquired a different dimension where the simulator could interact with the real world substituting some part of that real world.

Simulators provide a lot of value in the field of engineering, because they let that engineers can test different solutions with a very low cost scheme. Simulators are of wide use too for training of expert technicians, pilots, and so on.

Simulation is very common tool in engineering, engineers have a lot of tools to simulate different solutions before they select one of them in order to develop or build a new device or infrastructure.

A useful simulator for training can be a very powerful tool, however, the higher the precision of the simulator is, the higher the cost of development is. This makes the market of highly precise simulators very little. They are built only for certain applications that require the use of very expensive and complex systems and any reduction of the number of fails in their manipulation produces big savings.

A virtual aerial tour over Madrid Barajas Airport towards Madrid City

Picture 1 A virtual aerial tour over Madrid Barajas Airport towards Madrid City with Flightgear free Flight Simulator

This kind of simulators is a tool for risk reduction. For instance, a trained operator of a nuclear facility will reduce the probability of higher damage for the people in an accident because his response to the crisis will be faster and safer.

These simulators usually have a real interface connected to a computer that simulates the system under control. The use of virtual reality instead, would provide lower costs of development of the simulator and some advantages; because we can substitute real panels by virtual ones, and even extend the simulation to the environment similar to the real facility out of the control panel.

Virtual environments are not only useful to train people but even to test new devices. Imagine that you have modeled an industrial automated facility in a virtual environment, you can test in the traditional way a new device adding the virtual model of the device to the virtual environment but you can connect the real device to the virtual environment in the same way as an operator interact with a training simulator. In this way you can test how a new real device will improve your automated facility without stopping the production at the real facility. This technique is known too as virtual commissioning. With virtual commissioning you can test how different components of an industrial facility are working adding the real devices one by one. This technique lets you to identify possible fails of a component in a very complex system.

This kind of virtual industrial facilities are built yet. You can get products in the market to virtualize your own industrial automated facility, visualizing the behavior of the system in your computer screen in real time.

Virtual reality is a step further. The aim virtual reality is introducing you inside the virtual environment instead of seeing it through the computer screen. The benefits of this kind of technology are huge; however, this is not well developed yet. The problem is how to get that people perceive the virtual environment as the real one. Nowadays there are some devices to put our eyes inside a 3D virtual world but the experience will be improved a lot in the next years.

As usual, in a similar way as with any valuable technology, governments are not seeing all the possibilities of virtual technology as a solution for many problems of our societies. While some people are warning about a potential problem of unemployment due to the development of robotics, nobody is advancing the capability of generating employment of virtual reality.

Virtual reality is not only a matter of engineering. It is a matter of engineering the technology of support; however, the capability to create employment for many professions that do not fit the industry is huge. Virtual reality required a virtual environment, an environment that can be imagined by an artist.

This can be seen yet in the real economy. Although virtual reality is not developed, simulation techniques are acquiring a great importance in a real market: In the market of computer gaming.

The market of computer gaming is increasing year by year, producing the development of new electronic devices as graphics processors required to visualize in a fast way any kind of virtual simulation, increasing the market of high speed communications, and providing jobs for many artists related to imaging and writing of scripts. In fact, we can say that probably now, computer gaming market is the support of the development of many electronic devices required to improve virtual reality instead of traditional industry.

Most of computer games are created for young people. There is a segment that has not been touch related to adult public. In this kind of segment, the professions that could create jobs would be very different. Imagine a recreation of a play by Shakespeare in a virtual world where you can take Hamlet’s role. It would require knowledge of literature and history provided by several bachelors in English literature and history.

If you do not think that there would be a demand of some kind of leisure, you only need to see how movie writers have imagine the way as adult people of Star Trek waste their leisure time.

If really the industry is making more automated every day reducing the number of people working at the facilities, we should look at the possibilities that more leisure time and new technologies can provide for the employment of the future.

The way to find this future will require that governments support the entrepreneurs in the development and exploitation of new technologies instead of putting sticks in the wheels of people that are developing this kind of new technologies because they do not see leisure market as a priority for their policies. In the same way as tourism is a very important engine of the economy of countries as Spain, Italy or France, virtual reality could be in the future an important engine of the economy of any country without sun and the Mediterranean sea.

 

 

 Azul Gris 0002Mr. Luis Díaz Saco

Executive President

saconsulting

advanced consultancy services

 

Nowadays, he is Executive President of Saconsulting Advanced Consultancy Services. He has been Head of Corporate Technology Innovation at Soluziona Quality and Environment and R & D & I Project Auditor of AENOR. He has acted as Innovation Advisor of Endesa Red representing that company in Workgroups of the Smartgrids Technology Platform at Brussels collaborating to prepare the research strategy of the UE. Additionally, he is an expert in robotics and computer vision and a noticiable scientist in computer vision and brain research.

 

The structural differences among countries in the Euro Zone

In the last months, there has been a discussion about the model of governance of the Euro. New voices have been listened talking about the possibility of an exit of the Euro as currency for some countries due to the Greek political crisis. I have shown in several articles that the Euro construction is an irreversible process. This does not imply that a country cannot abandon the common currency. It only implies that the cost for all countries would be much higher than the benefits it could have been provided yet.

A rupture of any integration scheme increases the probability of a collapse of the economies. Of course, the effect of an exit of an economy on the rest of the system can be different depending on the importance of the economy inside the common system. Greece never was seen as a system problem, however, other countries could have provoke a total disaster in the all the Euro economies.


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Graph 1 Contribution of the main Euro national economies to the GDP of the Euro Zone. Data Source OECD

We can see that Spanish economy is two times more contributing to the production of the Euro zone than Netherlands. Fortunately, Spain seems to be far from the creation of a systemic problem now that it has recovered a path of higher growth.

Euro zone is a complex scenario, because there are different policies involved in every country. The aim of the Euro is, in fact, to make easier and cheaper the international trade inside the zone. This is a way to reduce the increasing complexity that implies the creation of a common trade zone. I have analyzed this fact during several years from a complexity science viewpoint. Summarizing, the introduction of a common currency is removing a lot of structure substituting this energy in form of structure (several currencies) providing a state of maximum entropy or uncertainty (a single currency). This is not a problem although it can sound odd for some people. I have demonstrated before that a flat frequency characterization of an uncertainty distribution can be better than high frequency structure in order to control any system.

The problem of several currencies is not the number itself, but they are a source of high frequency structure when its value can change daily through trading, making the whole system less manageable by the political establishment.

The Euro is removing high frequency structure related to currency exchange; however, it does not make more uniform the productive differences among countries.

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Graph 2 Different production per capita in the Euro Zone. Data Source OECD

An indicator as the GDP per capita is showing than there are differences inside the Euro zone related to different social and productive models. There is some structure related to the productive models that is preserved inside the Euro zone and it cannot be removed easily thinking only in the use of financial tools.

An interesting way of look at this is analyzing some indicator of the added value of the labor factor, for instance, the GDP per hour worked.

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Graph 3 GDP per Hour Worked of the five main Euro economies. Data Source OECD

This graph is showing significantly than Italy has converged towards Spain instead of Germany or France in productivity. This indicator is not showing a bad behavior of the labor factor necessarily. It can be related to the added value of the activities made by the labor factor and then, the productive model. I will go back to this point later to show why this latter option is a better explanation of Spain.

The good behavior of the economy of Netherlands can be analyzed searching for another complexity-related indicator: the PMR. The product market regulation index, is showing barriers to entrepreneurship, trading, and so on.

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Graph 4 PMR index of the five main Euro economies. Data Source: OECD

Regulation is another way to structure the economy. In this case we can see as the effect of some degree of deregulation of the real economy can be positive. This is another clear example of how sometimes structure can be worse than uncertainty. It is well known than markets near perfect competition are more efficient than markets far from it. This indicator is showing why the promotion of competition drives to a better GPD per capita index in the case of Netherlands.

If regulation can be a barrier for growth, we should look at the taxes:

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Graph 5 Total Tax Revenue in the five main Euro economies. Data Source: OECD

We can see that countries with a lower taxation scheme have a higher productivity per capita. The case of Spain is very interesting to be analyzed. Spain has a taxation scheme similar to Germany but the added value of the labor factor is much lower. This is showing that the common economic policy actions as increasing or decreasing taxes cannot improve the economy themselves. It is necessary to act on the productive model. The required action of economic policy should be linked to an improvement of the productive model. For instance, reducing taxes to added value activities could be a way to promote a change of the productive model that a reduction of taxes itself will not provide necessarily.

Another interesting issue that can be seen in the previous graph is the effect of unemployment on the tax revenues. The great unemployment provoked by the crisis of 2007 in Spain has reduced the incomes from taxes by the Spanish government hugely. One of the main objectives of any government should be to make actions in order to preserve the level of employment of the people instead of thinking in taxation or public expenditure policies without an effect on the real economy.

Now, I am going to analyze the social responsibility policies of different European countries to show you that there are important differences.

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Graph 6 Green House Emissions per GDP of the five main Euro economies. Data Source: OECD

The more pollutant economies are those ones which productive model provides higher added value for the labor factor. This is related to industrialization. However, again, we can find a country showing a different behavior: France. This country has not got a lot of emissions of Green House effect gases due to its bet for the nuclear energy. Nuclear waste can be more dangerous, it has not an effect on the global warming of the planet.

If we want to analyze which ones are the less polluting citizens of this group of countries of the Euro Zone we should look at the following graph.

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Graph 7 Green House Emissions per Capita in the five main Euro economies. Data Source: OECD

As we can see, from a mean viewpoint, each German or Dutch citizen is a 50 % more polluting than each Spanish, Italian or French one although it is a 50 % more productive too. This is showing that the differences of productivity are more related to the productive model instead of the labor factor itself. This can be especially true in the case of Spain due to a bad support of the highest added value innovation activities for some governments. There have been important initiatives and reforms but a stronger effort is needed.

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Graph 8 Percentage of graduates with a role in introduction of innovation in the main Euro economies. Data source: OECD

In order to improve the productive model and innovation it is not only necessary to promote entrepreneurship. What it is necessary is to promote the entrepreneurship and the innovation activities of the higher education staff because it will provide higher added value businesses.

Spain and Italy has a similar level of GPD per hour worked, however, Spain has the lowest number of graduates with a role in the introduction of innovation and Italy the highest figure. On the other hand, Italy has higher tax revenue over GDP and Spain the lowest one. This is showing that economic policy is not a matter of two or three typical actions, as acting on taxes or expenditure.

Economic reforms must have the aim of improving the productive model of a country, and they have not any sense alone. Economic policy is a matter of many coordinated actions searching for a common objective.

Summarizing:

  • The integration process of Europe is highly complex. There are a lot of differences among countries, and then, there is a great need of economic policies driving to convergence.
  • Financial mechanisms are very positive, however, they cannot provide all the solutions required to reach the economic convergence.
  • Improvement of market regulation is a must in order to get better results and to preserve a process of supranational convergence.
  • There is a special need of coordination of the largest economies in order to avoid risks. This implies that certain countries must have an important presence in the coordination forums to reduce this kind of political risk.
  • Different productive models can be good if they are taking advantage of the local capabilities, however, they can be a systemic problem in the future if the differences are provoked by bad policies.
  • Social Responsibility issues should be considered too when we are analyzing the total value provided by different partners to the union.
  • Structural reforms in every country should be driven to provide a productive model of higher added value. Education and innovation cannot be forgotten.
  • Spain requires to improve its innovation process in order that its economy can converge with other Euro economies.
  • Economic policy is a matter of many coordinated actions searching for a common objective related to the search for a sustainable growth. It is much more than a matter of controlling debt and deficit.

 

 

 Azul Gris 0002Mr. Luis Díaz Saco

Executive President

saconsulting

advanced consultancy services

 

Nowadays, he is Executive President of Saconsulting Advanced Consultancy Services. He has been Head of Corporate Technology Innovation at Soluziona Quality and Environment and R & D & I Project Auditor of AENOR. He has acted as Innovation Advisor of Endesa Red representing that company in Workgroups of the Smartgrids Technology Platform at Brussels collaborating to prepare the research strategy of the UE

 

October 2014: Innovation in order to reduce the complexity of the business

From a strategic viewpoint there can be a lot of routes in order to reach a certain positioning for our company. Thinking in mathematical terms, for a set of managing variables the best route to be chosen would be that one minimizing the money spent. It could be seen as a geodesic curve on a hypersurface (the subset of states that we can reach from our managing actions) of the space corresponding to the variables defining the state of the company.

I am going to draw a simple example to illustrate this fact.

Imagine a simple company with the following function of production:

o = C  x

Where o is offer, x amount of raw material

And the following contour conditions from the law of offer and demand:

d = -A p+dt

Where d is demand, dt total demand and p price of product.

The state of our simple economy is defined by two variables: x (amount of raw material for production) and p (price of the product) that define sales and surplus supposing the cost of raw material and the slope of the demand curve are constant. Making equal offer and demand to maximize benefit both variables will be linked and the state of the system will have a lower dimension (when there is no surplus).

B = Bs-S

Where B is benefit, Bs is benefit from sales, and S cost of surplus.

Understanding the positioning as the market share that we want to reach, our strategy would be defined by the percentage of demand that we want to serve. This value would define directly the price of the product and the quantity of raw material that we need to get. We have only a degree of freedom to define our strategy of prices if we want to maximize benefit.

There is a natural equilibrium point where the curves of the prices of offer and demand match providing an equilibrium value for the quantity of production, following the law of offer and demand. The optimum value would provide a unique state for our production and prices. Then, as there is only one possible state, there is not any need of a price strategy. In markets at perfect competition, the minimum price would be imposed finally in this way and our sales would be linked directly to the sales of other competitors.

The law of offer and demand

The law of offer and demand

A real economy is much more complex than this one. In a real case, the curve of demand would not be linear. There would be other competitors at the market serving the product, and if the market can be fulfilled by other competitors we cannot take the offer and demand curve as a direct reference of our sales. The cost of raw materials would be under its own curve of offer and demand too. Then, there would be many more variables involved and defining the state of system although we could only act on our price of the product and our amount of raw material for production again.

Thinking in this way we can see that the result of any marketing strategy is, in practice, unpredictable.

Strategy is not a matter of solving a set of equations, but a matter of anticipating the movements of competitors. We need a strategy because we are in competition, in other way we would need only to minimize some cost function.

Strategic thinking requires capability of prediction that it can be got only under certain states. For instance, in the previous example, if the offer of competitors can fulfil the total demand we cannot assume that we can sell something if our prices are not below the prices of competition. We can only predict sales at lower prices. This is what happens in a crisis. In this case, the demand is being reduced and only the companies that bet for reducing prices (modifying the offer curve) can control their own company in the physical sense of the word control. As production costs impose a limit on the price of the product, the strategy that fits better that situation following this economic model is a strategy of cost leading.

And what about innovation? Well, in this case, innovation is not necessarily a drawback, but innovation should be driven to improve production reducing the production cost. Process innovation would be the logic innovation related strategy. This would be to swim with the tide, or the low risk innovation strategy.

A more interesting approach is forgetting mathematical models and using model free techniques to analyze our activity. Risk can be seen as something related to perception or subjective. In the case of we are talking about mathematical risk, considering risk as not objective can be considered valid too because although mathematical risk is not observer dependent, is model dependent. Sometimes to swim against the tide can produce better results than with the tide.

If we look back the previous example, the problem with predictability is related to a fulfilled demand, then, a product innovation strategy can be a solution too, because a new product will have a new and not fulfilled demand. What are the pros and cons of this? They are obvious. Although the demand was not be very high, you can select a high price strategy that you cannot use before avoiding the limits imposed by the cost of production, and less competition can imply less complexity (less variables and uncertainty to be considered to define the state of the business), as the initial example showed.

Mature markets can become more complex than novel ones because there is a natural trend to increase entropy in every system as time goes by.

A product innovation strategy, even in a crisis, can provide simpler businesses than a cost leading strategy although many people can think that it should be swimming against the tide. The important thing is to find the proper market or market niche. Probably, they are right with the comparison. As swimming against the tide, you will need the required energy to do it, or in economic terms, the required money to do it. Sometimes, there are not only better or worse strategies but realizable and unrealizable ones too.

Swimming with the tide is comfortable, but comfort usually is not synonym of survival, because not all the competitors can win following the same strategy. The best soldiers are trained to accomplish task under the worst conditions, and there is a good reason for this.

 

Gris Azul 0001Mr. Luis Díaz Saco

Executive President

saconsulting

advanced consultancy services

 

 

Nowadays, he is Executive President of Saconsulting Advanced Consultancy Services. He has been Head of Corporate Technology Innovation at Soluziona Quality and Environment and R & D & I Project Auditor of AENOR. He has acted as Innovation Advisor of Endesa Red representing that company in Workgroups of the Smartgrids Technology Platform at Brussels collaborating to prepare the research strategy of the UE

 

The Future of the European Energy Sector

In a developed global economy, there are two sectors that can be considered the most critical to preserve its good performance: Energy and Telecommunications. Any modern productive activity cannot work without some kind of energy supply. Only a few services business could run without energy. For instance, financial services are today full-depending on telecommunications and this one requires electricity supply.

Energy sector is the basement of any healthy economy. Energy is required to run any industry and many industries could be built through self-financing. Financial sector provides efficiency to the economic system and let to increase its functionality. It is another critical sector due to the complexity of the economic system that cannot run properly without some mechanism for store the value of the production for the future.

Our modern societies are demanding a high quality, clean and sustainable energy supply. This is one of the main targets of any government thinking in the future.

Total Primary Energy Supply on GDP

Graph 1 Total primary energy supply of the main Euro economies, UK and US. Data Source: OECD

Looking at the main Euro economies and the Anglo-Saxon countries we can see the primary energy supply represents near the ten percent of the Gross Domestic Product. In the case of USA this figure is over the fifteen percent. This graph is showing how countries as Spain or Italy are more efficient in terms of energy consumption than USA, France and Germany. They can produce the same amount of money with less energy production.

If all of us usually think that the German one is a better economy than the Spanish or the Italian ones, the reason can be that efficiency is a variable overvalued by many managers. This is absolutely true. There are other management variables that can be more important as effectiveness or robustness.

This can sound odd for some people, and it can be important to be more precise: efficiency would be an extremely good variable to compare the same activity; however, an economy is the addition of many different industries, with different needs of energy. This value of the energetic efficiency of the economy depends strongly on the economic model. A country based on agriculture will require less energy for the same production than a country based on industrial sector, of course, a country based on agriculture will require other resources as a large and fertile countryside, an adequate climate, and a large workforce.

I have spent some time in explaining the concept of efficiency because it is an engineering concept used wrongly by some people on the TV. The goodness of the concept of energetic efficiency is not the same when we are talking about a building and when we are talking about a large economy however, many people have studied Schopenhauer and they know the dialectic stratagem of enlargement. Unfortunately, dialectic stratagems do not work with physical matters as real economy although they can increase the number of votes.

I am going to illustrate this reasoning with the following graph. We can think that a more efficient economy should provide higher GDP per capita, however, we can see that this is not true.

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Graph 2 GDP per capita of the main Euro economies and UK. Data Source: OECD

A first reason is easy to understand. The concept of efficient economy should be applied to every resources of the country not to the energetic ones only.

There are other aspects to be considered when we are talking about the validity of efficiency to drive the economic strategy of a government: complexity. When the economy is making more complex uncertainty decreases effectiveness; and a loss of effectiveness usually is a big increase of production costs that drives directly to a lower efficiency. The key point can be trying to reduce complexity instead of trying to increase efficiency.

Complexity is a problem when our economy is working in highly uncertain environment. The energy sector is a typical sector working in a very uncertain environment due to the variability of the price of the raw materials, especially oil.

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Graph 3 Crude oil Import Prices for the main Euro economies and UK. Data Source: OECD

The last decade it has been a linear increasing trend of the oil price until the subprime crisis in 2007. Prices seem to be more chaotic from then, and now are oil is much more expensive than ten years ago.

Spanish economy is traditionally more oil dependent than other ones, especially the French one. If we look back the total primary energy supply per GDP of France, we can see that France is less efficient than Spain. However, France has an energetic mix with more nuclear production that requires a raw material with a more stable price. Things like this can contribute to a better GDP per capita.

Oil large Spanish companies are doing a good work of managing oil resources. This fact can be seen looking the differences of the prices between countries.

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Graph 4 Crude Oil Import prices for the main Euro economies and the UK. Data Source: OECD

Although USA gets much better prices than European countries due to its own oil reserves and its influence as global leader, Spain can get better prices due to the good trading activity of its great multinational companies and traditionally good relationships with many production countries.

The strategy of the EU has been centered in the development of renewables. Nowadays, the degree of implementation is growing as we can see in the following graph.

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Graph 5 Contribution of Renewables to the energy production in the main Euro economies, UK and US. Data Source: OECD

 

Italy, Spain and Germany are leading the introduction of energy from renewable sources, however, it is important to consider some issues about this.

Renewable energy is an imprecise concept. This kind of energy is not fully renewable and it is not fully clean, and of course, it is not cheap. Generators have physical parts that must be built and can become finally waste with a limited life time. Under a cost benefit approach to analyze the investment other energy sources can be more competitive, nowadays.

This energy sources will continue increasing its penetration in the Euro countries but this growth must be supported by technological improvements to improve their competitiveness. There are several facts to support this sentence:

–          Oil neither is cheap nor has a stabilized price, and unfortunately Europe cannot preserve a proper production level exploiting their own oil resources.

–          There is a tradition against nuclear energy in Europe that it is not easy to change suddenly, although nuclear generation has improved the technology with better and safer reactors. Last attempts to change the European policies were stopped after Fukushima’s disaster.

–          The solution for limiting CO2 emissions against the greenhouse effect were substituting oil by gas, however, this policy can turn into a problem in countries as Germany due to geopolitical reasons. Spain has a different portfolio of suppliers and French policies against the greenhouse effect are supported through nuclear energy.

–          Spain has had an excellent sector of manufacturing of renewables generators with good technological level.

On the other hand, the selected scheme to promote the introduction of renewables has not been proper always. The EU should analyze new ways to implement an energy strategy centered on the introduction of renewables to limit its dependency of oil and gas.

 

Marengo Blanco Verde 0004Mr. Luis Díaz Saco

Executive President

saconsulting

advanced consultancy services

 

Nowadays, he is Executive President of Saconsulting Advanced Consultancy Services. He has been Head of Corporate Technology Innovation at Soluziona Quality and Environment and R & D & I Project Auditor of AENOR. He has acted as Innovation Advisor of Endesa Red representing that company in Workgroups of the Smartgrids Technology Platform at Brussels collaborating to prepare the research strategy of the EU

Benefits of the Certification of R & D & I Projects

English: Picture of the medal of honor

Picture of the medal of honor (Photo credit: Wikipedia)

BENEFITS OF THE CERTIFICATION OF R & D & I PROJECTS

Luis Díaz Saco. Head of Corporate Technological Innovation. Soluziona Calidad y Medio Ambiente. Expert Technician (Auditor) on R & D & I Projects of AENOR

(The text corresponds to a paper presented in the 2003 Conference on Innovation at Palacio de Congresos of Madrid. Nowadays Luis Díaz Saco is Executive President of Saconsulting Advanced Consultancy Services)

Congreso Innovación 2003

Congreso Innovación 2003 - Sala Roma

OVERVIEW

Norcontrol a company of Soluziona Quality and Environment, has been the first company in Spain to certify a project according to the standard UNE 166001 for management of R & D & I projects, this experience has been an important step forward in the systematization of its innovation processes.

The activity of R & D & I has a few special characteristics that should be taken into account when defining an R & D & I project. These differential aspects identified for years by specialists are especially important when attempting to give a boost to that activity in the business environment and to establish links of stable relationships between the public research system and private companies with the aim of increasing competitiveness.

The use of a methodology in the development of R & D & I projects facilitates decision-making about investment and it guarantees the further use of resources dedicated to these activities. The new standard UNE 166001 for R & D & I project management provides a framework suitable for this activity, and its use is associated with additional benefits such as the establishment of a common language for all those involved in the generation, development and marketing of the project.

The certification process that involves the integration of public entities and independent technicians in the process of R & D & I of the company reduces the risk associated with the activity. Finally, obtaining the certificate results in new benefits for the company as the improvement of its corporate reputation, and for the project itself, which acquires a recognized own entity that makes easier its development, this is especially important for projects carried out by several entities.

THE EXPERIENCE OF SOLUZIONA QUALITY AND ENVIRONMENT

The companies that compose Soluziona today have been characterized since their initiations by the introduction of new products and services to keep themselves in a proper position of their markets. In 2002, Norcontrol, a company integrated in the area of quality and environment of Soluziona, has been the first company in Spain that has received a certificate of R & D  & I project from AENOR due to the research and development of a novel technology with application to mechanical inspection systems. This milestone, has involved a significant leap in the definition of systems and the management of R & D & I projects, it supports the consolidation of the culture of innovation at the company, and the systematization of the processes of innovation that began in 1998 with the creation of an R & D program supervised by a Committee of technological innovation chaired by the CEO of the company.

This experience places Soluziona Quality and Environment in a favorable situation to transfer these benefits to its most important projects, and its customers, as well as to continue with the systematization of these processes by implementing a management system of R & D & I according to the UNE 166002 standard.

CHARACTERISTICS OF R & D & I PROJECTS

All R & D & I activity requires three key components:

  •          An idea.
  •          Human and material resources to develop it.
  •          Sufficient funding to cover the costs of development.

Organizations can have any or all of them; those who combine these components effectively in a systematic way are more capable of achieving leadership in its competitive environment.

While the basis of all activities of innovation is in the ideas, the key to success is in the appropriate systematization of activities from the generation of ideas until its transformation into products that reach the market.

Ideas are the key component of the innovative activity. By its own nature, the good ideas are not only difficult to generate, are difficult to manage within the organization (to get resources enough to develop them), and they are difficult to be sold internal and externally (to get funds to develop them). However, these troubles for the development are a source of competitive advantages if they pass the test.

An essential feature of any innovation system will be “to make the difficult thing easy”, and to put the idea on a proper support to manage the development and the internal and external dissemination. This is the project of R & D & I that can be identified as the core for the deployment of any innovation strategy.

The R & D & I project is associated with a lower risk than the idea from which it comes. An R & D & I project must have a limited risk; it must be possible to identify the technical component and the economic component of that risk and this one must be able to be estimated in monetary units to be able to be compared to the benefit. I.e., the project should be itself the main way to control the risk that is associated with the innovation activity.

R & D & I projects have characteristics of investment projects. They are aimed at a goal clear and known, and oriented to the profit (business or social). However, the existence of technical risk associated with novelty, involves a certain uncertainty for achieving the results. The outcome is uncertain, and its development should be based on a precise definition of activities that ensures the possibility of analyzing the working methods used to learn from mistakes. Monitoring and control procedures must also be according to the associated risk, and it is very important to spend time and resources initially to the analysis of the idea and the study of how to implement it.

A management methodology for this type of projects that meet the specific needs of this activity is needed.

THE STANDARD MANAGEMENT OF R & D & I PROJECTS

A project of R & D & I with high possibilities of success should cover the following aspects:

  •          The idea is clearly defined and studied.
  •          It defines clearly the work to be carried out and the necessary resources.
  •          It facilitates decision-making:

                             – To the proponent unit, that usually has a manager that analyzes the novelty of the idea.

                             – To the Funding unit that demands an understanding about the return of the investment.

                             – To the executing unit that needs to know if it can assign resources to this activity.

                             – To the directorate that keeps compliance with standards and the business strategy.

  •          It includes mechanisms to control and to reduce risk.
  •          It includes mechanisms and other criteria to introduce changes into the project.

The standard UNE 166001 covers these aspects from a general viewpoint. It is applicable to different types of organizations and different types of projects (basic research, applied research, technological development and innovation), which makes it a reference framework that can serve as a common language for researchers and entrepreneurs.

This standard provides guidance for the preparation of the basic information of a project of R & D & I. conforming to it ensures the proper analysis of the idea from the study of the State of the art, definition of tasks and adequacy of the human and material resources to them, control of the project risk, establishment of mechanisms of changes in the project on the basis of the progress, needs financing, management of quality, and exploitation of the results.

These aspects may be covered in accustomed to the activity of R & D & I organizations and have their own methods of project management. However, fitting an external standard guarantees:

  •          A common language to communicate with entities with either similar and different objectives.
  •          The setup of easier collaborations.
  •          The training of the Organization about the importance of the activity and systematization.
  •          Using criteria generally accepted for good management practices.
  •          Benefits associated with the certification process and the certification itself.

BENEFITS ASSOCIATED WITH THE CERTIFICATION PROCESS

During the certification process a technical specialist analyzes the project and evaluates compliance with the standard, and the quality. Then an independent expert evaluates the project and determines those activities that are R & D and those ones that are innovation (identifying those ones that have a higher technical risk). This process helps the organization to identify, estimate, and reduce the risk of the project and then, facilitating decision-making.

Performing a subsequent certification of expenditures will assign a value to the project that may be useful as a scheme for the distribution of the benefits among the different participating entities and other entities. This certification of expenses is compatible with the tax deductions of the Ministry of Treasure.

The certification is itself an acknowledgement of the quality of our R & D & I activity, and it can help to improve the corporate reputation of organizations. This is especially important in those, both public and private, whose objective is to research and development.

These benefits associated with this merit of the project admitted by third parties turn it into an asset of the company, even before its own execution.