ENGINEERING ENTERPRISE DEVELOPMENT CENTRE (EEDC)
BUSINESS PLAN: OPTION A
Acknowledgement and Rationale
The following late-draft proposal for an Engineering Enterprise Development Centre was prepared in 1998 by a Technology Task Force of the Institution of Engineers (Queensland).
The latter's permission to reproduce the document here has been sought, because a lack of capability to commercialize new ideas continues to be seen as THE major deficiency in Australia's innovation system, yet those most concerned with the problem continue to argue that Australia's innovation system can only be developed by governments, though the latter have NO prospects of overcoming the acknowledged major deficiency (see Boyd T. 'Smartening up our ideas', Financial Review, 30/7/02 - and related CPDS Comments)
The preliminary EEDC proposal illustrates one method whereby a more commercially-relevant innovation system might be 'bootstrapped'. It involves the creation of an institutional arrangement which leverages off existing commercialization capabilities and adds potential value to specific projects so as to create a sustainable level of demand for commercialization capabilities.
The Institution of Engineers Australia (IEAust) established a Technology Task Force in Queensland to consider and develop initiatives whereby technology can contribute more effectively to community economic welfare.
A community's capabilities to create or identify technological advances and exploit them through innovation can be an important source of the competitive advantages which enterprises require to achieve high productivity. This source of competitive advantage has been under-emphasized both nationally, and in Queensland in particular, because of the natural resource oriented economic strategies traditionally pursued. Thus a real opportunity to achieve stronger performance is available - which has been increasingly sought over the past decade with some (but only fairly slow) gains.
Technological advance and innovation requires collaborative efforts of many persons and organizations with different capabilities (eg technology, finance, production, research, marketing). Concerted action to create a critical mass of persons and organizations with the complementary skills required for technological advances and innovation provides scope for important and self sustaining commercial and economic gains.
The IEAust believes that, given appropriate skills and support, its members, professional engineers, are likely to be the most effective catalysts available for creating such a critical mass in the community - because of the central role which technology plays in their profession, and their frequent graduation to 'management' roles.
In order to be effective catalysts to the creation of a critical mass of the skills required for technology based growth, the traditional focus of engineers in Queensland which has involved a technical role in responding to business and economic initiatives, needs to shift towards taking a leading role in organizing such initiatives at the enterprise level.
This initiative, to boost the enterprising skills of engineers, and to boost engineering enterprises as an economic force, through establishing an Engineering Enterprise development Center (EEDC) is a practical start in building a base from which engineers can increasing take such a leading role. This initiative is focused in Queensland, but may have national application at a later time.
The Economic Role of Technology
Technology is knowledge of how to do something useful (i.e. know how). Technology is not a machine (like a computer), though knowledge of how to create or use such a machine is technology.
Human progress is a process of technological advance. The industrial revolution which allowed appreciable rates of economic growth for the first time in history was due (in part) to the invention of the social 'technology' of liberal capitalism (which allowed enterprise) and the mechanical technologies derived from steam power. Subsequent economic cycles can be seen in terms of the emergence of new groups of social technologies (e.g. mass production in the 1920s) and physical technologies (e.g. electricity, internal combustion, electronics).
One way in which technology contributes to economic and jobs growth is through creating new products for which demand can increase rapidly if they have attractive features. Another way is through increasing efficiency. With fewer employees required for each unit of output, prices can be reduced (e.g. by an order of magnitude), and lead to a much larger increase in demand (e.g. by two orders of magnitude). Economic and employment growth usually focus in sectors most affected by technological advances.
Technological advances can result from insight; combining or building on existing ideas; copying ideas; or research. The practical application of a new technology is innovation.
Economic growth theories have focused on technology, and innovation. Until the 1930s, growth was seen as a result of investment (which allowed technological changes). The role of the catalysts who assemble the resources to attempt innovation (e.g. entrepreneurs) was also seen as critical. In the 1950s, Solow showed that most growth in the USA was not due to increased inputs of labour and capital, but to a 'third factor' / 'productivity' (i.e. most growth comes from technology). 'New growth theories' (e.g. from Romer) now place all knowledge (including technology) at the center of growth.
Even rapid economic growth may be unsustainable, if not based on productivity gains. A fundamental criticism of economic growth in East Asia (by Paul Krugman) suggested (perhaps not correctly) that such growth reflected mainly growth in inputs without a significant contribution from productivity (the third factor). If correct, Asian growth would be as limited as the rapid growth achieved in the USSR in the 1950s. It is probable (but has never been assessed) than much of Queensland's growth has been due to increased inputs with relatively little due to productivity. If so, this growth will also be unsustainable.
For businesses, technology can contribute substantially to value added, by providing one source of competitive advantage. Business strategists argue that firms which lack competitive advantage tend (in a competitive environment) to be unable to generate the margins required for higher value added. The comparatively low productivity of Queensland's economy (a major theme of the 1997 State Economic Development Strategy) is perhaps due to traditional reliance on the natural comparative advantages of regions (e.g. natural resources from which producers can gain little market power, as all have the same advantages) rather than on the competitive advantages of enterprises.
Worldwide, the contest for the commercial and economic gains from technology has become more complex. For example, the social technology of mass production migrated to newly industrialised countries progressively from the 1960s, leading to de-industrialisation in Europe and North America. The Japanese challenge with unique (total quality) management methods appeared likely to dominate in the 1980s. Now a new social technology of networked, telecommunicated and globally oriented production is emerging in the (so called) 'new American economy'. Simultaneously rapid progress is being made in new physical technologies (e.g. biotechnology, micro-electronics, nano-technologies, eco-technologies) as potential sources of competitive advantages.
At the same time, social and environmental issues further complicate any attempt to unambiguously define economic and technological goals.
However, despite these complications, enhanced economic and jobs performance, and other goals such as a reduced ecological 'footprint' from growth can best be achieved by a stronger technological capability.
The Technology Task Force considered a range of options, including:
An Engineering Enterprise Development Center (EEDC), as a means of mobilizing support to engineers as they initiate or expand enterprises, was adopted for detailed consideration because:
This draft Business Plan sets out an option for the EEDC, in terms of:
This draft will be developed into a firm business plan (ie Option B) for consideration by the IEAust, and others who might wish to jointly sponsor such an endeavour. At the same time, the Technology Task Force will develop a means of addressing broader issues related to enhancing Queensland's technological capability.
2. ENVIRONMENTAL SCAN
Factors in the Queensland environment which are relevant in forming a provisional business plan for an EEDC are believed to be:
3. PROVISIONAL PURPOSE
The purpose of the EEDC is to nurture and develop engineering enterprises and industries, including professional engineering services and enterprises, as internationally recognized and competitive in producing products and services which are based on engineering skills.
To achieve this, the EEDC will provide access to a well-publicised, readily accessible, qualified and managed resource base which is able to:
This will indirectly establish an active and self-developing network of technology-driven engineers and engineering enterprises, and increase community support for engineering and engineers, in their efforts related to technology advancement.
4. RATIONALE FOR AN EEDC
The following outlines the rationale for an EEDC within the context outlined in Section 2.
Firstly, there appears be a potential for more effective and more numerous engineering enterprises in Queensland noting:
Secondly: The potential for new enterprises based on engineering skills and innovation appears not to be translated into reality, because of a gap between the support required, and that which can at present be provided commercially. For example:
Engineers often have limited training and skills related to initiating and participation in enterprises. Business offers support for those who have 'got their act together' (ie who understand the possibilities of their business) However business has trouble helping those whose main problem is a limited understanding of their options;
Also Queensland business is still learning to deal with technological innovation - because traditional economic strategies relied on natural resources, rather than on the competitive advantages of enterprises. Thus the quality of commercial help, even for those who have 'got their act together', is not always high (though it is improving as demand increases);
Individuals who wish to initiate or enhance enterprises with significant growth potential often lack the resources to pay for the services required and the skills required to encourage others to invest. Covering this gap is the role of venture capital, which is only available to a limited extent.
Other areas from which support is likely to be required by engineering enterprises with an involvement in technological innovation will be universities (for education, research support, education) and specialized research bodies. Universities have established 'industrial liaison' arms to help enhance the interface with firms - which are effective to an extent (though have limited ability to interface with start-ups). Specialized research bodies generally do not exist because the limited demand for their services.
Queensland business and other institutions can be expected to become effective in providing the required support for engineering enterprises when there is a large market for those services (eg when there is a larger mass of successful engineering enterprises).
Overcoming this market gap is the role of the EEDC.
Thirdly: There are a variety of stakeholders who could profitably join as partners in sponsoring an EEDC. People have finite time and resources, and those with the ideas, energy and enthusiasm to establish engineering intensive enterprises typically and those who provide such enterprises with support, do not individually have the experience or resources to build both engineering enterprises and their business infrastructure.
Functions like those suggested above for an EEDC can be of value both in supporting the emergence / growth of individual engineering enterprises and also in building a critical mass of such enterprises to justify better support.
Thus sponsorship of an EEDC may be of value to, for example:
Furthermore the EEDC will help locate potential 'gems' who could thereby be introduced to venture capital support. The filtering process which the EEDC would provide will be of value to such investors - who might thus take a role as sponsors of the EEDC.
The above potential gains to key stakeholders are the core of this draft business plan.
Fourthly, though governments may have an interest in developing engineering enterprises, they can not be relied upon to bridge the market gap limiting their growth.
Creating the critical mass of engineering enterprises needed to justify high quality business services involves 'applied education' - ie it involves introducing certain types of business- like skills to many engineers where:
Such 'applied education' can not reliably be provided by government agencies (ie activities like those of the IIB in recent years can not be maintained), because:
Constructive advice and assistance about enterprise development or innovation can only be provided by 'market conscious' organizations with relevant experience and skills. Government agencies need to be responsive to political considerations. Assistance which is not politically supported tends to be under-resourced, while that which is politically controlled is often of poor technical quality.
Public sector budgeting tends to reward the 'outputs' of government agencies (ie what they actually do) rather than the 'outcomes' of their actions (ie what is possible for the society as a whole). Thus government agencies have great difficulty in gaining resources for facilitating the emergence of 'market conscious' support mechanisms.
Attachment B presents a brief outline of the forms of government assistance which are presently available dealing with issues similar to those intended for EEDC. Despite their intrinsic limitations, those schemes should be recognized for those occasions when they might be of value..
5. DRAFT PRINCIPLES FOR AN EEDC
The EEDC will be different from other attempts at technology-based enterprise growth in directing its attention to engineering as a focus for economic growth, and concentrating on developing enterprise skills and opportunities around engineering products and services.
Several principles form the basis of the EEDC:
6. PRELIMINARY MARKETING PLAN
The first stage of the marketing plan for the EEDC is to refine the current proposal for the EEDC to meet the requirements of its sponsors and customers. In this process it is expected that the EEDC will begin to win the support of sponsors and potential customers.
The process proposed to bring the EEDC to fruition is shown in Figure 1. Basically this involves presenting a preliminary EEDC concept to a forum of stakeholders including:
Information would be sought through the forum to develop the business plan, about:
Following its establishment, the EEDC marketing plan involves:
The number of engineers in SE Queensland is currently ??? (with ??? in Queensland and ??? nationally), and the number of engineering enterprises ??, ?? and ??. The annual growth rate in such enterprises is ?, ? and ?. The total potential market for services provided through an EEDC (assuming an initial focus on SE Queensland) would thus be:
Preliminary lists of established firms who appear likely to share interests with the EEDC in creating a critical mass of engineering enterprises have been prepared. No attempt has been made as yet to identify specific customers.
While the operating base for the EEDC would be SE Queensland, extension of its operations to other regions nationally will be considered early on, through contacts in IEAust branches, and through establishing a Web based mode of service delivery.
7. Preliminary OPERATIONS PLAN FOR EEDC
A draft Operations Plan is outlined below.
The EEDC will seek four types of outcomes, through nominated services.
(a) Launching New Businesses
Free support to individuals / small firms, through
Support to 'qualified' and 'paying' individuals / small firms in becoming Business Ready through
Support to engineering educational institutions through
(b) Expansion of Engineering enterprises
(c) Faster Development of Technology
User pays support for enterprises and research bodies in effective organization of technological development, including subsequent commercialization by:
(d) Engineering industry Development
Developing proposals for engineering infrastructure opportunities, in conjunction with and at the cost of interested firms
Developing a critical mass of engineering enterprises, to improve the quality of services and support available to existing firms by
In addition to these major programs, the EEDC will maintain communication with relevant entities eg by forums on EEDC capabilities; public relations directed at universities, firms, and its supporter's network; linkage to corresponding organizations; and contributions to public policies (eg R&D support)
Three of these programs involve services to customers (while the others would be cooperative projects for sponsors). Strategies for providing customer services will include:
The fourth program will be undertaken on behalf of sponsoring organizations, with some funding being project based.
The 'shop-front' of the EEDC will be a panel of Advisors - being staff from sponsoring organizations with 'generalist' skills related to the development of engineering enterprises, who will provide introductory EEDC services. At least one Advisor will be available at the EEDC premises at all times. Advisors will 'think tank' with customers about issues relevant to the latter and (where they believe it appropriate):
The 'back-office' of the EEDC will be Case Managers who will provide EEDC services for 'qualified' or 'paying' customers. Case Managers will be nominated by the sponsoring organization that accepts responsibility for the customer. Sponsoring organisations may enter commercial relationships with customers independent of the EEDC.
Resource allocation and incentives within the EEDC will be managed through floating and self balancing a Developmental Fund (see below) through which resources available to the EEDC will be made available to support 'qualified' customers.
Customers will become 'qualified' for modest assistance by the EEDC's Developmental Funds after initial help from an Advisor, and assessment of recommended customers by a panel established by sponsors. Assessment will be based on: intellectual property; international market potential; length of product(s) life cycle; likely longer term financial regards to EEDC sponsors; availability of specialized support required; ethical and social responsibility considerations; and availability of developmental funds.
Sponsors will then bid to service 'qualified' customers on behalf of the EEDC - with the opening 'price' being a $1000 payment from developmental funds to be increased if the customer's prospects looks poor and no one wants to deal with them, or reduced if several sponsors express interest, and include the possibility of contribution by sponsors to the developmental funds.
Sponsors will also 'bid' (contributions to developmental funds) to service 'paying' customers. Part of any contributions to Developmental Funds will be paid to advisors (ie 30% to the primary Advisor who assisted the customer prior to becoming 'qualified', and 10% each to the secondary Advisors).
This incentive system will ensure that:
9. PRELIMINARY ORGANISATIONAL PLAN
The EEDC will be established as a tax exempt company limited by guarantee, whose memorandum and articles of association will define objects as outlined above, and provide for involvement of various sponsoring organizations (including the IEAust as the founding sponsor).
The EEDC will be directed by a Board consisting of persons drawn from sponsoring organizations who have successful experience in the development of engineering or technology based enterprises, and a balance of skills (eg international marketing, product development, intellectual property). The Board would be advised when required by special groups eg involving EEDC customers or particular engineering industry areas.
The EEDC will enter into agreements with sponsoring organizations of three types:
The EEDC will also make contact, and actively network, with other institutions with complementary interests, such as:
The EEDC will be located in 'commercial' premises which are convenient to its main customer base. These premises will be a shared user facility including the EEDC, representatives of various sponsoring organizations and some EEDC customers in an 'incubator' environment.
Linkages with regional areas will be maintained through contacts in IEAust regional branches who will be invited to: introduce potential customers to EEDC; identify potential regional participants in an EEDC franchise in the region; and participate in Internet conferences on the EEDC.
Training processes to enhance the skills of Advisors and Case Managers will be ongoing (based on contact with experts, and with complementary institutions).
The EEDC will also have a full time manager (with market development experience), and will draw upon administration services from the shared user facility. In addition to maintaining the EEDC operations, the Manager will:
As the hub of a support network, the EEDC itself will not directly participate in commercial arrangements with customers. Neither will it accept legal liability for advice offered. Any commercial benefits and legal liability will only emerge as a result of specific agreements with clients through Advisors, or Case Managers.
10. PRELIMINARY FINANCIAL PLAN
The EEDC will require one full-time executive ($60k), supported by administrative assistance ($12k part time), as well as premises' costs ($24k), marketing and research ($25k) and developmental funds ($80k) for a total annual cost of around $200,000. This will derived initially from:
The EEDC will maintain an Operational Fund into which sponsorship contributions will be paid, and from which basic operations and developmental costs will be disbursed, and a Developmental Fund used for developmental operations, and contributions.
In the long term sponsors contributions to Developmental Funds for the rights to provide EEDC services to 'paying' or good 'qualified' customers is expected to allow the basic sponsor's costs for the EEDC (especially by IEAust) to be reduced or eliminated.
IEAust members with experience of enterprise development are expected to support the EEDC with volunteer time as mentors.
Attachment A: Example of the IIB Export Centre
As an example of what can be developed, particular note has been taken of the apparent success of the Information Industries Branch (ex Board) Export Centre.
The Export Centre of the IIB has been fully operational for over 3 years. The focus of the Centre is to facilitate exports of IT&T products and services of Queensland based companies. Because Queensland has such a diverse mix of IT&T products, the Export Centre activities have become the Industry Development Thrust.
The Centre contains experienced individuals in the North American market, Asian market and the European market. By bringing together this market know-how, with the technology which exists in Queensland, the industry has grown exports from $74 million in 1995 to $325 million in 1997. (The industry forecast for 1998 is $629 million). This has been accomplished through many levels of activities ranging from consultation to long term comprehensive programs to 'demystify" the Export process for companies.
Approximately 50% of the time is spent on consultation. The where, what, when and how of individual company needs are discussed when attempting to export their products. The second level is more proactive than reactive.
The following emphasis is an example of the long term programs:
There are 14 parallel programs in progress which has resulted in the number of exporting companies being raised from 81 in 1995 to 194 in 1997. Even though the IIB Export Centre concentrates on IT&T the business model under which it operates is generic.
Attachment B: Government Enterprise Support Schemes
Most schemes in Australia are government dominated, and this ascendancy of political consciousness over market consciousness may be the key factor in the perceived persistent failures of these schemes. Despite this, such government schemes rarely die but undergo a series of Darwinian mutations as the political environment changes. Occasionally, there is a full metamorphosis as, for example, when the Section 39 larvae of the 1970s grant blossomed into a veritable swarm of CRC butterflies in the 1990s.
Systems to help business develop can be classified in many ways - eg chronologically; by scale; by type of system and outcomes proposed; or by industry or activity sector. The following is a classification in terms of the source of financing.
The two departments most involved with business programs are DIST (Industry Science and Tourism) and DEETYA (Education, Environment, Training and Youth Affairs). Other agencies (especially Department of Defense) also have a role.
DIST schemes have gone through a number of mutations but they appear to have followed three principal themes. These are:
Product or Process Development: This usually finds expression as R&D grants. This is directed to the technical side of the company.
Business Operations: These blossomed during the Quality consciousness phase of the mid 1980s and usually took the form of programs to develop business skills delivered via a partly funded consultant. The NIES program was the dominant one and subsumed a whole range of programs.
Overall Company Performance: The objective of these programs was to optimise local company growth by aligning it with, typically, a large multinational via offsets of the Partnership for Development program or by creating networks of non-competitive companies to emulate the published results of business networks in the USA, Italy and other selected areas.
Virtually every business idea or fad from Quality, R&D, Partnership, Worlds Best Practice, through to Networking has had its moment of glory and much has been achieved, particularly in growth of the consultancy population. All schemes, however, assumed that the enterprise already existed and the processes leading up to the creation of the enterprise were outside the ambit of these programs. This would still appear to be the case, although possible enterprise creation via University / CSIRO / Industry collaboration programs now appears to be an objective of programs such as the CRC.
A list of DIST programs is:
State Governments have had several roles in enterprise development. One has been as the 'local agent' of the Australian government programs and another has been to emulate Australian programs but on a smaller, more focussed scale (e.g. QGRAD).
State Governments have, however, been more involved with 'bricks and mortar' issues eg assistance with land and buildings, development of technology parks and special grant assistance. A 'cargo cult' mentality often exists is these programs whereby large levels of direct assistance are provided to multinational / interstate companies to locate in the state hoping for major economy gains in less than an electoral cycle time. Investing in resident people and organisations to build enterprises the hard way is outside the field of view.
Current support is provided by the Queensland Government to organizations including:
Local governments have also tried to assist on a reduced scale. Some local government assistance can be of immediate benefit to small companies, eg the provision of serviced land on good terms, facilitation of planning requirements, extension of services and so on. Large councils (eg Brisbane City) have extended assistance to export funding.
An interesting example of an enterprise creation program is that undertaken by the Ipswich, Boonah and Esk Councils.