The key challenge
In the manufacturing sector, a popular topic is the potential disruption, driven by:
- New technologies like artificial intelligence, internet of things and augmented reality
- New technology specific to the equipment we offer
- Changing customers
- Emerging markets
- New entrants into the industry
And the potentially disruptive new value offerings, operating models and business models which could emerge. As manufacturers, we run the risk of missing the boat, so the question is: Disrupt or Be Disrupted? Most of the companies will not be able to disrupt but certainly need to know how to thrive in a disruptive world.
In my view, the following is required to be successful:
- Full understanding of disruption and its potential impact for the business
- Clarity on what needs to change in your business to thrive in a disruptive industry
- High pace of continuous change to innovate and execute
However, too often I see misconceptions about disruption and disruptive innovation, a lack of clarity on what needs to change and too slow a pace of change.
By consequence, manufacturers tend to make inadequate assessments and develop inadequate strategies, allowing leading competitors and new entrants into the industry to take the lead.
In this article I will focus on what disruptive innovation is, the impact and how to prevent typical pitfalls.
What is disruption?
Disruptive innovation is a nasty beast. We have seen quite a few strong brands (almost) disappearing because of disruption, like Kodak, Nokia, IBM computers and Polaroid to mention a few.
For clarity I’d like to categorise innovation along two dimensions:
- Impact: mainstream versus disruptive
- Scope: Customer value versus internal capabilities
Mainstream innovations annually improve the value of products and services (including the related internal capabilities) as expected by the market. The aim is to increase our value and margins by better serving our best clients.
These innovations can be small and incremental or more radical.
Examples of incremental mainstream innovations are improved fuel consumption of cars engines, improved uptime of the equipment we sell through more reliable equipment and better maintenance.
Examples of more radical mainstream innovations are cars going electric and our services becoming more predictive and performance based.
MANUFACTURERS THAT FALL BEHIND THE COMPETITION HAVE NOT BEEN DISRUPTED YET
The majority of the manufacturing companies are too slow in driving the mainstream innovation and see leading competitors achieving higher growth rates, higher margins, more service – recurring and stable – revenue and higher customer loyalties being ahead of the game. As Jack Welsh said: “If the rate of change on the outside exceeds the rate of change on the inside, the end is near.”
Disruptive innovations break with the ongoing and upward trend of improving value.
There are two ways of disruptive innovation: offering lower value at a lower price for the low-end market or offering lower-barrier solution opening a new market segments which have not been served so far.
At the early stages, disruptive products and services serve a small niche, often at a lower value level. These solutions will follow a mainstream innovation journey, increasing value and price. Gradually the products or services become a viable alternative for a larger portion of the markets.
Examples of low-end disruptions are the low-cost airlines, which offer flights at lower service levels and lower prices. This is quite attractive for business travellers who do not want to pay a premium price for meals and convenience.
One example of new market disruptions in which a new product or service serves other needs are the PC’s, which after some time started competing against the mainframes. Another example is salesforce.com, which offered so much more flexibility and lower cost of ownership than the traditional on-premise CRM systems.
Innovating internal capabilities
New technology enables us to develop new organisational capabilities. For example, the low-cost airlines have adopted quite different operating models which allow them to consistently fly at much lower cost and hence maintain good margins at a low price level.
For service operations, we see many manufacturers developing capabilities like remote service, connectivity, big-data and algorithms and predicting failures. These, in themselves, are not value propositions and have no value for customers. However, these can be crucial capabilities for new service propositions.
Innovating external (customer) value
For maximum impact Focus on customer value, not on capabilities
The real impact to drive competitive value is by addressing unmet needs or barriers to use new technology or solutions with new product, services or integrated solutions. Examples are:
- How Rolls Royce offers zero-disruption proposition for aerospace engines in which clients only pay per flight hour
- How MAN reduces fuel consumption by improving driving behaviour
- How Caterpillar helps managing a construction plant and will ensure at every stage of the construction the right number of the required equipment is available.
Besides the services and products, we can also increase value by enhancing customer experience, our brand and (lower) price levels.
Why does this matter?
At the early stages of a disruption, incumbents may see the new products and services entering their market. However, compared to business-as-usual, the new products and services are relevant for a small niche only, the market volumes are small and the added value often is much lower. Their best clients are not interested. Above that, there are so many trends and new innovations, it is hard to predict which ones will become successful.
This, together with the pressure to optimize top-line and bottom line and adequately serving our best clients, means it is easy to ignore the signs and consider them as irrelevant.
Disruption most often comes from outside your industry
Historically it appears that often incumbents beat new entrants when it’s about mainstream innovations, as they will defend their main business with valuable clients.
However, when it’s about disruptive innovation, new entrants disrupt the industry and incumbents only start to respond (in panic) when it’s too late. The new entrants have built the knowledge, capabilities and the brand which makes it tough for incumbents to catch up in time.
What needs to change
In order to thrive in our disruptive world, for sure our value propositions, operating models and business models will change. However, the fundamental changes are more around how we innovate and change.
It’s mission critical for manufacturing companies to:
- Have a broad and balanced portfolio of innovations, spread over all sections of the matrix above, covering products, services, customer experience, brand and business models.
- Develop several what-if scenarios of potential disruptions which are (still) far from current business.
- Prevent budget allocation processes from ignoring the longer term (mainstream and disruptive) innovations which do not deliver significant contribution to the top- and bottom-line
- Not to focus on disruption only. The risk of dropping out due to too slow mainstream innovation may be bigger.
Accelerate pace of change and execution
The pace of business innovation and change is mission-critical in our rapidly changing world. Even leading manufacturers which have consistently been ahead of the pack, now notice that with new entrants in the industry (with a DNA in data and algorithms), they need to accelerate change significantly.
The name of the game is: Adapt or Die
On fieldsevricenews.com you can find several articles of mine, summarizing the 4 winning habits of the fast moving and leading companies.
How to take action
In several workshops with various businesses, we have noticed that the provided insights working with the matrix leads to valuable eye-openers. A critical success factor for all of us is constantly turning insights and knowledge into action.
I would recommend you do the following in the next 2 weeks:
- Draw the matrix above and map ongoing strategic initiatives in your overall business and in your service unit.
- Include potential disruptive innovations in your industry (from current competitors and potential new entrants), in a different colour.
- Assess the speed of innovation and change for each, using the leading competitors or new entrants as the benchmark.
- Formulate 3-6 strategic conclusions of this assessment.
- Involve like—minded colleagues in the process.
This insight will help you define a compelling story about your concern and vision, with which you can start developing a shared concern and momentum within your own unit and other stakeholders in your business.
In case you would like to read more about disruptive innovation, I can recommend
- eBook: How to Thrive in a Disruptive World(Jan van Veen)
- Innovators Dilemma and Innovators Solution (Clayton M. Christensen)
moreMomentum is an international consulting and training company. We specialize in increasing momentum for continuous business innovation and change for manufacturers.
In our vision, the industrial manufacturing sector is a dynamic backbone of our digital economies which solve important challenges on our globe.
Jan van Veen, co-founder of moreMomentum has been in various manufacturing sectors for 20 years. In his research of 2016 with 89 companies, he identified the 4 winning habits of the leading manufacturers. He is an international author and speaker.