As financial titans teeter and collapse, manufacturing executives must be wondering if they are next. It's not like manufacturing leaders didn't have enough to keep them up at night. Rapid technological changes means today's competitive advantage is tomorrow's competitive constraint. A seemingly never-ending stream of low-cost attackers has made it difficult to maintain, let alone grow, profits.
In the face of today's economic headwinds, manufacturing executives face a crucial choice: Hunker down and try to weather the current crisis, or redouble efforts to innovate and grow.
Unfortunately, in today's world hunkering down is tantamount to corporate suicide. The gales of creative destruction have never blown fiercer. Companies that don't develop the ability to improve what they have and create what they don't face the prospects of dwindling growth, tumbling profits and ultimate destruction.
Innovation -- creating new products, services, processes, marketing programs and so on -- has gone from being a strategic option to a strategic necessity. It is a tough challenge, particularly for manufacturing companies. Service companies can often launch new ideas without large capital investments, making the risk of a single bet going wrong quite manageable. Contrast that to, say, Boeing and Airbus. The cost of an incorrect bet on a next-generation aircraft is staggering.
The following four tips can help manufacturing companies successfully master innovation.
1. Seek opportunities to grow markets. The biggest bang for the innovation buck comes from finding ways to create new markets. One obvious source of growth that many companies are still struggling to seize is targeting customers in the developing world. Success in developing economies requires more than slashing costs. It requires deep understanding of the problems customers are struggling to solve, the performance thresholds that matter to them and innovative ways to balance performance and price.
For example, Tata Group Chairman Ratan Tata sensed an opportunity to develop a low-cost "people's car" as he watched Indian families make do with unsafe scooters. His team re-designed a car, now called the Nano, from the ground up to hit a price point that could enable mass consumption.
There are opportunities to create new markets in developed economies as well. For example, Group Danone has created a multi-billion dollar line of probiotic products under the Activia and DanActive names. These products provide simple ways for people to manage digestive issues.
2. Expand your view of innovation. Most manufacturing companies assume innovation always means a new and improved product. There are many other innovation levers to consider. For example, Procter & Gamble asks each of its business units to dedicate a portion of their innovation efforts to "commercial" innovations, such as novel marketing, promotion, or bundling approaches. Much of IBM's growth over the past decade has come from expanding from products into services.
Some companies have even created growth by introducing new business models. For example, about five years ago Dow Corning created Xiameter, a low-cost, online-only distribution channel for commodity silicones. Xiameter went from an idea to a viable business in nine months; three months after launch Dow Corning's entire investment had been paid off.
3. Develop smart ways to de-risk innovation. There is a general sense that innovation is risky and expensive. It need not be that way, if you are smart about managing assumptions and are willing to change course as you learn the flaws in your strategy.
For example, one of General Motors' big successes over the past decade has been the creation of its OnStar telematics business. CEO Rick Wagoner believes that one key to OnStar's success was being willing to change course. "With a new business you may start out with a strategy, but after about four days you probably change it," Wagoner says. "You don't have to figure it out a hundred percent. If you think it is right, get on the road and adjust as you go."
It is critical to find relatively cost-effective ways to learn about assumptions. Each year John Deere hosts a multi-day international feedback program to garner insights on prototypes of its new golf and turf equipment offerings. The session brings together representatives of Deere's sales and engineering teams with several hundred customers from around the world. At first blush, this seems like an expensive "focus group", but the quality of insights gained at this in-depth session leads to product developments and refinements that likely boost sales and save millions of dollars in what could otherwise be misdirected product development effort.
Generally, models and simulations can be great ways to learn prior to making big capital commitments. Tools such as prediction markets or transaction-based tests using "good enough" prototypes can provide deep insight into the potential of a new idea.
4. Be ruthless in managing the portfolio. Most companies that claim to have no resources for innovation actually have plenty of resources -- those resources are just tied up in the wrong activities. When times are tough, companies have to be ruthless about weeding the innovation portfolio. They have to shut down the least promising ideas early so they can really focus on the ideas with the most potential. Even though there's a risk that you might prematurely kill a great idea, better to kill one great idea early than to lose an entire innovation program because of lack of progress.
Application of this principle goes beyond simply new product development efforts. It also applies to entire business lines. Take a well-known innovative company such as 3M. Despite pursuing 16 new business acquisitions in 2007, the company also pruned its business portfolio of its European pharmaceuticals business, as well as its control systems and traffic detection units, displaying the "creative destruction" necessary to maintain a portfolio of high growth initiatives.
Part of the managing the portfolio involves taking a hard look at existing operations. Imagine that you are a 50-year-old male who has let his health get away from him. You are overweight and can't find a way to fit exercise into your everyday routine. Then one day a friend calls you up and says, "Let's run the Boston Marathon together." Would you sign up?
Of course not. You simply aren't ready for that level of competition. Companies similarly need to make sure their core business is under rock solid control before they focus on innovation. The core doesn't have to be growing, but an out-of-control core will inevitably take management attention away from innovation efforts.
A generation ago, manufacturing companies like General Electric and Motorola showed the world how to make the management of quality a predictable discipline. Today, manufacturing companies like Procter & Gamble and Johnson & Johnson are showing the world how to make the management of innovation a predictable discipline. Other companies need to follow in these leader's wakes, or suffer the consequences.
Scott D. Anthony is the President of Innosight LLC. Joseph V. Sinfield is a Senior Partner at Innosight and a Professor of Civil Engineering at Purdue University. They, along with Innosight CEO Mark W. Johnson and Elizabeth J. Altman of Motorola, are co-authors of The Innovator's Guide to Growth (2008) http://www.innovatorsguidetogrowth.com/
Innosight is boutique consulting, training, and investment firm that works with Fortune 500 companies, startups, non-profits, and national governments to improve their ability to create innovation-driven growth. http://www.innosight.com/